Uncovering the complexities in asset leasing

So far, alternative investments were accessible only to high net worth individuals (HNIs) in the form of AIFs (Alternative Investment Funds). These require minimum investment 1 crore. Now, over the years one of the new-age alternative investment options – from invoice discounting to asset leasing to peer-to-peer lending and fractional – has emerged, targeting small investors and promising returns of up to 20%. Up to real estate – have come to the fore. , These are affordable for retail investors as the minimum ticket size starts from 3,000.

This article, the first in a Peppermint The series on alternative investments deals with property leasing and what it means for retail investors.

What is asset leasing?

Asset leasing refers to a form of investment in which individuals or a consortium of investors fund a lease transaction and earn fixed monthly payments. Asset leasing is offered by platforms such as Gripinvest, Leapround, Giraffe and Paysay, but the leasing structure varies from platform to platform.

For example, let’s take the case of a startup X, which needs some EV scooters for its operational needs. Instead of buying scooters, X decides to lease them. An asset lessor, in this case called Paise, lists this leasing request on its platform and invites investment. Multiple investors can invest in this listing of Giraffe, which follows a limited liability partnership (LLP) structure and acts as an intermediary, facilitating the leasing of batteries between X and the investors. does.

Once the required funds are collected, Pyse sets up an LLP in which each of the investors is made a partner and the capital is used to buy the EV scooter. The platform then leases these scooters to X for a predetermined fixed return. The principal along with the accrued interest, which is the monthly lease payment, is disbursed by the platform to the investors.

When the lease expires, X returns the EV scooters to the platform, which either sells them to interested buyers or other rental companies. The income generated from this sale is also distributed among the initial investors, allowing them to realize their returns from both the lease payments and the sale of the property.

A different model of leasing is adopted by Leaf Round, in this direct leasing model, each investor owns an asset and leases that asset to the lessee company. In this case, the leased assets are small items ranging from the cost of a Wifi router to 2,700 for a laptop 70,000. Investors own the property, but at the end of the lease term it is managed by the buying and selling platform for a fee. Interest earned by investors is taxed at slab rates in the direct leasing model, while interest earned through the LLP model is taxed at 31.2%.

The third leasing structure is that of securitized debt instruments or SDI. This model followed by Gripp is called LeaseX. The company, which earlier followed the LLP model, launched SDI in October 2022 and has now completely moved to the SDI model.

In this model, SDIs issued to investors by a SEBI-registered trustee are owned by Grip (the promoter) and are listed on the NSE. It should be noted that SDI requires minimum investment 2.5 lakh, but Nikhil Agarwal, founder and CEO of Gripp, told Peppermint that they’re working to bring it down 1 Lac. Furthermore, SDIs are illiquid and can be sold in the secondary market, but there are very few buyers at the moment and hence sellers may have to offer deep discounts. The upside is that SDI is rated by both the rating agencies CRISIL and ICRA. “This helps our users to get an independent assessment of the riskiness of investment opportunities,” said Agarwal. Since SDI is treated at par with a bond, notional gains made on its market value attract capital gains tax at slab rates.

Under all three of these structures, the listing shows an internal rate of return (IRR) that investors can earn.

Defect in IRR

The IRR metric is used for investments that involve regular payments and a balloon payment at the end of the investment term. A balloon payment is a large, one-time payment that occurs at the end of a loan term, followed by a series of smaller installments. IRR assumes that regular payments are reinvested at the same rate of return. This is a flawed assumption because in most cases the payments are reinvested at a very low rate or not reinvested at all.

MIRR is a modified version of IRR that addresses this limitation. The MIRR considers a reinvestment rate that represents a more realistic scenario than the IRR. For example, consider that you invest 50,000 in an asset leasing listing that offers a pre-tax IRR of 18% and a tenure of two years. will get monthly payment of 2,125 and receive a balloon payment of Rs. 10,000 at the end of the lease term (after the asset is sold).

But, the assumption in this example is that all monthly payments are reinvested at 18%. Whereas, assuming the monthly payments are reinvested in an AA-rated corporate bond, which has a yield to maturity, or YTM, of 9%, the MIRR comes in at just 10% (pre-tax). However, if the principal is amortized throughout the life of the investment and a balloon payment is not to be made at the end, as is the case with the SDI model, IRR is a fairly appropriate metric to use in such a case. ,

Assuming the investor falls in the 30% tax bracket (an LLP is taxed at 31.2%), the post-tax returns would go down to 7-8%. The platform also charges a fee of up to 2% which will further reduce your final returns. Even after taking a higher risk, investors in the highest tax bracket get only 7-8% post-tax returns. Currently, FDs are offering post-tax yields of 5-7% with very low risk.

Note that 10% TDS is deducted if the annual rental amount exceeds 2.4 lakhs.

beware of the risks

Asset leasing carries the risk of default on lease payments by the lessee. If the lessee company becomes insolvent, you may not get your money back, said Vishwas Panijar, partner, Nangia Andersen LLP.

The platform also does not take any responsibility for delay or default in payment.

“Our projects are mostly with listed companies like Tata, which means they are backed by reputed companies with a proven track record. You can withdraw your money after a lock-in period of 6 months, and with Paise, you can make a positive impact on the environment, while also earning a good return on your investment.”

The platforms claimed a 0% default rate and a deal pass-through rate of less than 1%, but Peppermint Could not independently verify these claims.

(For the extended version of this story, visit livemint.com)