Collateralisation & Securitisation

Financial institutions and investors in Pakistan still prefer to use immovable tangible properties as collateral and there is no experience using Intellectual property Rights as assets to bank as guarantee to secure financial loans. The World Intellectual Property Organisation (WIPO) has recognised securitisation or collateralisation of Intellectual Property assets a new growing financial tools ,particularly in developed world IP assets are now being used in asset based lending by small and middle-sized companies. For many leading technology firms, these IP rights have become their most valuable assets. The Charismatic rising image of companies such as Apple, Google and Face book reflects the importance of IP as development factor in today’s IT Economy.

Many developed countries had experienced and involved in this unique innovation in the world of finance through issuance of bonds of intangible assets used for securitisation against future earnings. This initiative brought great success for the IPR holders and encouraged the recognition of securitisation over IP rights, based on the assumption that security rights may be created for any type of IP including patent, utility models, design, Trade mark or even copyrights.

In 1997, famous Musician and song writer David Bowie came up with a new scheme to generate cash from his extensive back catalogue .He sold asset-backed securities dubbed Bowie bonds which awarded investors a share in his future royalties for 10 years. The securities which were bought by US insurance company Prudential Financial for $55 million committed Mr. Bowie to repay his new creditors out of future income and gave a fixed annual return of 7.9%. The Walt Disney and Company in the year 1988 raised about $725 million from Industrial Bank of Japan through issuance of bond against future earning of amusement park for the coming 20 years. Both these showbiz entities took benefit of modern Banking and Finance system in their respective economies and opened a new phase of assets based lending in which investors showed interest and responded positively in the market creative industries. Presently, two Pakistani Singers Ustad Rahat Fateh Ali Khan and Atif Aslam can be considered our potential candidates, who may use their musical work as financial tools.

The main challenges in using IP assets as collateral and security are risk, which may occur at various stages of the securitisation and collaterisation process. The evaluation and certification of IP assets, uncertainty over the legal enforceability of IP rights, technology transfer, validity and valuation of IP assets are the main obstacles to using IP as collateral and security.

IP securitisation presents significant difficulties due to valuation issues regarding the intangible nature of IP assets. Calculation and valuation are necessary to determine the feasibility of securitization and to protect future cash flow. Pakistan has no regulation or experience to structure IP valuation and securitisation. Most Pakistani creative industries remain dependent on tangible assets and conventional financing transactions .Not many creative industries know how to protect and commercialise their IP assets in IP securitisation and Collateralisation schemes. The Government of Pakistan can adopt “Regulation of Intellectual Property Valuation’’ through a Financial regulatory body or IPO –Pakistan to value inventions, industrial design ,Utility models ,Trade Marks and copyrights works upon request of the creator for charging a service fee to determine value of the intellectual Property. These evaluations of IP assets are equally important and essential for SECP and SBP for collateralisation and certification of IP assets.

The process of issuing securities backed by assets in structured financing is called securitisation, because assets are turned into securities. IP securitisation is a financing technique or method of financing whereby a company transfers right in receivable including royalties from IP holders to an entity, which in turn issues securities to capital market investors and passes the proceeds back to the owners of IP.

Currently our existing legislative frame work does not offer lending on IP assets based securities but short term and long term bonds or Term Finance Certificates( TFCs) of IP assets can be issue by IP holders to financial Institution (Banks) and General public to raise fund in the form of redeemable capital, following section 20 (4) of SECP Act 1997 along with section 100 of the Companies Act 2017 , in compliance of guidelines of SECP and approved regulations of SBP for the issue of term finance certificate/bonds .

IP securitisation seems an appropriate method for funding or financing industries where making money on products or services is a more lengthy process. IP securitisation is also beneficial for society since it offers an alternative investment to investors and provides opportunities to society for obtaining income distribution .Through IP securitisation, creative industry can also tap into their future cash flow and keep up with marketplace. Securitisation of Intellectual Property assets represents a unique securitisation market that has not been widely developed .Although the case flow from intellectual property can be steadier than the cash flow from assets that are currently widely securitised.

The collateralisation of tangible assets is fairly common phenomenon prevalent around the world. As of late, banks around the world have also started to collaterise intangible property assets. Similar to tangible property, borrowers pledge their IP rights to bank and other financial institutions in exchange for a loan. IP is intangible; taking security over IP uses similar concepts to taking security over traditional forms of Property. The Creation of security right in an intangible asset requires a written agreement between the grantor and secured creditor, which by itself or in conjunction with the course of conduct between the parties evidences the agreement of the parties to create a security right.

Unfortunately, Pakistani law does not cover IP assets under the scope of collateralisation. However certain amendments in the existing legislation can operate the function of IP collaterisation. To facilitate start-up companies and entities in accessing loans facility on IP assets based lending .The State bank of Pakistan –SBP under the statutory provision of section 17 H of The State Bank of Pakistan( amendment ) Act 2014 , can add IP assets as Intangible Property or collateral in the Prudential Regulations lists for scheduled banks for consumer borrowers. The similar addition is also required in other statutes like The Financial Institutions (secured transaction) Act 2016, The Companies Act, SECP Act and related laws.

Along with the need for a stronger IPR regime through legislative amendments in the relevant laws to recognise IPR as intangible property for the use of assets based lending to small and medium size business. The SBP must formulate and implement such collateral policies that allow SME’s to pledge their intangible assets, granting them access to finance to develop and introduce a product in the market .To achieve this end, the SBP must prioritise the promotion of IP in the prudential Regulations, and issue necessary certification guidelines to banks and other financial institutions. Such measures would go a long way in reducing impediments to the commercialisation of high tech innovation.

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