Role of Intellectual Property for Startups and Micro, Small and Medium Enterprises (MSMEs) in India Amidst COVID-19

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The economic challenges presented by the COVID-19 pandemic have all the more emphasized the role of intellectual property as a part of almost every business model. New ways to address the post-COVID challenges have also come to light, and one of the proposed solutions points to a concerted action at a national, regional and international level to enable start-ups and Micro, Small and Medium Enterprises (MSMEs) to participate in and benefit from technological advances.

Recognizing the role of start-ups in driving the innovation ecosystem, the Indian government in the year 2016 started the Start-up India program. To qualify as a start-up under the Start-up India program, a company should, among other things, “work towards development or improvement of a product, process or service and/or have a scalable business model with high potential for the creation of wealth and employment”. The Indian government has already launched a total number of 125 schemes for start-ups under the said program.

On similar lines, the government also launched a dedicated portal for MSMEs to facilitate ease of registration and access to the schemes. Giving a clarion call for Atmanirbhar Bharat (i.e. ‘Self-Reliant India’), the Indian government has recently launched several schemes for reinstatement of MSMEs amidst COVID-19 pandemics, such as Collateral Free, Guarantee Free Scheme, Credit Guarantee Scheme for Subordinate Debt and Equity Infusion for MSMEs through Fund of Funds. The Indian government has also announced economic relief packages worth Rs. 20 lakh crores to assuage India’s economic slowdown amidst the pandemic. In June 2020, the definition of MSMEs under the Micro, Small and Medium Enterprises Development Act, 2006 was also amended to ensure a wider reach of all the benefits. The definition of MSMEs, as it stands amended, is as follows:

Classification of enterprises: An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely: –

(i) a micro-enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.”

The reason for all these proactive measures is because, in India, MSMEs employ about 150 million people and are considered as the backbone of the Indian economy. MSMEs also contribute to about 29 % of India’s gross domestic product (GDP). It is, therefore, essential for the Indian government to support MSMEs. However, merely giving away monetary packages to distressed MSMEs or start-ups would not reap many benefits in the information age. Steps towards encouraging innovation would also have to be taken to pull start-ups and MSMEs out of the COVID syndrome.

Innovation and Intellectual Property (IP)

Technological advancement and innovation are the roots of economic development and the primary drivers of a country’s GDP. By providing incentives to innovators, IP bolsters innovation and plays an integral part in the general economic development of a nation. The Indian government has also sooner than later realized the importance of IP and its role in boosting innovation. In 2019, NITI Aayog, a policy think-tank of the Indian government, released the India Innovation Index 2019 to encourage innovation at the regional level. However, the statistics of IP filings of Indian start-ups and MSMEs are nowhere near the global average. Indian start-ups or MSMEs have limited resources, and that is the reason why a lot of entrepreneurs do not prioritize IP creation and protection. Time and money are two most valuable assets for start-ups and MSMEs, and most of these companies are unwilling to spend either of these in creating and protecting their IP. It has now become imperative for start-ups looking to raise capital to have an IP strategy in place. When pitching a business plan to private equity or venture capital firms, a start-up would be dead in the water if it does not demonstrate an IP portfolio and enforcement measure taken to protect the same. Amidst the COVID-19 pandemic, IP creation and protection has become all the more important for start-ups or MSMEs for valuation or raising capital. While Indian start-ups may have started to realize the importance of IP creation and protection for inter-alia, increasing their valuation and receiving funding, many MSMEs are yet to adopt IP in their business strategy. The primary point of concern here is less about the lack of IP awareness among MSMEs but more about the lack of will of entrepreneurs themselves. The Indian government has already laid down several IP related schemes for start-ups and MSMEs, such as IP Facilitation Centre for MSME and Scheme for Facilitating Start-Ups Intellectual Property Protection, etc. Additionally, several incentives in filing IP applications are also provided to start-ups and MSMEs, such as a reduction in application fees, expedited grants in patent procedures, etc. However, even then MSMEs have little to no contribution to IP filings in India and around the world.

