IP Securities
Introduction
Stock markets are vital element of the economy. The rise or fall of the indices depicts the
economic growth of a nation. Indian stock market, i.e. BSE Sensex has the largest
number of scrips listed on its bourses. Current trends depict that the economy of the
nation is booming, as we see that most of the stocks are trading on their historic highs.
The extension of the same is seen in the Commodities Exchange. In which the
commodities, like vegetables, crops, bullion, etc. are traded. Few days back, the trading
in commodities exchange surpassed the trading in the stock market, in money terms.
Now the question of discussion is whether Intellectual Property (IP) can be traded on
stock exchange as other securities. Securities, in general include shares, bonds,
debentures. To introduce trading of IP on stock exchange, it must fulfil the characteristics
of ‘securities’. But another question pops up in mind, why do we need to trade in IP,
when IP is part of the company, and that company is listed on the bourses. The same
question must arise for commodities exchange too. As the commodities that are traded on
commodities exchange are also part of the securities dealing in commodities that are
listed on stock exchange.
One of the aspect in relation to IP is that more and more companies are relying on IP for
their growth and development. And in some cases, esp. in US, it may form up to 70% of
the assets of the company. The question is why multi-million organisations are relying on
intangible assets for their growth. As IP is an intangible asset, which can neither be seen
or heard. IP is nothing but just the legal recognition has boosted its importance in the
world. Pharma companies, entertainment and publishing houses and companies are the
ones which are most dependent on these IP rights.
The next part of the research paper deals or describes about what is Intellectual Property.
And in the subsequent part, we shall take up the concept of securities, as defined by law
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and as used in general parlance and try to get a checklist of characteristics that are
required to qualify for securities.
Intellectual Property1
Intellectual property, very broadly, means the legal rights which result from intellectual
activity in the industrial, scientific, literary and artistic fields. Countries have laws to
protect intellectual property for two main reasons. One is to give statutory expression to
the moral and economic rights of creators in their creations and the rights of the public in
access to those creations. The second is to promote, as a deliberate act of Government
policy, creativity and the dissemination and application of its results and to encourage fair
trading which would contribute to economic and social development.
Generally speaking, intellectual property law aims at safeguarding creators and other
producers of intellectual goods and services by granting them certain time-limited rights
to control the use made of those productions. Those rights do not apply to the physical
object in which the creation may be embodied but instead to the intellectual creation as
such. Intellectual property is traditionally divided into two branches, “industrial property”
and “copyright.”
The Convention Establishing the World Intellectual Property Organization (WIPO),
concluded in Stockholm on July 14, 1967 (Article 2(viii)) provides that “intellectual
property shall include rights relating to:
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
literary, artistic and scientific works,

performances of performing artists, phonograms and broadcasts,

inventions in all fields of human endeavor,

scientific discoveries,

industrial designs,

trademarks, service marks and commercial names and designations,
www.wipo.int
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
protection against unfair competition,
and all other rights resulting from intellectual activity in the industrial, scientific, literary
or artistic fields.”
Securities
United States is one of the oldest and most developed securities market2 in the world, in
spite of the fact that it was not the first. It was indeed a late entrant, but when it came to
bringing in the revolutions, it was certainly the first, with one of the most advanced legal
regimes in the world. In US, the term ‘securities’ is defined in Section 3 sub-section (10)
of the Securities Exchange Act, 1934 and the sub-section (11) defines the term ‘equity
security’ as follows3:
(10) The term “security” means any note, stock, treasury stock, security future,
bond, debenture, certificate of interest or participation in any profit-sharing
agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust
certificate, preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit for a security,
any put, call, straddle, option, or privilege on any security, certificate of deposit,
or group or index of securities (including any interest therein or based on the
value thereof), or any put, call, straddle, option, or privilege entered into on a
national securities exchange relating to foreign currency, or in general, any
instrument commonly known as a “security”; or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, or warrant or
right to subscribe to or purchase, any of the foregoing; but shall not include
currency or any note, draft, bill of exchange, or banker’s acceptance which has a
2
A securities market is like any other market where buyers and sellers meet to exchange goods and
services. The buyers (investors) are individuals and institutions who have money (capital) to invest. The
sellers are corporations, governments and other investors. The products they sell are securities, including
stocks, bonds and other financial products, which are exchanged for money.
http://www.ecseonline.com/HTMLFiles/FAQ2.html
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http://www.sec.gov/about/laws.shtml
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maturity at the time of issuance of not exceeding nine months, exclusive of days
of grace, or any renewal thereof the maturity of which is likewise limited.
