Why Companies Must Give Greater Importance to Intellectual Capital

A company may own factories, buildings, machinery and inventories, yet these physical assets may represent only a small part of what the market believes the company is worth. The real source of value may lie in its people, knowledge, technology, patents, brands, customer relationships, organisational systems and reputation.

This is the central message behind T. V. Rao's data in Hurconomics for Talent Management. Rao's Table 2.1 compares the net tangible assets of selected Indian companies with their total market value. In several information-technology companies, tangible assets represented extraordinarily small percentages of market value: Engineers India 1%, TCS 1.5%, Infosys 2%, Satyam 2%, i-Flex 3%, i-Gate 3% and Wipro 3%. Even companies such as BHEL, Hero Honda, HLL and Britannia were shown at only 4%.

The point is not that the remaining percentage is literally "intangible assets". Accounting does not permit such a conclusion. Rather, the comparison shows how much of corporate economic value exists beyond the conventional tangible-asset base.

From physical capital to intellectual capital

Modern businesses increasingly compete through things that cannot be touched: software, patents, proprietary technology, data, brands, organisational knowledge, skilled employees, customer relationships and business processes.

The Intellectual Property Office of Singapore notes that intangible assets include patents, trademarks, copyrights, designs, software, proprietary data, licences, customer relationships, brands and goodwill. It also reports that global corporate intangible value reached about US$79.4 trillion in 2024 and that intangible assets represented about 90% of the value of S&P 500 companies.

The same transformation can be seen at the national level.

Singapore provides a particularly interesting example. IP-intensive industries accounted for approximately 49% of Singapore's GDP and 38% of employment in the 2011–2013 period. Singapore has consequently developed a deliberate national strategy around intellectual assets and intellectual property. Its current Intangibles Disclosure Framework encourages companies to identify, measure, manage and communicate assets such as brands, patents and designs.

Switzerland provides another powerful example. Switzerland's government describes adequate IP protection as a core interest of its innovation-driven economy and reports that around 80% of Swiss exports rely on intellectual-property rights. Pharmaceuticals, chemicals, machinery, watches and precision instruments all depend heavily on patents, trademarks or other IP rights. Switzerland has also remained the world's number-one innovation economy in the WIPO Global Innovation Index.

These economies demonstrate an important principle: intellectual property is not merely a legal protection mechanism; it is an economic asset.

Why goodwill matters

Goodwill is frequently misunderstood.

Under the Indian Partnership Act, 1932, Section 14 expressly includes goodwill of the business within the property of the firm. Section 55 specifically deals with the sale of goodwill after dissolution.

Modern accounting gives goodwill a different but complementary treatment.

Under Ind AS 103, Business Combinations, goodwill arises in a business combination when the consideration transferred and other relevant components exceed the fair value of identifiable net assets acquired. Ind AS 103 also explains that certain values which cannot be recognised separately as identifiable assets—such as the value attributable to an assembled workforce—may be subsumed into goodwill.

Under IFRS 3, the acquirer recognises and measures identifiable assets and liabilities at fair value and allocates the residual acquisition value to goodwill.

However, internally generated goodwill is not recognised as an asset. Ind AS 38 specifically states that internally generated goodwill cannot be recognised because it is not an identifiable resource that can be reliably measured. IAS 38 follows the same principle: acquired goodwill is accounted for under IFRS 3, while internally generated goodwill is not recognised.

This creates an important paradox.

A company can spend decades building an excellent reputation, customer loyalty and organisational capability, but much of that value may not appear as an asset on its own balance sheet. Yet when another company acquires it, the market may be willing to pay substantially for those very attributes.

What is brand value?

Brand value is the economic value attributable to a brand. It is not simply the advertising expenditure incurred by a company, nor is it identical to market capitalization.

A strong brand can generate economic benefits through:

• customer preference;

• pricing power;

• repeat purchases;

• lower customer-acquisition costs;

• distribution strength;

• licensing opportunities;

• market entry advantages; and

• protection against competitors.

Brand valuation therefore attempts to estimate the future economic benefit attributable specifically to the brand.

One commonly used approach is the relief-from-royalty method. The question is: If the company did not own the brand and had to license it from someone else, what royalty would it have to pay? The present value of those hypothetical royalty savings provides an indication of brand value.

Other approaches include the income approach, excess-earnings approach and market approach, depending upon the nature of the asset and available evidence.

Brand value during mergers, acquisitions and demergers

This becomes particularly important during M&A, amalgamation and demerger transactions.

Under Ind AS 103, an acquirer must identify separately recognisable intangible assets acquired in a business combination and measure them at fair value. Ind AS 38 then governs the subsequent accounting for qualifying intangible assets.