IP filings by Start-ups and MSMEs

The reason for the reluctance of MSMEs to create and protect their IP may be attributed to how these companies carry out their business. Most of the Indian MSMEs still operate as companies in the industrial age. Notably, among MSMEs, Micro-enterprises are the ones that are still operating only as brick and mortar businesses. Such an ancient business model is unsustainable in today’s challenging time amidst the COVID-19 pandemic. Moreover, it is not just the lack of awareness about intellectual property rights (IPRs), but the lack of willingness to change that has kept Indian MSMEs at bay with regard to IP filings.

When it comes to MSMEs, a common perception is that these companies lack awareness about IPRs; however, this is not the case anymore. Contrary to that, some MSMEs do comprehend the need for protecting their IP, thanks to the awareness program and schemes of the government of India. Nonetheless, statistics show that MSMEs engaged in IP intensive activities are still very small in comparison to the large size of the MSME sector in India. Trademark, designs, and copyrights are more visual and appeal to the creativeness of everyone and therefore are widely understood. Whereas, patents do not seem to attract any attention at all. Perhaps because of the technical expertise and cost involved in creating, protecting, and maintaining a patentable invention. Clearly, for MSMEs, the opportunity cost involved in acquiring patent rights outweigh the exclusive rights granted by patents. Perhaps, that is the reason why MSMEs are active in trademark, design, and copyright filings in India and not in patent filings.

Although trademark filing by Indian applicants has seen enormous growth in the past decade, patent filings are still deficient in number. A reason for the minuscule amount of patent filings by start-ups and MSMEs could be attributed to their business model. Many start-ups and MSMEs which have otherwise invested deeply in building their trademark and design portfolios do not go for patent protection primarily because their business model itself is not patent-eligible. India has the second-largest number of internet users across the world and thus the growing number of internet-based start-ups. These start-ups face a roadblock in their patenting strategy when they come across provisions such as Section 3(k) of the Patents Act, which excludes from patentability a mathematical or business method or a computer programme per se or algorithms.

Another reason for the low number of patent filings by start-ups and MSMEs could be because most of these companies work with utility model type inventions, which are not afforded protection in India under the current patent regime. Also, more than one-third of MSMEs carry out a trade (e.g. import and export) as their primary business activity. Such companies have little to nothing in their business model for which they could file a patent application. It is, therefore, indispensable and essential for entrepreneurs to recognize different types of IPRs and also to take suitable legal advice on how to manage and exploit their IP for achieving success in their business.

Yet another reason that may be attributed to the low number of patent filings by start-ups and MSMEs is the differing value of a patent depending upon the field of invention. The value of a patent may differ due to the amount of research and development and the time taken to conceive an invention in a particular field of invention. For example, out of all the MSMEs, the companies involved in the biotechnology field have been the most active in securing patent rights. It may be because inventions in biotechnology field require extensive research and development as well as regulatory approval to launch a novel product. On the other hand, the stakes may not be so high in terms of computer-related inventions. Also, unlike patents in the field of computer-related inventions, patents in the biotechnology field do not lose value within two-three years since there is no rapid innovation in the biotechnology sector. Thus, there is lesser incentive or motivation to protect IP in fields other than biotechnology within MSMEs.

At this stage, the Indian government needs to step up and ease the patentability requirement at least for start-ups and MSMEs. Models of international legal and regulatory framework could be adopted, and a protocol specifically moulded to suit the Indian business ecosystem could be established to encourage more start-ups and MSMEs to file patent applications.

Battling out of the COVID syndrome

For India to become a $5 trillion economy by the year 2025, things got to change. Much has already been said about the correlation between GDP growth rate and patent filings. As per the Indian Patent Office annual reports, from the year 2011 to 2016 the number of patent applications filed by Indian applicants increased from 8,678 to 13,219. Interestingly, the data available at the World Bank website indicates that during the same period, India’s GDP growth rate also steadily increased from 5.24% to 8.25 %. Undoubtedly, there is a strong correlation between patent filings and macroeconomic development. However, it is yet to be seen how technological developments and innovations would pull the world economy out of the slowdown caused by the COVID-19 pandemic.

