Brand as Collateral explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Security is only security if it can be sold. When the moment came, no airline would take the trademarks at any price.
The exposure
The company started funding its losses by drawing loans from various banks and by the year 2012, it has an outstanding loan of more than Rs. 7,500 crores towards a consortium of Banks out of which SBI had the maximum exposure of Rs. 1600 crores. The company soon started defaulting in paying back its lenders leading to a series of legal and regulatory actions against the company.
Against that, the security: based on this Valuation, the company was able to raise loans from banks by making its Brand the single largest collateral for these loans.
Ordinary security has a property that a brand does not: its value is largely independent of the borrower's fortunes. An aircraft, a building or a receivable can be sold to somebody else at close to its market price whether or not the borrower survives.
A brand is the opposite. Its value is made of the borrower's performance. Default, unpaid salaries, a grounded fleet and a promoter controversy do not merely coincide with the fall in the brand's value — they cause it.
So the security correlates almost perfectly with the risk it is meant to cover. It is worth most when it is not needed, and worth least at the moment of enforcement. That is why the case says lenders should have relied on the collateral that can be sold or enchased at a later stage.
The numbers show the correlation exactly. INR 4,100 crore at the peak; INR 160 crore on default; nothing realised on sale. The Standard's own guidance points the same way — brand value is driven by trust, by presence, by affinity, all of which a public collapse destroys.
Two questions would have caught it, and the case names both: on what basis is the trademark value sustainable and how would the business have to perform to make it as valuable as claimed. The second is the sharper one. It converts a valuation into a testable forecast — and a business that had never made a profit could not have met it.
The third omission was ongoing: banks should monitor the brand's value on a regular interval as there can be impairment on account of deterioration in financial performance. A brand taken as security in 2008 and not re-measured until default was, in effect, unsecured for four years.
The sale that failed to realise the brand as collateral
In April 2014, SBICAP Trustee Co. Ltd, a wholly-owned subsidiary of SBI Capital Markets Ltd, attempted to sell the Kingfisher Airlines brand and called for an expression of interest in acquiring trademarks linked to the grounded Kingfisher Airlines.
Unfortunately, there were no takers for these brands as by that time the controversy surrounding Kingfisher had damaged the brand so badly that no airline came forward to take it.
The Standard's remark that goodwill can be transferable or non-transferable applies with equal force to a brand. A name fused to a promoter's reputation, and to a public failure, transfers nothing a buyer wants.
What lenders should ask before taking a brand as collateral
- Is the security realisable? Prefer collateral that can be sold or enchased at a later stage.
- On what basis is the trademark value sustainable?
- How would the business have to perform to make it as valuable as claimed?
- Who valued it, for what purpose, and on what date?
- How often will it be re-measured for impairment?
A crisis of value
The role of Bankers and Regulators in the entire case was also questioned and investigation was carried out by SFIO. The most pertinent question asked was how the Banks can issue loan against Brand as a single largest collateral.
While no one could be expected to behave in tralfamadorian way; this rather infamous case has brought to fore the role of valuation and more particularly the valuation of intangibles and to this date offers a case study arising out of Crisis of Value.
Common mistakes taking a brand as collateral
- Accepting a brand as the single largest security in a facility.
- Relying on a valuation prepared for another purpose or another date.
- Not asking what performance would sustain the claimed value.
- Failing to re-measure the brand between origination and default.