EY's study of Indian purchase-price allocations found that, across the transactions examined, approximately 28% of enterprise value was allocated to identified intangible assets and another 35% to goodwill, although the proportions vary considerably by industry. IT, technology, telecom, consumer products and life sciences showed particularly strong intangible allocations.

Actual transactions demonstrate the point.

Five examples

1. Tata–Air India

Tata acquired Air India for an enterprise value of ₹18,000 crore. The transaction transferred not merely aircraft and other physical assets but also iconic brands including Air India, Indian Airlines and the Maharajah, together with international slots, bilateral rights and customer relationships. Independent analysis has estimated the Air India/Indian brand component at approximately ₹5,000–7,000 crore, using a relief-from-royalty approach. This is an estimate rather than an independently reported audited brand carrying amount, so it should be treated accordingly.

2. HUL–GSK Consumer Healthcare

The merger brought brands such as Horlicks, Boost, Maltova and Viva into Hindustan Unilever. HUL separately acquired the Indian Horlicks intellectual-property rights from GSK for ₹3,045 crore, plus transaction costs, resulting in approximately ₹3,136 crore recognised as an intangible asset. The transaction also recognised substantial intangible assets and goodwill associated with the GSK Consumer Healthcare business.

3. Kraft–Cadbury

Kraft's acquisition of Cadbury for approximately US$18.547 billion provides a particularly clear illustration of the scale of intangible value. Kraft's purchase-price allocation recorded approximately US$12.905 billion of intangible assets and US$9.530 billion of goodwill. The disclosed figure is for intangible assets collectively rather than a separately identified Cadbury brand value, which is precisely why brand value and total intangible value must not be confused.

4. Google–Motorola Mobility

Google acquired Motorola Mobility for approximately US$12.4 billion. The purchase-price allocation assigned US$5.5 billion to patents and developed technology, US$700 million to customer relationships, US$800 million to other net assets and US$2.5 billion to goodwill. Trade names and other intangibles were also separately recognised. This illustrates how intellectual property can dominate the economics of an acquisition even when the target owns substantial physical assets.

5. Coca-Cola–Parle brands

An older but famous Indian example is Coca-Cola's acquisition of the Parle beverage brands—including Thums Up, Limca, Gold Spot and Citra—for approximately ₹180 crore. The strategic objective was not merely to purchase factories; it was to obtain established consumer brands and accelerate market penetration.

These examples show why a demerger, merger or acquisition cannot be evaluated solely through land, buildings, machinery and book value. The value of the brand, technology, customer base, contracts, licences, patents and organisational capability may be decisive.

What Rao's numbers tell us

Rao's table becomes much more meaningful when viewed through this modern lens.

If TCS had net tangible assets equivalent to only 1.5% of its market value, the obvious question is: What creates the other economic value?

The answer is not one single asset.

It can include:

people + knowledge + software + intellectual property + customer relationships + brand + reputation + systems + future growth + goodwill.

That is why the correct interpretation of Rao's table is not "98.5% intangible assets." It is that only a very small proportion of the market's valuation was represented by net tangible assets.

This distinction is also supported by Ind AS 38 itself, which warns that the difference between an entity's fair value and the carrying amount of its identifiable net assets can capture many factors, but does not automatically represent the cost of intangible assets controlled by the company.

Why companies should maintain goodwill and intellectual property

A company's intellectual capital should therefore be managed just as deliberately as its physical capital.

Goodwill must be maintained because reputation takes years to build but can disappear rapidly through poor governance, unethical conduct, bad customer service or inconsistent quality.

Intellectual property must be protected because an invention without legal protection can be copied, a brand without trademark protection can be challenged, and proprietary technology without proper controls can leak.

Human capital must be developed because skilled employees create knowledge that often becomes the foundation of innovation and customer value.

Brands must be continuously invested in because a brand is not merely a logo. It is a relationship between the organisation and its market.

For investors, this has a direct implication. Portfolio valuation should not stop at book value, fixed assets and traditional financial ratios. An investor should also ask:

What intellectual property does the company own? What brands does it control? How strong are its customer relationships? How dependent is it on key people? Does it possess pricing power? How defensible is its technology? How much of its market value is supported by identifiable assets, and how much depends on expectations of future intangible-driven earnings?

The global economy is increasingly rewarding companies that convert knowledge into protected economic rights and protected economic rights into cash flows.

The lesson from Rao's data, Singapore, Switzerland and modern M&A transactions is therefore straightforward:

The future value of a company will increasingly depend not only on what it owns physically, but on what it knows, what it creates, what it protects and what customers are willing to pay for.

Tangible assets build the foundation. Intellectual capital creates differentiation. Intellectual property protects it. Brands monetise it. Goodwill reflects the residual economic advantages that buyers are willing to pay for.

A company that understands this will manage its intellectual capital as seriously as its factories, land and machinery—and investors who understand it will be better equipped to value the companies of the knowledge economy.