Unravelling the complexities in asset leasing

Hitherto, alternative investments were so far accessible only to high net worth individuals (HNIs) in the form of AIFs (alternative investment funds). These require a minimum investment of ₹1 crore. Now, a slew of new-age alternative investment options—from invoice discounting to asset leasing to peer-to-peer lending and fractional real estate—have cropped up in the last few years aimed at small investors and promising returns of up to 20%. These are affordable to retail investors as the minimum ticket size starts from as low as ₹3,000.

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

What is asset leasing?

Asset leasing refers to a form of investment wherein individuals or a consortium of investors fund a lease transaction and earn fixed monthly payments. Asset leasing is offered by platforms such as GripInvest, LeafRound, Jiraaf and Pyse, but the leasing structure varies from one platform to another.

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

After the requisite funds are collected, Pyse sets up a LLP wherein each investor is made a partner and utilizes the capital to purchase EV scooters. The platform then leases these scooters to X for a predetermined fixed return. The principal, along with interest earned , which is the monthly lease payments, are distributed by the platform to investors.

When the lease term comes to an end, X returns the EV scooters to the platform, which either sells them to interested buyers or other rental companies. The proceeds generated from this sale are also distributed among the initial investors, allowing them to realize their returns from both the lease payments and the asset sale.

A different model of leasing is followed by LeafRound, In this direct leasing model, each investor is the owner of an asset and leases that asset to the lessee company. In this case, the assets on lease are smaller items ranging from a Wifi router costing ₹2,700 to a laptop worth ₹70,000. Investors own the assets, but buying and selling it at the end of the lease term is managed by the platform for a fee. The interest earned by investors is taxed at slab rates in a direct leasing model, whereas that earned via the LLP model attracts 31.2% tax.

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

In this model, the SDIs, issued to investors by a Sebi-registered trustee, are owned by Grip (originator) and listed on the NSE. It should be noted that SDIs require a minimum investment of ₹2.5 lakh, but Grip’s founder and CEO Nikhil Aggarwal told Mint that they are working towards bringing it down to ₹1 lakh. Also, SDIs are illiquid and can be sold in the secondary market, but there are very few buyers at the moment and so sellers may have to offer deep discounts. The upside is that SDIs are rated by Crisil and Icra, both rating agencies. “This helps our users get an independent assessment of the risk of investment opportunities," said Aggarwal. Since SDIs are treated at par with bonds, the notional gains made on the its market value attract capital gains tax at slab rates.

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

The flaw in IRR

IRR metric is used for investments that involve regular payouts and a balloon payment at the end of the investment tenure. A balloon payment is a large, lump-sum payment that is due at the end of a loan term, after a series of smaller installments have been made. IRR assumes that the regular payouts are reinvested at the same rate of return. This is a flawed assumption as in most cases the payouts are invested at a much lower rate or not reinvested at all.

MIRR is a modified version of IRR that addresses this limitation. MIRR considers a reinvestment rate that represents a more realistic scenario compared to 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. You will get monthly payouts of ₹2,125 and receive a balloon payment of ₹10,000 at the end of the lease term (after the asset is sold).

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

Assuming that the investor falls in the 30% tax bracket (an LLP is taxed at 31.2%), the post tax return will further go down to 7-8%. The platform also charges a fee of up to 2% which will further eat into your final returns. Even after assuming higher risks, investors in the highest tax brackets get a post-tax return of only 7-8%. Currently, FDs are offering post-tax yields of 5-7% with significantly lower risk involved.

Take note that 10% TDS is deducted if the annual rental amount exceeds ₹2.4 lakh.

Look out for risks

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

The platforms also do not take responsibility for delays or defaults in payments.

“Our projects are mostly with listed companies like Tata, which means that they are backed by reputable companies with a proven track record. You can withdraw your money after a 6-month lock-in period, and with Pyse, you can make a positive impact on the environment while also earning a good return on your investment," said Kaustubh Padakannaya, co-founder, Pyse.

The platforms claimed 0% default rate and a deal pass-through rate of less than 1%, but Mint couldn’t independently verify these claims.

(For an extended version of this story, go to livemint.com)