Lease Financing in India — Statistical Arbitrage
“Money is a terrible master but an excellent servant.”
With the current globalized, the world of investing has also become globalized with the ability to invest in countries other than India, including the US and Chinese markets. With the growth in investing in equities, partly driven by the pandemic, the need for asset classes beyond traditional real estate and gold has been on the rise.
Regular income generating sources in India include assets that generate payout regular dividends such as stocks, mutual funds, bonds and rentals on real estate. This along with the need to build more diversified income sources and bring diversification to the asset basket has resulted in the popularity of alternative asset classes such as P2P lending, NBFC financing and lease financing in India.
But before investing in any of these alternate assets, it’s important to understand personal finance as a whole and how these fit into one’s basket. Lease financing provides you with a regular passive income, generating fixed monthly returns which are much better than any Fixed Deposit or government security bond returns.
What is Lease Financing?
Lease Financing is an alternative arrangement of medium- and long-term loans. In Lease financing, the owner of an asset gives another person the right to use that asset against periodical payments. The owner of the asset is known as the lessor and the consumer of the asset is called the lessee.
As an example, imagine that you and 5 of your friends (owners/lessors) were to co-invest in bikes that were then leased to a restaurant (users/lessee) to use for delivery and pay all of you a monthly rental. It is as simple as that. The question would then be why rent and why not buy the bikes outright.
Why not buy them outright?
Companies or businesses for that matter do this as they don’t have to spend huge sums of cash on an asset in one go. This allows them to spread their cash payments across a period of time and as known in businesses, cash is oxygen. From outright buying the asset, leasing allows the company to move these cash investments from the balance sheet to the profit and loss statement.
Besides being able to conserve cash, these rental payments become business expenses and better tax treatment. When they buy outright, the asset would be on the balance sheet as a depreciating asset. That also allows the company to save some taxes but the cash outflow happens in one go.
Leasing contracts are fairly common in the west from both raising money and investing point of view. In fact, most businesses such as airlines, heavy equipment companies, and manufacturing giants lease their assets rather than own them. All heavy investment centric businesses can use lease financing to go about their business.
Asset Leasing is an alternative investment option that lets you invest in non-market linked instruments to generate recurring monthly income. So let’s take asset leasing as an investment with the help of one such platform called Grip.
What is GRIP?
GRIP is an investment platform that offers curated investment opportunities in lease finance with a low minimum investment amount and fixed returns. Think as low as Rs 10K in one investment and generate reasonable post-tax returns. This was an asset class, initially available to banks as lessors and big-name industries and companies as lessees.
Asset leasing by GRIP allows you to co-invest in physical assets like electronics, furniture, bikes, and batteries that are leased to startups or new age corporations with a strong balance sheet and business fundamentals. This is where GRIP differs from the traditional lessors, that they would typically not lease to these entities.
The terms of the lease are pre-agreed which leads to monthly recurring payments. GRIP has been generating 12% IRR post-tax. That’s better than most traditional investment options like fixed deposits, government bonds, and so on.
- The payout schedule is available in a transparent fashion.
- The financials are available as well
Investments at a Glance
GRIP has people believing that IRR is 21% on their website but that’s pre-tax post-tax it is 12% post-tax. This drop-in investment is due to the fact that LLP income is taxed completely instead of just the returns. Each investment deal is an LLP of its own.
GRIP’s popular partners include:
For example, Take a look at this
Udaan, a very popular B2B firm is leasing 3Cr and has 333 different investors involved in this specific asset class. This roughly turns out to be 1L per investor roughly. This is quite a micro-investment tool and augurs well for the future of lease financing in India. More startups and entities should be able to better optimise their financials and also allow retailers to participate.
Grip selects investment deals based on three key metrics:
- Financials (balance sheet)
- Corporate profile(company reputation)
- Business performance(key contracts,trends,etc)
The asset class has the following going for it:
- Monthly Payouts: Get paid monthly on a fixed schedule.
- Fixed Returns: Pre-agreed monthly payments for the full lease tenure with no day-to-day volatility like stock markets.
- Diversification: Non-market linked
- Low Friction: Upfront security deposit as well as the ability to recover, re-lease or sell assets to mitigate risk
- Tools: Lots of tools available for calculations and tax assistance.
While GRIP does its due diligence and sources deals carefully. With most of these being startups with a very small history and run away, we don’t recommend blind investing. This investment can be started as an experiment, which can then be scaled slowly bases on how it goes. We would recommend investing from the risk part of the barbell.
Lease Financing Taxation
All payments that you receive are post-tax since the LLP already makes the tax payments and hence there are no additional tax implications for you.
- As a partner to the investment LLP, you will need to additionally fill ITR form 3 when you submit your income tax returns.
- On behalf of the LLP, Grip will file ITR 5 and provide the same to you to make the process transparent and easy for you
All said and done, everything goes out of the window, the movement there is a default.
- The LLP have the ability to reclaim assets for selling or re-leasing.
- While there are safeguards in place, it does not guarantee 100% returns in case the leasing partner defaults. In that case, GRIP will take a suitable legal course.
- GRIP will take care of all the processes related to the reclaim of assets for selling or re-leasing in case of default.
If one still decides to invest and go through the process. There are multiple ongoing deals at any point in time. The process is similar to Kickstarter campaigns. This is the easiest way to participate in lease financing in India currently.
- Once the funding target for a deal is achieved, GRIP would send you the agreement and consent letter for the LLP which would be the vehicle of investment for the deal
- Investors will start receiving returns within 30 days after the 100% funding is completed.
Originally published at https://statarb.in.