(11) The term “equity security” means any stock or similar security; or any
security future on any such security; or any security convertible, with or without
consideration, into such a security, or carrying any warrant or right to subscribe to
or purchase such a security; or any such warrant or right; or any other security
which the Commission shall deem to be of similar nature and consider necessary
or appropriate, by such rules and regulations as it may prescribe in the public
interest or for the protection of investors, to treat as an equity security.
In India, the position of securities market is such, that it is not quite old, as the securities
saw growth only after coming up of the regulator, i.e. SEBI4. After coming up of the
regulator, we saw a spew of legislations in context to securities market, followed by
regulations from the regulator. The regulations governing the securities market are
Securities and Exchange Board of India (SEBI) Act, 1992, the Depositories Act, 1996,
and Securities Contract Regulations Act (SCRA), 1956 was brought under the authority
of the regulator, although SCRA existed earlier for the purposes of
.
And it is in SCRA that the term ‘securities’ is defined in section 2(h)5 as:
“Securities” include-
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body
corporate;
(a) derivative;
(b) units or any other instrument issued by any collective investment
scheme to the investors in such schemes;
4
5
Securities and Exchange Board of India, www.sebi.gov.in
http://www.sebi.gov.in/Index.jsp?contentDisp=SubSection&sec_id=1&sub_sec_id=1
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(ii) Government securities;
(a) such other instruments as may be declared by the Central Government
to be securities; and
(iii) rights or interests in securities.
If we critically examine the definition of securities as is defined in Indian as well as US
laws, it only defines as to what instruments can be brought under the ambit of the term
‘securities’, with no conceptual explanation, as to what is ‘securities’.
The definition of securities can only be derived from what the various dictionaries or the
historic background behind the development of this concept.
Concept of “security”6
Originally the term “securities” was used to denote security interests (such as mortgages
and charges) supporting the payment of a debt or other obligation. In Early modern
Europe, companies and government agencies began to raise capital from the public using
secured debt obligations, which came to be known as “securities”. As shares became
more readily transferrable from the Victorian era, their functional similarity to debt
securities became clearer, and both forms of investment became known as “securities”.
More recently, the term has also been extended to include units in investment funds and
other forms of readily transferrable investment.
The concept of “securities” should be distinguished from “interests in securities“. The
latter are the assets of a client from whom an intermediary holds securities on an
unallocated basis, commingled with the interests in securities of other clients. The
distinction between securities and interests in securities is often overlooked in practice,
although it is a source of legal risk.
The definitions of ‘securities’ are –
6
en.wikipedia.org/wiki/Securities
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“Securities are a type of transferrable interests representing financial value.
Traditionally securities have been categorised between debt and equity securities,
and between bearer and registered securities.”7
“Securities are financial products or instruments issued by companies and
governments to raise capital. They are generally classified into two main types.
Equity (stocks/shares) represents ownership in a company with specific rights,
including the ability to share in the profits. Owners of equity may receive periodic
income payments from the profits of the company. These are called dividends.
The second type of security is a bond, sometimes referred to as a debenture. A
bond is a loan that investors make to an issuing company or government. The
borrowers (issuers) get the cash they need while the lenders (investors) earn a
designated interest on the amount loaned (principal). At some specified point in
the future, the issuer must pay back the principal.”8
Hybrid
Hybrid securities combine some of the characteristics of both debt and equity securities.
Preference shares form an intermediate class of security between equities and debt. If
the issuer is liquidated, they carry the right to receive interest and/or a return of capital in
priority to ordinary shareholders.
