Farming can be laborious work due to factors such as size and scale of the farm, type of farming, season and crop, climate and location. Given its importance, political and policy considerations, agricultural income is generally tax-free in India.

Sensing an opportunity here, a few online platforms using the fractional model, are providing retail folks access to agri-income/ farm project financial investment opportunities. Using a wide investment ticket size of Rs 5,000 to Rs 15 lakh, with return on investment ranging from 10-15 per cent for tenures of 12 to 36 months, platforms such as FAAB, Growpital and Krishifunds are pitching opportunities for portfolio diversification to investors.

Agri investments have had a chequered past in India, as many investors of the 1990s will tell you. Case in point being Anubhav Plantations that sold shares in teak plantations on guaranteed interest, but suddenly closed down a few years later, leaving thousands of investors in the lurch. So, are the latest agri income opportunities safe, regulated and reliable? How do they work? Here is a lowdown.

What’s on offer

Ask anyone growing ridge gourd, tomato, brassica, or cucumber in their backyard, and they will narrate stories of hard work, sweat, and sleepless nights. The passive financial investor model pitched by online platforms seeking funding for agri projects, leapfrogs the tough part of farming. But, that doesn’t mean things are all rosy from hereon.

There are two major types of risks involved in agriculture: price risk and weather risk. To mitigate these risks, platforms grow a variety of crops to hedge against price risk and claim to have distributed land inventory across different states to hedge the weather risk. While diversification of crops and land holdings is a prudent risk management strategy in agriculture, it does not guarantee zero risk. With the internal rate of return (IRR) in some projects as high as 24-25 per cent, rewards are commensurate with the risks that come with agriculture.

The online platforms allow investors to choose the investment and farm project. In most cases, teams from the platform handle administration and property management. Platforms either have their own team of farmers, farm managers, and experts who grow in-demand crops that can yield high profitability, or they outsource the same to contract farmers.

Just like most fractional investing models, each investor in an agri/ farm income opportunity has to sign a partnership deed relating to the Special Purpose Vehicle (SPV). The platforms may assume responsibility for oversight, reporting, and management of these SPVs on behalf of the investors.

In some cases, returns usually start after 90 to 180 days of receiving 100 per cent funding for the project (takes 30-60 days). In others, the profit share is sent at the end of every financial quarter.

Usually, investors can exit projects at any time after providing a 30-day notice. The initial investment will be credited to the wallet after deducting legal charges (say Rs 2,000). Some projects have a minimum commitment period, and if you exit within a timeframe, you will get no returns.

Profits are merely ‘assured.’ If there are losses, as a partner, you will also have to bear the burden. Yes, farm income returns are contractually agreed, but note that they are not guaranteed. All returns mentioned in a deal are projected returns, based on the past performance of the fund. If any platform is selling ‘guaranteed return projects,’ that should be taken with a few pinches of salt.

From a tax perspective, any income is the share of profit given by the farm project entity, which is an LLP, as per Section 10(2A). The earnings of the LLP are agriculture income and are exempted under Section 10(1) of the Income Tax Act in India. To reflect this type of income, you will need to additionally fill ITR Form 3 when you submit your income tax returns.

Platforms take nominee details while registering you on the platform in the process of e-KYC.

Regulations

The online platforms courting investments for agri-income opportunities are internet-based asset ownership portals owned and operated by different firms. Note that the platforms are neither registered broker-dealer, investment advisor, lender, etc. and feel they do not conduct any activity that would require such registration or certification from any agency, including SEBI. Thus, it appears that such platforms are not directly regulated by any financial watchdog, despite being directly involved in a complicated system of financial investments. The use of LLP structure does fall under the purview of the Ministry of Corporate Affairs, but so are tens of thousands of firms!

In most cases, the platforms, the project entities/ assets claim they are separate legal entities. Once you invest in a project, you become a limited partner (LP) to the said project entities or assets. So, the online platform entity is just a place to invest/ transfer the amount to these project entities for taking fractional ownership of these projects in the form of partnership shares. Hence, investors must carry out proper due diligence on the risks & consent agreement, LLP agreement, and non-disclosure agreement before making the investment.

According to some platforms, they merely list different projects and investment opportunities in the form of LLP capital contribution, hence no “equities” are involved where SEBI’s regulation is required. This is debatable and a grey area as of now. It is unclear whether the agri/ farm income platform operations fall under SEBI’s Collective Investment Scheme (CIS) norms for arrangements under which the contributions or payments made by the investors are pooled and utilised with a view to receive profits, income, produce, or property, and is managed on behalf of the investors.

Our take

Purchase of agri/ farm investments even via the fractional route involves a high degree of risk, including the risk of loss of capital, and returns are not guaranteed. Such type of investments are suitable only for sophisticated investors, who fully understand and are capable of bearing the risks of purchasing such assets.

Additionally, the unclear regulatory landscape for such fractional farming investment projects don’t give us comfort. Regulators may take note after this space attains critical size or some issues crop up. While farming is a noble profession, at this point in time, risk-averse investors have no reason to rush into such opportunities even if the promised returns look appealing.

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