The COVID-19 pandemic has unquestionably had an adverse impact on all sectors of the economy. However, the sector worst hit by the pandemic is the MSME sector, which has again proved to be most volatile to the economic insurgency. Recognizing the impact of the COVID-19 pandemic, in July 2020 the World Bank also approved a $750 Million Emergency Response Program for MSMEs in India. The MSME sector has seen a sharp fall in revenues due to inter-alia cancelled orders and supply chain interruptions, similar to the 2008 financial crisis. To insure against unforeseen circumstances, MSMEs should consider building their IP portfolio and enter the intangible asset market. A recent (2019) study by European Intellectual Property Office (EUIPO) reveals that even during a severe financial crisis and recession in much of Europe, the IPR-intensive sectors coped better with the problematic conditions than did the rest of the economy.

Generally, the unique selling point of a start-up or MSME would either be an idea that significantly reduces human effort and enhances business productivity or, a business model that generates high cash flows instantly. But the point that start-ups and MSMEs should consider is, “how do you protect that idea and cash flow?” The answer usually comes down to IPRs. Depending on the business model, there could be different types of IP that would be suitable for a company. Not every IP is useful for every business. For example, to some companies, a trade secret could come out to be more valuable than filing a patent. “IP is the companies’ knowledge stocks that provide uniqueness to the company”. Strategic exploitation of IPRs can contribute to lenders’ and borrowers’ investments and can make substantial monetary transformations in the business. A novel method of IP exploitation is IP portfolio securitization, which in simple terms refers to the ways of raising debt by using IP portfolio as collateral. Such means for raising debt have been successfully employed in the past by various companies. For example, companies such as Disney, Nestlé, and Calvin Klein have time and again used their copyrights as collateral to raise debts. Needless to say, that to use IP as a financial instrument, an MSME must showcase that its business model has high cash flow generating capabilities.

The one thing that is common among all start-ups and MSMEs is the need to create a strategy to protect and document as much IP as possible. It would not only help in higher valuation but also promote new and existing entrepreneurs to transform their business potential and creativity into market value and competitiveness. The entire thought process of entrepreneurs needs an overhaul from grass root levels. Hopefully, the COVID-19 pandemic has been an eye-opener for MSMEs to rethink their business strategy and develop an IP portfolio.

Way Forward

IP rights are not just legal means that legislative authorities have to deal with. Indeed, they bring value to the company and unlock new sources of finance for the business”.[1] With that being said, start-ups and MSMEs should realize the significance of IPRs and come up with an IP strategy that is conducive to their business model and growth trajectory. The last thing that you would want as a start-up or an MSME is going into a trade fare with your best product line and encountering a competitor across the aisle with the same products and trade name as yours! So, “own what you know and know what you own”.[2]

Here are some key pointers that every start-up and MSME, irrespective of their business model, can do to foster a culture of innovation and create more and more intangible assets:

  • Rethink your growth strategy. COVID-19 pandemic has been an eye-opener for every business, and it is unquestionable that traditional brick and mortar type businesses are now obsolete. Endeavour to move towards an IP based business model in a phased manner.
  • Restructure your human resource. For start-ups and MSMEs to benefit from IPRs, they have to have a legal and management team both structured to enable strong cooperation. This way, the company would be able to tap on any existing as well as a potential IP. It would also ensure better research and development as well as the actual valuation of the IP, thereby making it possible to use it as a source of finance in times of crisis.
  • Carry out IP due diligence. Before you reap the benefits of your IP assets, it is imperative to carry out an accurate analysis of those assets. Akin to due diligence carried out in the financial industry, IP due diligence is necessary to ascertain inter-alia valuation of IP assets. Proper valuation could be later used for licensing, IP securitization, and other means of value creation.
  • Plan and Implement holistic IP strategies in a phased manner. Strategies which cover all types of IP rights. Also, leverage IPRs to your benefit to ensure steady cash flow.

 

References

[1] Ilayda Nemlioglu, “A novelty on unlocking businesses’ potential growth: Intellectual Property Securitisation”, Procedia Computer Science 158 (2019) 999–1010; available at: https://doi.org/10.1016/j.procs.2019.09.141.

[2] Quote by Jessica J. Harrison, Esq, Resolute Legal PLLC (USA).


Siddhant Sharma is an Indian qualified lawyer specializing in Intellectual Property Rights. He may be reached at [email protected]


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