The world of investing has always subscribed to the age-old adage of ‘higher the risks, greater the rewards’. This mantra suggests that those willing to take on substantial risks stand a chance of earning sizeable returns. In the increasingly adventurous world of investments, fixed deposits have long been a favourite among conservative investors due to their stability and low risk. But, with inflation inching higher, coupled with the need to generate significant returns, alternative investments with higher returns have started gaining traction.
The new buzzwords in alternative investment products are asset leasing and invoice discounting, which offer annual returns of up to 20 per cent. But it’s important to remember the caveat such instruments carry: the higher risks involved. Not only does this put the spotlight on the shift in investment avenues that can satiate investors’ heightened appetite for more risk, it also signals a deviation from the earlier focus on traditional instruments like fixed deposits and bonds, among others. These new alternative investment avenues demand a leap of faith from investors. But how do they work and what are the risks?
The Avenues
Before the outbreak of Covid-19, exotic investments were usually the sole preserve of high net-worth individuals. But the fixed income market in India has undergone a sea change since then, with these products becoming readily available to retail investors, thanks to the rise of fintech platforms dealing in them.
Take invoice discounting, for instance. The Reserve Bank of India (RBI) recognises it solely through its Trade Receivables Discounting System (TReDS) platform. But, TReDS does not accommodate retail investors. Eyeing this opportunity, fintech firms have launched innovative products that allow retail investors to participate.
What happens here is that small firms—usually in need of short-term capital after delivering an order—struggle to secure funds to work on the next order. As a recourse, they sell their invoices to investors at a discount—on the various fintech platforms that have sprung up in the space—to meet their short-term financial needs. When the buyer against whom the invoice has been generated settles it, the borrower (small firm) repays the loan along with the accrued interest to the investors who had bought the invoice. This solution allows businesses to unlock the value of their outstanding invoices, access working capital, and improve cash flows through the fintech platforms, which charge a service fee.
Similarly, under asset leasing, retail investors pool funds to lease an asset to a company through a wealthtech firm. Assets are leased for predefined durations in return for regular rental payments. These can generate returns of 13-18 per cent over 24-48 months. This offers firms the opportunity to secure essential equipment without having to make a substantial upfront capital investment, making it an attractive option for businesses. For example, one can lease ATMs or electric vehicles to payments solutions providers or ride-hailing apps, respectively.
At present, fintech players such as Grip and Tap Invest (formerly Leaf Round) offer these options to retail investors. What differentiates them is the manner in which they sell these products. Some offer them as securitised debt instruments (SDI) while others sell them as a single invoice or multiple invoices against the same company. SDIs are financial securities that represent ownership in a pool of underlying assets such as loans, leases, or receivables. These assets are typically bundled together and securitised, transforming them into tradeable securities that can be bought and sold in the financial markets.
“Grip offers asset leasing and invoice discounting via the SDI structure. The structure offered by the other companies is not regulated by Sebi (the Securities and Exchange Board of India). Raising capital or crowd-sourcing of investments for such structures (other than SDI) is not permitted under any Sebi regulation,” says Nikhil Aggarwal, Founder & CEO of Grip. He adds that unlike SDIs, other products are neither credit rated, nor listed, hence providing a suboptimal level of experience to users in terms of transparency, understanding of risk and difficulty in buying and selling.
Regulatory Clarity
Since these assets are relatively new in India, both regulated and unregulated players operate in the space. Hence, it is important for investors to understand some key regulations before going in for such products.
The first is Sebi’s SDI guidelines, which permit the creation of fixed-income instruments based on specific underlying cash flows from asset leasing, loans, invoices, and more. SDI units can be issued to investors with a minimum ticket size of `1 lakh, must be listed on stock exchanges, and carry a credit rating.
The second set of guidelines pertain to Online Bond Platform Provider (OBPP), which allow platforms to facilitate investments in certain fixed-income products after obtaining a licence from Sebi, explains Aggarwal of Grip. Start-ups like Grip and Wint Wealth have OBPP licences.
“As per Sebi regulations on OBPP, there is a permissible list of securities [for] the platform. First is listed debt securities. Then [there are] products regulated by other entities such as RBI, PFRDA or Irdai, followed by unregulated products,” says Vijay Kuppa, CEO of InCred Money. An example of products regulated by other entities is fixed deposits, regulated by RBI. Kuppa explains that Sebi is clear about not encouraging non-regulated products. “Sebi has talked about a separate platform with a different brand name for unregulated products. Those who are not following this are in the process of transitioning, getting a new licence and figuring it out,” he adds. Saurav Ghosh, Co-founder of Jiraaf, says, “Jiraaf has applied for the OBPP licence from Sebi to become a registered online bond platform.” Jiraaf and altGraaf are distribution platforms under parent Ai Growth Pvt Ltd, co-founded by Vineet Agrawal and Ghosh.
Default Recourse
While alternative instruments offer tantalising returns, one needs to ask a couple of questions before investing in them: One, what happens if the company goes bust? Two, what is the fate of the investment? “If the buyer (of products from the small firm) defaults on the payment, the investor (who bought the discounted invoice) can approach the National Company Law Tribunal for recovery and explore other legal remedies under the Insolvency and Bankruptcy Code, 2016. However, they will be an operational creditor in the bankruptcy queue and recoveries for operational creditors tend to be lower than financial creditors,” says Anshul Gupta, Co-founder and CIO of Wint Wealth.
Moreover, corporate buyers can delay payments against invoices without any impact on their credit rating. “Even well-known corporate buyers may raise disputes and withhold payments against invoice receivables,” says Gupta.
Hence, investors must know the recourse to take in case of a default. “These instruments are typically not regulated and therefore not recommended as the associated risks can be very high, and the loss of capital could be permanent,” says Vishal Dhawan, Founder of Plan Ahead, a Sebi-licensed registered investment advisory firm.
There are wealthtech companies that mitigate the risk by spreading the investments across companies. In contrast, some invest funds in a single company, subjecting investors to higher levels of risk. Therefore, exercising proper due diligence when investing is paramount.
@teena_kaushal
