Question 1

What is covered in an IP due diligence and why is it done?

Accepted Answer

IP due diligence is conducted in M&A, VC/PE investment, licensing, and franchising transactions to verify: (1) what IP the target owns vs. licences; (2) whether registered IP (patents, trademarks, designs, copyrights) is actually registered, in force, and in the target's name; (3) ownership of IP created by employees, contractors, and founders; (4) freedom to operate (FTO) — whether the target's products infringe third-party IP; and (5) material IP litigation/disputes.

Question 2

What is an "IP register" and how is it audited?

Accepted Answer

A well-maintained IP register lists every IP asset — trademark, patent, design, copyright work — with registration number, filing date, renewal date, jurisdiction, owner, and licences granted/received. In DD, the CA and lawyer cross-check the register against: Trademark Registry records (IPRS portal), Patent Office records (e-SankhyaGatha), Design Registry, and copyright registration certificates. Gaps between the register and actual registrations are a red flag.

Question 3

How is IP ownership verified for software developed by employees or contractors?

Accepted Answer

Section 17 Copyright Act 1957: works made in the course of employment vest in the employer — no assignment needed. For contractors: IP vests in the contractor unless there is an express written assignment. In DD, the CA reviews: employment agreements (IP assignment clause), contractor agreements (work-for-hire or assignment clause), and founder IP assignment agreements executed at inception. Missing contractor assignments are a critical gap in SaaS and tech companies.

Question 4

What is Freedom to Operate (FTO) and how does a CA firm assist?

Accepted Answer

FTO analysis determines whether a product or process can be commercialised without infringing valid third-party patents in a given jurisdiction. A CA firm does not conduct FTO independently — that requires patent lawyers with technical expertise. The CA firm's role in IP DD is financial: valuing IP assets (royalty relief method, multi-period excess earnings method per ICAI Valuation Standards 2018), identifying IP-related contingent liabilities (infringement litigation), and assessing IP-related tax positions (royalty deductibility under Section 80RRB, capital gains on IP transfer).

Question 5

How is IP valued for M&A or licensing purposes?

Accepted Answer

Three methods: (1) Cost approach — what it would cost to recreate the IP asset; (2) Market approach — comparable licence royalty rates or IP transaction multiples; (3) Income approach — royalty relief method (the royalty the company avoids paying by owning the IP, discounted to NPV) or MEEM (Multi-Period Excess Earnings Method). Under SEBI and Companies Act requirements (for demerger schemes, related-party IP transfers), a Registered Valuer must prepare a formal valuation report under ICAI Valuation Standards 2018.

Ip Due Diligence

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