Intellectual Property Rights - Valuation and Audit - Is India still in nascent stage of evolving these concepts?
Published: Jun 19, 2017
By Somesh Arora, Advocate (Amicus Rarus) and Former Commissioner of Customs & Excise
THE concept of exclusive Intellectual Property Rights Audit and valuation of Trademarks, Patents, Copyrights or other Intellectual Property Rights (IPR) is mostly alien to Indian business and the corporate world. Even Indian banks including private financial institutions are not equipped to properly value such assets which can be a substantial chunk of business assets for Businesses dealing with goods as well as Information Technology (IT) and other Services. A patent at any given point of time will have market worth depending upon inventiveness involved in developing it, the stringency of enforcement of IPR in the domains where such patent is registered and such value will keep on dwindling the moment a registered patent is approaching end circle of its life span of 20 years. A trademark will command a market value by factoring in the existence of longevity of goods and services, on which such trademark or a brand name is affixed. The value will also depend upon money spent on advertisement to create a brand recognition in public. The value of IPR also depends on other multifarious variables and can witness a sharp rise and decline in short term of time. The variable factors can be existence of completing brands for similar products and services, change of fashion in case of design, change in reading or viewing habits in case of copyright or development of better technologies in case of patents. All these indices need to be incorporated while making any attempt to value IPR that a business or an individual may possess. Related to this is the issue of identifying the existence of IPR assets which may be vested in or owned by a business or a corporate, as non-identification of the same and failing to pursue any action against infringers can lead to the situation whereby a claim to an IPR may be lost. An Intellectual property audit has several objectives:
- Identification of IPR which may exist within any organization being audited.
- Assuring that identified IPR are properly assigned, licensed and protected and there is no overlapping of market between different assignees.
- To identify any developing Intellectual assets that are worth protecting and, therefore, registering.
- Identifying any gaps that may exist in the systematic usage of knowledge and converting intellectual capital into intellectual assets.
- Identifying any gaps, problems of failures in the procedure followed by a business in identifying and ensuring security of such assets against any misuse or infringement in future.
IPR auditing includes the survey of the company's IP portfolio and competitive position in the marketplace, followed by a more focused analysis of IPR issues of particular interest. The most comprehensive audits include estimates of the IP's monetary value, and protocols and detailed recommendations for dealing with IP in the future.
The importance of IPR Audit assumes a lot of significance at a time when any merger or acquisition has to take place or Rights are to be purchased. Even large and well organized business set ups falter on this count. For example Volkswagen group acquired business interest of all assets of Rolls Royce Company around the Year 2000. However, while in process of acquisition of plant, equipment etc. they somehow failed to get the famous Roll Royce trademark. Later on, it was revealed to them that the trademark was owned by Roll Royce Air plane Engine Company which was altogether different entity. Eventhere existed further licensing agreement between the Airplane Company and Motor Car company. The license agreement terminated upon change ofownership by the Car Company. Therefore, Volkswagen was left high and dry and had to renegotiate.
During demonetization, certain banks had to initially face copyright issues as the new note of Rs.2,000/- with its size was not in the copyright agreement that they had with suppliers and machines were not equipped to dispense them. Such issues may have been difficult to imagine even for macro level economists in Ministry of Finance or in RBI. But they do crop up.
Further, in the Indian context, the loan case of Kingfisher on its Brand name is worthy of notice. When the Kingfisher was still operating, its brand value was estimated to be of $ 550 million (Rs. 3000 cr.). With such valuation, Kingfisher airlines took loan from 14 banks including State Bank of India, IDBI Bank, Punjab National Bank, Bank of India and Bank of Baroda under the debt recast agreement in which company took loan valuing Rs. 6500 crore and brand name was given as collateral but none of the banks in India hadcapitalized brand value in the their balance sheets because it is an intangible asset. Central Bureau of Investigation (CBI) which is investigating the whole matter is also, interalia, probing how banks took brand Kingfisher as collateral because giving loan on the brand value is a major concern. It is basically an intangible asset on which there is no convention of giving loan.
That brings us to pertinent question that whether a loan should or should not be given on IPR assets, which command huge value and are built up by huge ad or research spend. It is true that an IPR is akin to any other property right and is considered for taxation on its sale and purchase and is also registered for its life. But the reluctance of Banks to give advances against it or accepting IPR as collateral stems from the fact that there hardly exists any system of its audit or valuation in India. Banking prudence will, therefore, generally avoid it or accept it, subject to huge margin money.
Since IPR assets can form formidable part of asset class of any business nowadays, it is imperative that such assets are valued and audited periodically and properly. Existence of an institutionalised arrangement of valuation and audit in the country is, therefore, a must. It will enable funding of research on loans, can augment and canalise Government expenditure on technology and research on sound basis. And can fetch the realistic commercial value from the market on final sale or at the time of commercial exploitation of such IPR.
(Author is Master of Laws( IPR) from University of Queensland. Views expresses are his own)
