Summer Training Report

On
LEASE FINANCING
In RITES LTD.
Submitted In Partial Fulfillment
Of the Requirement
Of Masters of Business Administration

Corporate Mentor:

Submitted By:

Name: MR. ANIL GHAI

Name of the student: ATUL KUMAR

Designation: AGM (FIN. & ACCOUNTS)

Organization:

RITES LTD.

ENR No: 07861203913

Batch: 2013-15

Submitted To: MRS. SAKSHI SAXENA

Banarsidas Chandiwala Institute of Professional Studies, Dwarka, New Delhi
(Affiliated to Guru Gobind Singh Indraprastha University)

CERTIFICATE FROM THE GUIDE

This is to certify that the project work done on LEASE FIANACING Submitted
to Guru Gobind Singh Indraprastha University, Delhi by ATUL KUMAR in
partial fulfillment of the requirement for the award of degree of Master Of
Business Administration, is a bonafide work carried out by him under my
supervision and guidance. The work was carried during 16 JUNE, 2014 TO 30
JULY, 2014 in RITES LTD.
During the training period his behavior & performance was satisfactory.

Date: 24 NOV, 2014

Name of the guide: MR. ANIL GHAI

Address: PLOT 1, SEC. 29,
GURGAON, HARYANA 122002
,

BONAFIDE CERTIFICATE

This is to certify that as per best of my belief the project entitled

LEASE FINANCING is the bonafide research work carried out by
ATUL KUMAR student of MBA, BCIPS, Dwarka, New Delhi during June-July
2014, in partial fulfillment of the requirements for the Summer Training Project of
the Degree of Master of Business Administration.
He has worked under my guidance.
-------------------Name
Project Guide (Internal)
Date:
Counter signed by
------------Name
Director
Date:

DECLARATION
I hereby declare that this Project Report titled LEAE FINANCING submitted
by me to Banarsidas Chandiwala Institute of Professional Studies, Dwarka is a
bonafide work undertaken during the period from 16 JUNE, 2014 to 30 JULY,
2014 by me and has not been submitted to any other University or Institution for
the award of any degree diploma / certificate or published any time before.

(Signature of the Student)

Date: / / 2014
Name: ATUL KUMAR
Enroll. No.: 07861203913

ACKNOWLEDGEMENT

I pay my gratitude and sincere regards to Mr. Anil Ghai , AGM

(Finance & Accounts), RITES Ltd. who
agreed to be my mentor. I
am sincerely indebted to him, for his outstanding and undeniable
considerations. It was because of him only that I have
learnt so
much from the company in such short duration. I would also like to
thank all the employees in the finance division of RITES Ltd who
helped me to understand the working of the department as well as
organization.
Secondly, I am sincerely indebted to
Mrs. Sakshi Saxena, my project guide for giving me the cream of her
knowledge. I am thankful to him as he has been a constant source of
advice, motivation and
inspiration. I am also thankful to him for
giving her
suggestions and encouragement throughout the
project
work.
Thirdly, I offer my sincere thanks and humble regards
to
"BANARSIDAS CHANDIWAL INSTITUTE OF PROFESSIONAL
STUDIES, NEW DELHI" affiliated to
Guru Govind Singh
Indraprastha University for
imparting us very valuable professional
training in MBA.
ATUL KUMAR

TABLE OF CONTENT

Sr. no.
1.

TOPIC
Chapter 1: Introduction

PAGE NO.
8

2.

