KEY TAKEAWAYS
This article puts forth asset leasing as an alternative investment option for investors whose portfolio is highly skewed between high-risk, high-return equity markets and low-risk, low-return fixed deposits.
Asset leasing offers returns between 12%-16%, with the security of asset ownership and fixed periodic rentals.
LeaseX, an SDI by Grip, pools various asset-leasing opportunities into a tradable security, offering a regulated and diversified investment option compared to direct leasing.
Comparison between LeaseX and direct leasing is also done in the article, in terms of regulations, credit rating, security structure, taxation, access to information, returns, tenure, and liquidity.
The choice between LeaseX and direct leasing depends on risk tolerance, investment goals, and preference for security versus potential returns, with LeaseX offering more convenience and regulatory protection.
In India, when an investor searches for investment opportunities in the market, broadly two main options come up : first is the equity market, which can offer returns of over 15% but at the same time comes with high risk and unpredictability, whereas the second option is fixed deposits, which offer much lower risk but also much lower returns, in the form of around 6%-7% interest rate.
As you can see, there is a big gap between these two extreme options, 15% returns vs 6% returns, right? Some investors would want to invest in a middle-ground solution that helps them earn returns around 12% - 16% without taking too much risk.
That is where asset leasing can turn out to be a good solution to this problem. It's a simple investment wherein you purchase an asset and rent it out to get monthly returns. When the deal matures, the other party buys the asset at a pre-agreed amount. Throughout the deal, you remain the true owner of the asset, so the investment is secure and asset-backed. Also, the absolute returns and IRRs in the deal are fixed, so you get fixed periodic rentals.
Sounds great, right? However, there are some downsides. If you join a direct asset leasing deal through an investment platform, regulations are lacking, and the terms are set by the platform and lessee, giving investors little control.
Also, there's always a risk of mismanagement, default, and delayed payments. Relying too much on one party for lease rentals can also be risky.
So, what's the solution? Consider SDIs (Securitized Debt Instruments) that bundle various leased assets, sometimes with one counterparty or different ones. SDIs address several issues that are present with the typical LLP/SPV structure or direct leasing, as they are regulated instruments. In this article, we'll discuss LeaseX, an SDI by Grip that pools various asset-leasing opportunities into one tradable security.
The SDI mechanism differs from direct leasing in terms of risk, liquidity, regulatory framework, payout structures, taxation, as well as the underlying leased assets. In this article, we will explore these differences and what they offer to retail investors.
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Disclaimer: This is a Grip Invest-sponsored series. While they have sponsored us, we have tried to maintain our objectivity towards them or their products as much as possible. If you want to learn more about Grip Invest, check out
this article.
Please note that LeaseX is a Grip Invest’s branded product. When we mention LeaseX in this article, you can think of it as an SDI backed by a pool of lease rental receivables. These types of products can very well be available on other OBPP platforms as well. To read more about SDIs, please check this previous article in this series.
If you prefer video format, checkout this video here:
What Is LeaseX?
LeaseX is a SDI (Securitized Debt Instrument) issued by a trust. This trust can hold (via hypothecation) various assets such as cars, water purifiers, and ATM machines, which can be leased to different corporate entities. The rental income received from these assets is then distributed to SDI investors according to the repayment schedule. A LeaseX opportunity may either have multiple assets leased out to different entities or they may have one asset (like multiple Tata EV cars) leased out to one entity.
Difference Between LeaseX and Direct Leasing Model
Workflow
Regulations
| Characteristic | LeaseX (SDI) | Direct Leasing |
| Regulator | RBI and SEBI | Unregulated |
| Regulation | SEBI: SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 | Unregulated |
Direct Leasing has no regulations from any financial regulator. Leased assets such as cars may come under motor vehicle act and properties/real estate may come under RERA. But no specific regulations from a financial angle.
This makes the complaints, recourse, dispute mechanism and litigation tedious in direct leasing. The same is easier in LeaseX, wherein Grip Invest will have their own compliance officers and SEBI offers redressal/complaint facility on their SCORES website.
Credit Rating Of Products
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For simplicity, please assume lessee = company that has taken assets on lease from investor.
LeaseX is a listed fixed income product which has to be credit rated by one of the SEBI-regulated rating agencies like ICRA, CRISIL or IndiaRatings. The agency publishes their findings publicly, and highlights the risk involved with the investment. Why is this important? Most of you investing may not be from the finance domain and thus may not be able to evaluate the risk of the security. The rating agency does that for you and provides you with a credit rating.
There is no credit rating for direct leasing, however, a substitute can be the credit rating (if available) of the lessee itself, or the NCDs issued by it. The Credit Bureau also assigns CIBIL scores to MSMEs and companies which can highlight the lessee's credit rating.
Security Structure
This is probably the most important point, so I will break it down further to help you understand in a better manner:
LeaseX: The product has various security features that protects investors interest incase of delayed payment or default.
Hypothecation - Via hypothecation, the original owner keeps the asset, but a trust has rights to the future payments. To protect investors, the trust registers a claim on the asset. This way, if payments stop, the trust can sell the asset to recover the money. It’s similar to a car loan where, if the borrower doesn’t pay, the bank can sell the car to get its money back.
