By – Sai Ruchitha

Abstract:

This article evaluates the central role of intellectual property in shaping the success of startup exit mechanisms in India. It highlights how IP maturity influences deal valuation, regulatory approval, and investor decision-making in M&A transactions and IPOs. By examining statutory requirements, due diligence practices, and cross-jurisdictional contrasts, the study shows that strong IP governance reduces transactional risk and enhances market credibility.

Introduction:

In the current innovation economy, intellectual property has become the most valuable intangible asset for startups and the core of their economic value. In the Indian context, the importance of intellectual property has become more prominent in the past few years because of the exponential growth of start-ups after the launch of the “Startup India” initiative, which has led to an increase in high-stakes exit transactions through mergers & acquisitions (M&A) and Initial Public Offerings (IPO). With more start-ups looking to make exit transactions, intellectual property assets such as patents, trademarks, copyrights, trade secrets, and exclusive technologies have become the key drivers in such exit transactions. At the same time, government efforts such as the Scheme of “Startups Intellectual Property Protection” also indicate the government’s focus on promoting the development, protection, and exploitation of intellectual property in start-ups.

In this setting, this article seeks to address an important and pressing issue that is also critical in nature. Is India’s existing intellectual property framework supportive of high-value startup exits and protective of investors? This article analyses the interface between Indian IP laws and startup exits, examining how due diligence, disclosure obligations, and statutory regimes shape valuation and investor confidence. The analysis is structured around three domains: 1.M&A transactions, 2.IPO frameworks and comparative-regulatory perspectives to evaluate whether India’s current IP framework adequately balances innovation, investor protection, and transactional efficiency.

IP in Corporate Consolidation: Due Diligence, Assignment, and Risk Allocation in M&A

The integration of startups through mergers and acquisitions (M&A) foregrounds IP as both a commercial and legal determinant of deal success. When a startup is sold or merged into a larger company, its IP portfolio must be rigorously vetted. In an IP-driven acquisition, buyers typically undertake extensive legal due diligence to ensure clear title to all critical IP assets. In India, Section 68 of the Patents Act, 1970, which deals with patents to be in ‘writing’ and ‘duly executed’, and Section 45 of the Trade Marks Act, 1999, impose strict formality on registering changes in ownership of registered trademarks. These provisions reflect a formalistic approach to IP ownership, where title recognition is contingent upon documentary compliance rather than commercial intent.

 Further, even Indian courts have underscored the necessity of documentary clarity in corporate IP ownership. In Tech Plus Media Pvt. Ltd. v. Jyoti Janda (2014), the Delhi HC held that a juristic person cannot be the author of a copyrightable work and that, in the absence of a valid assignment or employment agreement, ownership cannot vest in the company. This ruling has direct implications for startup transactions: during M&A or IPO due diligence, investors require a clear “chain of title” showing that all IP rights are validly transferred to the entity. This also prevents former employees from later claiming ownership over work created during employment, since Section 17 of the Copyright Act requires explicit assignment for the company to hold the rights. A lapse in such documentation, even if inadvertent, can undermine enforceability and significantly depress valuation during M&A. 

IP due diligence in India also extends beyond registered rights. Acquirers must assess reliance on unregistered or non-patentable IP, such as algorithms, software code, and trade secrets, which lack statutory protection and are enforceable primarily through contract and equity. Dependence on third-party IP, including licensed or open-source software, introduces additional risks where change-of-control clauses, licence restrictions, or consent requirements apply. Further, Indian transactional practice adds further complexity through consideration and stamp duty requirements and the necessity of recording assignments with IP authorities as a condition precedent to closing. As a result, IP-driven M&A transactions rely heavily on representations, warranties, indemnities, and escrow mechanisms. While this framework enhances legal certainty, it also increases transaction costs and timelines, underscoring the importance of robust IP governance well before startups pursue an exit.