Chapter 2: Objective & Scope of study

12

Chapter 3: Literature Review

14

Chapter 4: Company Profile

17

Chapter 5: Leasing Concept

34

Chapter 6: Leasing Accounts & Rentals

44

Chapter 7: Research Methodology

50

Chapter 8: Data Collection & Analysis

52

Chapter 9: Conclusion & Suggestions

68

10

Annexures

73

EXECUTIVE SUMMARY

I joined the company for the summer internship programme in the

Finance Department under the guidance of Mr. Anil Ghai, AGM
(Finance & Accounts), RITES Ltd. My guide emphasized on taking a
generalized view of all the things happening in Lease Financing. I have
received continuous learning and a perspective to understand business
better.
For well over three decades RITES service spectrum and work profile
has gone a continuing process of evolution, marked with the
diversification in to the entire transport sector in India and Abroad.
The Research methodology used in this report Is through secondary data
only. And the secondary data has been collected from going over their
books, annual reports, journals and information provided by the
company mentor. Emphasis was given on the learning the procedures
and their practices.
The data has been collected from the various sources. Few of the
countries are not in position to import of rolling stock. So they resort to
leasing of these rolling stock. The business is going to pick up and Rites
is focusing on tapping the opportunity.
And the company has been a profit making company since its inception
in 1974. There has been a strong growth in business and in profit which
can be attributed to diversification of the company. The company has no
shortage of technical manpower. Rites is entering in to countries where
technology like our country prevails mainly in South Asian and African
countries. And Rites is entering in new areas like BOT (Build Operate
Transfer) and EPC (Engineering Procurement Construction). The rental
of facility is important part of the leasing business.

Leasing business is profitable for the lessor as well as to the lessee. Rites
should take measure to increase the business I more developing
countries.
This report deals with the understanding Rites ltd as a company, its
leasing business and its diversified business sectors. It also throw lights
on leasing business of Rites ltd and various financial processes and legal
obligation that governs and facilitate this sector. It involves the study and
analysis of leasing business processes and suggesting the measures for
its growth and improvement.

CHAPTER 1 : INTRODUCTION
According to historians and economists of leasing transactions were in
ancient Sumer and the state date back to around 2000 B.C. Thus, the clay tablets
found in the Sumerian City of Ur, contains information about lease of agricultural
implements, lands, water sources, cattle and other animals.
These leases involved the rental of agricultural tools to farmers by the priests who
were, in effect, the government officials. The city of Ur was then a thriving
commercial center. Land, as well as agricultural tools, was leased to the people
which gave them an opportunity to grow crops and sell their commodities with
minimal investment. The existence of leasing is further documented in ancient
history. In 1750 B.C., a Babylonian king named Hammurabi acknowledged the
existence of leases of personal property in his famous code of laws. Other cultures
of ancient times, such as the Egyptians, Greeks, and Romans, engaged in leases of
both personal property and real property. Ship charters have been recorded as a
thriving business since the time of the Phoenicians. These ship charters were
actually a very pure form of equipment leasing. In fact, short-term charters and
trip charters were really operating leases. Long-term ship charters were actually
net finance leases, since the charters lasted for most of the useful life of the ship
asset and the lessee assumed many of the benefits and obligations of ship
ownership.
For hundreds of years, personal property leasing was not recognized under English
common law, although real property was leased extensively and sometimes
involved very complex agreements. Under English common law, the mere
possession of personal property implied ownership. Personal property leases were
then called "bailments for hire" or "hire purchase agreements," and they continue
in use today. The first recorded leases of personal property in the United States
were related to transportation needs. Leases of horses, teams of horses, buggies,
and wagons by livery men, or livery stables, began in the 1700s.
In 1954, U.S. Leasing Corp. became the first company formed to engage in general
equipment leasing, as it is conducted today. The leases were net leases in which
9

the lessee paid all the expenses of maintenance, insurance, and taxes associated
with equipment ownership.
Until the 1970s leasing remained something of a novelty or mystery for most
companies. Although most airlines and railroads utilized leases in financing major
portions of their equipment needs, most non-transportation companies still did not
utilize leasing except for short-term operating leases of computers, office copiers,
and transportation equipment. In most cases, these leases were not even handles
by the company's finance departments, but instead were handled by the operating
departments involved. Since leasing competed with conventional sources of
financing, such as loans offered by banks and insurance companies.
Today in the 21st century leasing is one of the most effective ways to purchase
costly plant and equipment, upgrade existing capital assets. In developed countries
the share of leasing operations account for 30-40% of real investment in the
economy. During recent years the leasing industry has been subjected to numerous
tax, legal, and regulatory changes. Despite these changes, the leasing industry in
the United States and India to respond and adjust to these changes and to then
emerge stronger than ever.