Cash Collateral or Bank Guarantees - The lessee has to present a certain deposit or collateral while leasing the asset. This deposit can be in the form of cash deposit or irrevocable bank guarantee. It is used in situations of delay or default in periodic payments.
Experienced Originator: SDI’s usually have experienced companies that focus on leasing assets and also providing asset management services. They have built the know-how and capability to handle situations of delay or default in payments.
Direct Leasing: The ownership of the asset is in the hands of the investor, so in case of any default, the owner can simply reclaim the asset from the lessee. However, the investor may need to physically recover the asset, store the asset and manage all the logistics, with the help of the investment platform. In some cases, it may not be possible to retrieve the asset, or the asset may have been misused and might not have any secondary value.
Cash collaterals are usually not part of the deal. However, a refundable deposit or bank guarantee may be required, depending on the terms negotiated by the investment platform.
| Characteristic | LeaseX (SDI) | Direct Leasing |
| Security Features | Secured with the help of hypothecation and cash collaterals | Secured in the sense that you are the true owner of the asset. |
Taxation
In almost all debt/ fixed-income based deals including leasing deals, the Income Tax rules are largely the same, but there are a few caveats in the direct leasing structure, here are the specifics:
For LeaseX: Interest income from LeaseX will be taxed as per your income tax slab rates. Capital Gains tax may apply if the security is sold for a gain before maturity.
Direct Leasing: The entire lease income i.e. return of principal along with the returns is taxable. The lease income is classified as income from other business or professions and is taxed as per your slab rate. But the catch is that you can deduct depreciation and other maintenance expenses to reduce tax liability. Or in some cases, you can claim the benefit of presumptive taxation to reduce your liability even further.
Depreciation and Running Expense Provisions (Section 28 - 44AB): You can record the leased asset in your books and claim depreciation on it, along with any other expenses incurred in maintaining and insuring the asset. The net tax liability will be as per your slab rate.
Presumptive Income Provisions (Section 44AD): You can calculate your income as 6% of the total lease rentals and calculate tax on that as per your slab.
For tax filing assistance related to direct leasing, I highly recommend speaking to a Chartered Accountant as they can guide you which option may be beneficial for your investment.
- The lessee in the LeaseX mechanism has to mandatorily provide a quarterly and annual report of its operations and status of the pool of leased assets.
- In Direct Leasing, disclosures will relate to the financial health of the lessee. The lessee may provide quarterly and annual financial reports, depending on the investment platform's initiative. If not, investors will need to visit the RoC website to access the lessee's annual filings.
Returns
The returns are very much dependent on the quality of the lessees and the security package (cash collateral, bank guarantees, etc) they are offering. So it’s difficult to do at par comparison but generally speaking both LeaseX and Direct Leasing would offer returns in the range of 12% - 18% returns.
Tenure
The tenure again is very subjective of the assets being leased. For example a pool of cars may be leased for 3-4 years, whereas assets like bowling alleys may be leased for 10-12 years. The tenure is more dependent on the type of asset and not on the LeaseX vs. Direct Leasing structure. Most LeaseX or Direct Leasing transactions we have come across have a tenure of 24-48 months
Liquidity
LeaseX, being a listed security, can easily be traded through a DEMAT account. However, there is no secondary market for the instrument, so investors may have to find buyers themselves, or can ask Grip to help them with the sale.
Transferring direct leasing assets is difficult. The investor not only has to find a buyer for the asset, but also a buyer that agrees with the terms of the lease. The lessee and the new owner will then have to sign a new lease agreement. The investor can also offer to sell the asset to lessee, but it's a complicated process, one that may involve some principal loss as well.
Conclusion
The conclusion of any investment comes down to risk vs. return. LeaseX offers less risk due to its diversified asset pool and security features, falling under a regulatory framework and accessible in DEMAT form.
Direct leasing may offer access to certain exotic assets along with the potential to offer slightly higher return but is riskier with no regulations, no dematerialized version, and few safety nets. The choice depends on risk-weighted returns.
Another factor is return vs. convenience. LeaseX is easy to participate in, with an automated process. Direct leasing, on the other hand, requires signing agreements, raising invoices, accounting for depreciation, and handling physical delivery during defaults. So, investors should consider how much convenience they are willing to give up for higher returns, when choosing between the two options.
Ultimately, the choice between LeaseX and Direct Leasing will depend on your risk tolerance, investment goals, and preference for security versus potential returns. As always, it is advisable to conduct thorough research and consult with a financial advisor before making any investment decisions. But we hope this article has given you a fair comparison between the two products.
Thank you so much for reading, and also a big thank you to Grip Invest for sponsoring the ALTXtra series. There are a lot more interesting pieces to come out of this and hopefully, you all will enjoy them. If you have any feedback, please don't hesitate to reach out to us at ALT Investor or Grip Invest.
Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. The investor is requested to read all the offer related documents carefully and to take into consideration all the risk factors before subscribing to debt instruments.
This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities.
Neither ALT Investor or its associates/associated entities, assigns or affiliates takes or accepts any liability for consequences of any actions taken based on the information provided.
