Access to affordable credit is increasingly emerging as a significant competitive edge among states. Having a collateral is essential for individuals or businesses looking to establish a security interest. We have evolved from using chattel mortgages as a financing option for local needs to exploring various forms of collateral to support loans.

Historically, immovable assets such as land have been favored as the primary form of security for securing loans. These days, however, movable assets, which includes many things including Intellectual Property (IP) rights, are also considered the best form of security. Initially, and importantly, IP rights were regarded as crucial factors in fostering innovation and creativity in any nation. With the change in time and concept, the IP rights have another different aspect which is also regarded as a property and can be used as a collateral to secure the loan. IP rights have been recognised as a form of movable property, intangible moveable property, to be precise.

Using IP rights as collateral offers several advantages for businesses seeking financing. One key benefit is that it enables companies to leverage their intangible assets, turning IP into a valuable source of liquidity. This is particularly beneficial for startups and SMEs that may not have significant physical assets. Additionally, utilising IP rights can lead to lower interest rates. While project finance typically focuses on future cash flow projections, the role of IP rights as collateral remains crucial in this context.

While some jurisdictions do not explicitly address the securitisation of IP rights, our law recognises IP rights as movable property, allowing for the use of intangible assets like IP as collateral. This is further supported by a comprehensive reading of the Secured Transaction Act, 2006 (ST Act). The Constitution of Nepal, 2015, recognises IP as a property right in Article 25, while the National Civil (Code) Act, 2017 includes IP in its definition of movable property. While IP laws of Nepal, including but not limited to, Patent, Design and Trademark Act, 1965 and Copyright Act, 2002 (IP Acts) are principally concerned with documenting the creation of IP rights, the ST Act regulates the registration of security interests in such. The IP Acts also provides the process of obtaining monopoly over industrial property, period of control and the remedy to be attained in the event of infringement of patent, design, trademark and copyright.

IP rights are categorised as movable property under the ST Act, allowing for the creation of security interests. According to the Act, IP rights can be utilised as collateral, provided that the security giver files an initial notice, which will be registered online by the registration office. In the event of default, the security holder can act directly against the IP rights without needing to pursue judicial measures.

Although the ST Act is in force for nearly 20 years, no notices have been filed in be addressed by the relevant authorities. Although IP rights are theoretically well-suited for commercial transactions due to their generally transferable nature, the unique characteristics of IP require a different approach compared to traditional assets, especially when it comes to valuation, financing and securing collateral. While several methods exist for valuing IP rights —such as the cost, market and income approaches — there is currently no legal framework in place to address IP valuation. Nevertheless, the valuation can be determined through contractual agreements between the lender and borrower. The current notice content required for filing in the secured transaction registry office has not been designed to accommodate IP rights as collateral. Another hurdle could be the transfer of ownership of IP rights from security giver in case of default.

A joint initiative to raise awareness about IP rights, involving the Nepal Copyright Registrar’s Office, the Department of Industry and the Secured Transaction Office, can promote innovation and creativity among creators. This can also facilitate securing loans by pledging IP rights as collateral.

There are several gaps and shortcomings in the laws regarding the registration and securitisation of IP rights that a collaborative partnership could effectively address. This partnership would not only strengthen economic incentives but also expand access to credit by allowing creators to use their IP as collateral, ultimately contributing to the nation's overall economic development. If offices work together, one could see a significant increase in IP registrations and more individuals securing loans using their IP assets as collateral, enhancing access to credit in a country like Nepal. The government, along with the Nepal Rastra Bank (NRB), should take the lead in initiating this process, as it would boost liquidity in the market.

(Khatry is a licensed attorney recognized by the Nepal Bar Council and holds an LLM in International Finance Law.)

(This opinion article was  originally published in the November 2024 issues of New Business age Magazine)