Convertibles are bonds which can be converted, at the election of the bondholder, into
another sort of security such as equities.
Equity warrants are contractual entitlements to purchase shares on pre-determined
terms. They are often issued together with bonds or existing equities, but are detachable
from them and separately tradeable.
7
en.wikipedia.org/wiki/Securities
8
http://www.ecseonline.com/HTMLFiles/FAQ2.html
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Uses of securities
The use of securities can be from the point of view of the issuer and the holder of
securities.
For the issuer
Registered companies, governmental agencies, national and international authorities are
generally the issuers of the securities. The bonds which are issued government carry
relatively low rate of interest as compared to the companies or the corporations. Special
purpose vehicle (SPV) is the new mechanism under the SARFAESI, who issue securities
for the purpose of repackaging the company.
For the holder
Investors in retail are generally of two types, i.e. retail and in wholesale. It indicates the
quantities in which they buy the securities of a particular company. A company must
allocate 35% of its share capital to the retail investors as per the latest guidelines of SEBI.
The wholesale or bulk investors are instrumental for the running of any incorporation.
These are institutional investors which normally include investment banks, insurance
companies, pension funds and other managed funds.
Investment
The traditional economic function of the purchase of securities is investment, with the
view to receiving income and/or achieving capital gain. In case of debt securities or the
debentures, companies offer a higher rate of interest than what is offered by banks.
Equity investment does not offer any regular income in the form of interest, etc., but
dividend are offered by companies to the investors or it might result in getting the long
term benefits in terms of capital appreciation.
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Collateral
The last decade has seen an enormous growth in the use of securities as collateral.
Commercial and investment banks normally take securities as collateral. If a person takes
a loan from the bank, then he can deposit securities as collateral to the banks, in case he
goes insolvent.
Primary and secondary markets
The securities markets can be divided into the primary markets and the secondary
markets. Primary markets (also known as capital markets) comprise of new securities to
their first holders. The issue of new securities is commonly known as an Initial Public
Offering (IPO). Companies generally engage investment and merchant bankers for
finding the buyers or takers for the issue. The arrangement of engaging these bankers is
called underwriting. In recent years, the practice of underwriting has been such, that it
has been concentrated in the hands of few hands. In US, Goldman Sachs, Morgan Stanley
and Merrill Lynch are the popular players and in India, JM Morgan Stanley, Enam
Securities Pvt. Ltd. and SBI Capital are the prominent players.
Transferability is an essential characteristic of securities. This trading is called the
aftermarket or secondary market. Secondary markets are the markets or exchanges
which facilitate the meeting of buyers and sellers. They are popularly referred to as stock
exchanges. In India, the most popular ones are Bombay Stock Exchange and National
Stock Exchange.
Listing of securities
Securities are listed in a stock exchange. Stock exchange is an organized and officially
recognised market on which securities can be bought and sold.
Few types of securities are listed below:
1. Bearer securities
2. Registered securities
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3. Divided and undivided securities
4. Fungible and non-fungible securities
On the basis of the above discussion pertaining to the securities, the following checklist
can be prepared for the securities, so as to find that whether or not, IP qualifies as a
‘securities’ or not.
1. An instrument that signifies an ownership or debt position in a corporation.
2. A financial instrument issued by a company and traded on a Stock Exchange.
3. Shares produce a variable dividend and bonds, a fixed interest. Some amount of
benefit is derived from securities.
4. A security can refer to an instrument which allows the holder to claim an
ownership position in a corporation (a stock)
5. It can be transferred from one person to another.
6. A security is a certificate of ownership in an investment.
7. A financial instrument which represents a claim over real assets or a future
income stream.
