Discussion Doc for Leasing Model

Context

• See “Funding Marketplace Overview” for high level context

Open

• In India, per FCRA, foundations cannot transfer foreign money (or assets created by foreign money) which means we need to create a new entity in order to channel capital towards FOs

• We have DGIT board approval to execute 3 pilots in India where DGF funds DGT which purchases assets and makes them available to FOs via a collaboration agreement (at no cost); we have a legal opinion confirming this is a low-risk approach bc the assets are always owned by DGT, ownership never transfers to the FO.

• Its great to have room to execute the pilots but we want to get clarity on the longer-term model ASAP so we can continue moving ahead

Proposal

• We set up a new entity, NewCo, an asset leasing company

• The company will purchase assets (requested by farmer orgs) and make them available for flexible payments based on earnings generated by the asset. NewCo partners with Digital Green who provides technical assistance and capacity building / training to the farmer org which increases their likelihood of FO making lease payments.

  • Technically, we will be doing financial leases rather than operating leases bc the idea is to transfer ownership to the FO at the end of the lease term. This means NewCo will need to registered as an NBFC and regulated by RBI. If we do operating leases, we don’t need to be registered as an NBFC. We are in touch with specialists on this topic to learn more.

• Right now, by design, we are a bit all over the place in terms of what assets we will make available. If we go this route, I think we should focus on assets with the following profile

  • Strong climate resilience benefit: Huge need, income generation is a given, and this theme feels resonant / immediate to funders so we can raise capital for it, no great existing channels for supporting such investments

  • Movable: If FO is unable to make lease payments, we can shift the asset elsewhere

  • Useful life of +5 years: Expect payback will take a few years and want the asset to be useable beyond that period

  • Can we come up with a list of top 5 assets which this business will focus on? @Ravi Shankar Sharma (Unlicensed) @ashok ?

  • If we hone in on a shortlist of assets + vendors, we may be able to drive a good bargain and reduce cost of asset acquisition by helping vendors grow their addressable market

• In order to keep lease terms affordable for farmers, NewCo needs to have a low cost of capital to fund its capex. How will we achieve this?

  • A leasing model helps bc NewCo owns the asset and can always take it away in case of non-payment (eg, better security and priority, improved recovery prospects); lease rates are inherently lower than loans bc asset ownership stays with the lessor

  • Can we create a blended finance structure for NewCo which brings together:

    • Banks who wants to meet PSL requirements (what would it take for money lent to NewCo to count towards bank PSL targets?). Annual interest on this would be ~5 to 7%

    • Impact investors who purchase zero coupon bonds issued by NewCo and are drawn to the impact outcomes achieved by NewCo

    • Donors who provide first loss guarantees which protect the banks and other investors. This may need to grow into pool of money that subsidizes losses on capex depending on FO ability to pay. See example below

  • Beyond funding capex, NewCo will need to fund its operations and compliance costs and we will raise equity for this. Target impact oriented investors.

• On the capacity building front, there are a few things to consider:

  • Videos on how to properly utilize the asset. Can we collaborate with government partners on the technical content for this (eg, DoH has content on vegetable nurseries). Maybe the cadre of resources trained on video production can actually develop the content?

  • Business planning and financial skills. What is a lease? Tracking revenue and expenses.

  • Digital literacy: “How” and “why” of digitizing information and the actual toolkit for capturing info

  • Support accessing “convergence finance.” There is a bunch of government money available to farmer orgs. There are detailed checklists and rating systems that determine eligibility (largely related to their functioning / governance) to unlock this money and our role can be creating awareness and making the requirements more clear to FOs. This money is funding leverage which helps de-risk our lease.

Example

• Polyhouse capex is ~10 lakh

• Nursery profit on tomatoes is 20k per season (3 seasons per year) and 40k for brinjal (1 season per year) so ~1 lakh per year.

• If we structured the deal as 1 lakh up-front and then 3 years of payments at which point FO has paid 4 lakhs and can purchase at residual value (maybe 2 lakhs at that point which can partially be supported by govt grants, will depend on depreciation rules) so total payments of 7 lakh, would that work?

• @Sai @Shalu Umapathy (Unlicensed) Lets go through this in more detail

Discussion Questions

• Is there FO demand for such a model?

  • From a farmer perspective, how is this better than accessing equipment at a CHC? Do FOs care to build their balance sheet and eventually own these assets? Or, are we saying we will focus on equipment that is not available at CHCs?

  • Leases has low awareness and perhaps some [potential] tax issues (need to pay stamp duty on value of asset, no VAT credit, etc.) which make them less compelling than a lease; is the better to focus on loans to tap into loan guarantee programs and interest subvention programs (eg, AIF)?

• Review the numbers for Saharapada polyhouse and determine what lease payments Annapurna can support on the collection center?

• Which assets should we focus on? Having a short list where we can easily communicate the livelihood and climate resilience impact will help us fundraise

• Is there a secondary market for used assets? Would vendors provide some forward guarantee to purchase at end of term? If we do operating leases this is critical and may also be necessary for financial leases in cases where leasee decides not to purchase at end of term

• Is there a need of a local agri-entrepreneur to make the model work? Do we enter into a lease with the AE who works with the FO as a source of demand aggregation? There are some concerns about capacity and incentive at the FO level and maybe this approach can address those?