Bad. Boy! Billionaire?
Analysis of Kingfisher Airlines’ historic loan pawning its brand as collateral
Much anticipation and a couple of legal battles later Netflix finally released the docuseries, Bad Boy Billionaires. The series “explores the greed, fraud and corruption that built up — and ultimately brought down — India’s most infamous tycoons,” Netflix says on its website. The fourth episode of the series — about B. Ramalinga Raju, — remains on hold as Netflix is contesting a legal challenge on it. One of the episodes cover the rise and fall of the King of Good Times, Vijay Mallya. He was arrested in London in 2017 after 17 Indian banks accused him of willfully defaulting on more than 91 billion rupees ($1.2 billion) in debt accumulated by Kingfisher Airlines — a carrier he founded in 2005 and shut down seven years later. Vijay Mallya was able to secure this loan by offering the brand Kingfisher Airline (KFA) as collateral. How can a bank lend crores based on an intangible asset?
What is IP backed financing?
Normally physical, tangible assets are offered as collateral to secure asset-based loans; however, the collateralization of IP can also increase the amount of available credit. IP-backed financing refers to the use of IP assets to gain access to credit. Borrowers can offer up the trademark, copyright, patent or other IP as collateral, substantially increasing their value. IP backed loans can be secured in one of the following manners according to Enquiries into Intellectual Property’s Economic Impact published by the Organization for Economic Cooperation and Development (OECD):
- Direct Collateral: IP can be pledged directly as collateral in a loan agreement so that the lender can seize it if the firm becomes insolvent or otherwise defaults on the loan.
- Securitization: IP-backed assets can be securitized by placing an IP asset or the rights to its projected revenues (e.g. royalties) in a special purpose vehicle (SPV), which in turn issues securities in the capital markets. This way, lending institutions can eliminate the risk of holding IP assets while the IP owner can obtain more favorable funding conditions. This is because the securities issued by the SPV are, in theory, separated from the firm’s risk and therefore the firm can receive more favorable credit ratings.
- Venture Debt: In this model, the firm seeking funding gains access to capital in the form of a loan on which it agrees to pay interest. Simultaneously, the firm issues warrants for equity in the company, which are acquired by the lender. IP represents a key asset to facilitate these deals, but note that the loan is typically backed by a blanket lien, i.e. a claim on all the assets of the firm in case of default.
- Sale-and-Leaseback: An IP owner can sell its IP to a specialized investor or a lender in exchange for immediate funding. The original IP owner is then granted a license to use the IP, whereby it is required to make specified royalty payments to the buyer for a period of time. At the end of a specified term, the firm normally retains the option to buy back the IP asset(s) at a predefined price.
Law in India
The position of the law in India on the subject is still at a nascent stage. However, certain developments have been made, like the National IPR (NIPR) Policy. The National IPR Policy is India’s first policy which specifically aims at securitization of IP rights, allowing them to be used as collateral to raise funds for their commercial development. The policy also suggests financial support for developing IP assets through banks, venture capital, angel funds and crowdfunding mechanisms, a government official said. The policy suggests setting up an IP exchange to bring investors and IP owners together on one platform. Valuation of IPR is one of the main focuses of NIPR Policy. There have been significant changes in registration of IPR after the implementation of the policy in 2016.
The entertainment and the pharmaceutical companies have time and again secured loans based on IP both in India and abroad. For example, a large publicly listed manufacturer of pharmaceutical, medicinal, chemical and botanical products in India and internationally, secured a loan from a listed private bank. Transaction – The bank had extended a loan to the company which was secured against a portfolio of brands of certain prescription and non-prescription drugs and consumer products. To extend this loan the bank conducted research on the company’s performance under this brand historically and reached an edge over competitors of the product. However, the Supreme Court in the case of Canara Bank vs NG Subbaraya Setty held that using the assignment of trademark as security for the loan is against the Trademarks Act, 1999 and the Banking Regulation Act, 1949. “The Supreme Court took the view that the trademark cannot be said to be property which has come into possession of the bank in satisfaction of any of the claims of the bank. Trademarks are not part of any securities for loans or advances.” However, under section 2(1)(zf) of the SARFAESI, defines “security interest” as a right, title or interest of any kind upon property created in favour of a secured creditor and includes such right title or interest in intangible assets.
Then what went wrong with the King of Good Times?
The case of Vijay Mallya is far from the theory discussed above. In its 2012-13 annual report, Kingfisher Airlines had said that at its peak it was the largest airline in India, with a five-star rating from Skytrax. A brand valuation by consultancy firm, Grant Thornton put its value at $550 million (Rs 3,000 crore) on resumption of operations. The airline’s brand had been registered separately from the Kingfisher beer trademark. The airline’s brand was pledged to 14 banks including SBI, IDBI, PNB, BOB etc for nearly 7000 crore. After the airline failed to pay back the debts, the banks put up nine pledged trademarks of the airlines for sale. The nine trademarks include Fly Kingfisher, Flying Models, Funliner, Fly the Good Times, Kingfisher and Flying Bird Device, registered in the name of Kingfisher Airlines or held by the United Breweries Group but transferred to the airline for use. However, SBICAP Trustee Co. Ltd (STCL), a wholly owned subsidiary of SBI Capital Markets, did not get any seriou bids or the trademarks. The reserve price was kept at 366.70 crore.
According to brand consultant Harish Bijoor, owner of Harish Bijoor Consults Inc, banks will never be able to sell the Kingfisher brand, since essentially it still represents the Kingfisher which sells beer. He further said that, unless United Breweries completely stops using the trademark Kingfisher, there will be a buyer and hence is ultimately a dud. In 2013, the Reserve Bank of India (RBI) asked banks not to treat Kingfisher Airlines’ brand as collateral since it is intangible. This is because the loan has turned non-performing for most of the banks.
Whilst the legislature is trying to bring brand value and IP assets as a legit collateral, Vijay Mallya’s case has set back the efforts substantially. IP valuation is a big concern when rolling out such loans. There needs to be a set standard for IP valuation and how much it will be worth down the line, considering all possible scenarios. The traditional asset securitization process is still very much embedded in our lending process. Other reasons for this slow pace of IP financing include lack of consciousness to treat IP as a business asset, insufficient market and legal infrastructure for monetizing IP assets, challenges in IP licensing and transfer.
Vijay Mallya faces charges of cheating, criminal conspiracy, money laundering and diversion of loan funds. A few of his companies, including Kingfisher Airlines, face charges of violating The Companies Act, 2013, and norms laid down by the capital markets regulator. He had been accused of not paying salary to his employees whilst having lavish birthday parties which included Enrique Iglesias. King of good times must do what he is good at, right? However, in the process the Indian people have been robbed, the banks are facing a financial crisis and most importantly he has set the back prospects of IP backed financing in India by many years.
- IP-Backed Financing: Using Intellectual Property as Collateral, Duff & Phelps, December, 2019. https://ciiipr.in/pdf/CII-Duff-&-Phelps-Report-on-Using-IP-as-Collateral-2019.pdf
- DIPP, Annual Report 2018-2019