8. These instruments are usually tradeable.
Regulation of Securities Markets
In India, securities markets are regulated by SEBI. Although Department of Company
Affairs is also associated with companies and its registration and the regulation and all
the other procedural aspects. But primarily, SEBI is the primary regulator, when it comes
to listing in the market, trading and dealing with the investors. SEBI, as the regulator has
primarily the three functions:
1. To protect the interest of the investors.
2. To promote and develop the securities markets.
3. To regulate the securities market
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Securities are regulated to help ensure that investors have accurate information about the
securities and their value, to facilitate the trading (purchase and sale) of securities, to help
maintain the integrity of the trading system, and to prevent securities fraud. This is
achieved through regulation of the conduct of those who issue securities, regulation and
licensure of brokers and dealers who facilitate the trade of securities, and even regulation
of the conduct of individual investors.9
Mortgaging IP
IP can be mortgaged as this is right which comes with an IP. “Like any other form of
property, intellectual property can be sold, leased or mortgaged - so long as ownership
has been established unambiguously. By providing security of knowledge, and
establishing rights and rewards, intellectual property stimulates the innovation process.”10
Patents can be bought, sold, mortgaged, or licenced to others. 11 ‘In addition to the many
other benefits patents can be used to gain capital. They can be sold, or mortgaged to a
bank to raise funds. One can also licence the Patent in order to raise funds through
royalty payments.’12
In an article titles “Why It’s All About Location” published on www.ipfrontline.com by
Mr. Craig P. Opperman, in which he has discussed about Patent real estate model. In the
article, the author describes the various issues relating to patent in context or relation to a
house, in which it is clearly stipulated that patents holder has all the rights as that of the
person owning a house.
In a report by Canadian Law Commission issued on May 14th, 2004, an analogy has been
drawn between IPR and the land.13
9
Aaron Larson, Securities Law - An Introduction, www.expertlaw.com/library/
securities_law/securities_law.html, (July, 2004).
10
http://www.bbsrc.ac.uk/business/ip/ip.html
11
http://www.ipwealth.com.au/information.htm
12
http://www.fitzpatricks.co.uk/patents.html
13
http://www.lcc.gc.ca/resources/news_releases-en.asp?id=43
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“IPRs are more analogous to land than to movable property in three important
ways. First, IPRs constitute a relatively stable and durable form of property.
Unlike tangible goods, they are not subject to destruction by fire or theft. And,
unlike other types of intangible movables, IPRs cannot be obliterated through
their transformation into cash and their absorption into the marketplace (as
happens, for example, where receivables are collected or negotiable instruments
are negotiated prior to default and enforcement). Second, like land, IPR
ownership can be subdivided among different owners, either through partial
assignments or through the grant of territorially confined exclusive licences.
Finally, like land, IPRs last long enough that successive transfers of ownership
(and a correspondingly lengthy chain of title) are a real likelihood. In short, as
with immovables, establishing a title registry for IPRs can be justified on the
grounds of commercial efficiency.”
Can IP be called ‘securities’?
As said earlier, IP is the right created by the law in favour of a person and the person in
whose favour the right is created is the owner of the IP. IP cannot be seen or felt; it is an
intangible property, recognised in the eyes of law.
As said earlier, it is very difficult to issue IP as ‘securities’. IP forms vital element of the
assets of the company. Now we try to put the IP in a litmus test, on the basis of the
checklist designed for a particular interest to qualify as ‘securities’.
If an IP instrument is issued to signify the ownership or the debt position. As pointed
earlier, it is difficult to trade IP separately as it forms the pool of assets of the company. It
is certainly not feasible to make shares of an IP. As it depends from person to person,
some people want to have the exclusive rights with them only and may not allow others
to contribute or be a part of the asset and corporations have their stocks listed on the
stock exchange. The modalities to be worked to make an IP tradable are huge, that
whether it should be listed on stock exchange through open offer or closed subscription.
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IP may or may not produce returns. The income stream factor cannot be ascertained. The
legal battles that run over IP are immense. A patent is subject to litigation. If a patent is
revoked, it might bring down the value to negligible levels. The transferability of shares
in case of IP may not be that easy as it is case with other assets.
IP on these parameters or bottlenecks cannot be traded as securities. But it might or can
be traded on commodities exchange as a commodity, which is beyond the scope of this
paper. However, for the assets as IP, a separate exchange needs to be developed for
trading of IP.
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