Intellectual Property in IPOs and Public Offerings

While M&A transactions mainly involve private risk allocation between sophisticated parties, IPOs change the role of intellectual property by subjecting it to heightened public disclosure and regulatory scrutiny. A robust IP portfolio can serve as a signal of innovation and strengthen the company’s market valuation as its IP assets show its potential for growth and its ability to protect and commercialise its innovations. Because of this, IP forms a core part of the regulatory scrutiny applied during the IPO process. Hence, a company in its ‘prospectus’ is required to reveal any material information affecting investor decisions, which plainly includes key IP assets and disputes as per SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations. Any misstatement in such a prospectus, even incomplete disclosures of intangible assets, constitutes investor deception and may trigger liability under Section 34 (Criminal Liability), Section 35 (Civil Liability), and  Section 447 (Punishment for Fraud) under the Companies Act, 2013.

Beyond compliance with disclosure obligations, intellectual property also plays a decisive role in shaping market perception and investor behaviour during an IPO. Empirical studies show that patent holdings can significantly increase investor confidence by 0.507% in US firms and 1.13% in European firms. Further Research by Hossen & Ali shows that innovative firms will see better IPO outcomes, including higher post-IPO stock prices and longer IPO windows. This suggests that patenting activities, especially for high-tech firms, directly enhance their market credibility and influence the capital they can raise. Investors view patent portfolios as strong indicators of competitive advantage and future revenue streams.

At the same time, a robust trademark portfolio is equally important for ensuring brand stability and meeting regulatory expectations. To prevent delays in the listing process, startups must make sure that all key marks are properly registered, uncontested, and enforceable in relevant jurisdictions. Conducting a trademark “audit” helps identify domain names, brand assets, licensing agreements, and any gaps that may pose risks during SEBI’s scrutiny. They must also disclose any licensed technologies, restrictive covenants, or pending IP litigations that could impact the company’s future financial performance. Even any lapses, such as unregistered inventions, unclear ownership, or unresolved disputes, must be candidly disclosed to maintain regulatory compliance. This allows investors to assess both competitive advantages and risk exposure before purchasing shares in an IPO. Hence, India’s regulatory specifics under SEBI’s ICDR Rules and the Companies Act, do strictly impose statutory liabilities for misstatements and thus enforce a high degree of transparency. This demonstrates India’s commitment to balancing innovation with investor protection, ensuring that neither objective is compromised.

Conclusion: IP as the Strategic Core of Successful Startup Exits

In India, the mitigation of intellectual property risk in startup exit transactions relies predominantly on rigorous due diligence and disclosure obligations rather than flexible ownership recognition mechanisms. In M&A transactions, acquirers safeguard their interests through extensive representations and warranties affirming that IP assets are original, unencumbered, and non-infringing, a contractual strategy necessitated by India’s manual and document-intensive IP assignment and recordation framework, which delays ownership recognition and elevates transaction costs. By contrast, the US recognises both legal and equitable assignments based on intent and consideration even before formal recordal, as affirmed in FilmTec Corp. v. Allied-Signal Inc., thereby reducing procedural friction, while the European Union’s EUIPO E-Register enables real-time, electronic, and largely ministerial recordation of IP transfers, enhancing transactional efficiency. A similar divergence is evident in the IPO context, where India’s regulatory regime under SEBI’s ICDR Regulations and the Companies Act, 2013, imposes stringent civil and criminal liabilities for IP-related misstatements or omissions, enforcing a higher degree of transparency than many U.S. or European frameworks that permit greater issuer discretion through materiality thresholds. While this disclosure-centric approach strengthens investor protection and market integrity, it simultaneously magnifies the consequences of procedural lapses in IP ownership and documentation, underscoring India’s broader regulatory preference for certainty and accountability over flexibility; aligning these robust disclosure standards with more efficient IP ownership and recordation mechanisms would better ensure that innovation and investor protection are not compromised in high-value startup exits.

About the Author:

Sai Ruchitha is a third-year law student with an interest in IP law, mergers and acquisitions, and regulatory policy. She analyses how legal infrastructure influences valuation, innovation, and exit strategies in the Indian startup landscape.

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