10

Background
A lease is an agreement allowing one party to use anothers property, plant, or
equipment for a stated period of time in exchange for consideration. Leases have
become more prevalent as businesses and consumers look for alternatives to
finance the acquisition of fixed assets. A lease agreement involves at least two
parties ) a lessor (such as a bank or finance companies), who owns the property,
and a lessee, who uses the property. The lessor, essentially a creditor in the
transaction, is repaid from a combination of lease or rental payments, tax benefits,
and proceeds from the sale or re-lease of the property at the end of the lease term.
Over the years, the strength of the leasing industry has been its resiliency and its
ability to make the most of the changing business environment. Leasing is the most
widely used method of personal property financing in the United States today. For
bank lessors, leasing is another competitive product that can satisfy the needs of
bank customers; leases may be safer than other bank products because the
transactions are secured; and leases are generally more profitable than commercial
loans because of advantages inherent in their structure, such as tax benefits.
Leasing is a way for lessees (customers) to conserve capital because, in effect, they
obtain 100 percent financing. Depending on the structure of the lease, the risks of
ownership (such as the possibility that the product will become obsolete) can be
transferred to the lessor. Tax benefits could also be transferred to a lessor, resulting
in lower lease payments to the lessee. Operating leases are off-balance-sheet,
which may improve certain of the lessees key financial ratios. A special type of
transaction, the sale-leaseback, allows the owner of a piece of property (usually
real estate) to raise funds while retaining use of the property. In such a transaction
(actually two separate transactions), the owner of the property sells the property
and immediately leases it back. There is no physical transfer of the property.
From a safety and soundness perspective, leases that result from sale-leaseback
transactions should be reviewed in essentially the same manner as other leases.
National banks and finance organization may engage in leases for agricultural,
business, commercial, or consumer purposes. As a general rule, they may acquire
property to be leased only after the bank enters into a legally binding commitment
to lease or a legally binding written agreement indemnifying the bank against loss
in connection with the acquisition of the leased property. National banks may act
11

as lessors and finance net leases for personal property. In a net lease, the bank is
not directly or indirectly obligated to assume the expenses of maintaining the
property. This does not prohibit the bank from arranging for an independent third
party to provide servicing, repair, or maintenance of the leased property during the
lease term. A national bank is prohibited from being a general partner in a
commercial endeavor.

In India
Section 105 of the Transfer of Property Act talks about Leasing. It is transfer of
a right to enjoy an immovable property for a certain time, or in perpetuity against
consideration of a price paid or promised (premium).
Features:
o Lessee acquires a transferable interest and can sub-lease.
o It is both heritable and transferable.
o Lessor and Lessee must be competent to contract and cannot be the same
person.
o

Subject matter of the lease must be specific immovable property.

Chapter 2 : Objective and Scope of Study

12

1. Objective
The study specifically aims at :
(a)

to study leasing, its process and its types;

(b)

to study process of leasing capital assets in Rites ltd;

(c)

to study how lease accounts are maintained in Rites ltd.;

(c)

to study how lease rent is fixed;

(d)

analysing the financial performance of the lessor companies

2. Scope of Study
13

The study pertains to the evaluation of the lessor companies with respect to
certain copmanies in India. Broadly it covers the performance of lessor companies
capital assets. Leasing has been contributing significantay to the capital formation
in the developed and developing countries.It is the most powerful source of
financing next to that of banks. It covers the basic and structural understanding of
leasing business.It covers how leasing is done in Rites ltd.. The project deals with
how leasing works in Indian industry. This project studies the how accounts are
maintained in the leasing oraganization. The project intends to cover the study of
financial processes and the intricacies involved in the leasing business. The project
covers various aspects of leasing business like its functioning, its taxation system,
parties involved, receipts and payments system, etc. It further includes the study of
growth opportunities, strengths and weaknesses or issues faced by RITES in lease
business. The report intends to study the export business and the role of finance in
export in detail. It further encompasses the measures to be adopted for the growth
of financial processes and the improvement of financial management processes

Chapter 3 : Literature Review

14

There has not been much of work carried out on Indian Leasing since the
concept itself of is of recent origin. There is not any single study, which attempted
to study the Evaluation of Lease Financing from lessor points of view. It is in
this context, that the present study examines the performance of lessor company
(Rites ltd) and use of lease financing to finance capital assets and its impact on
lessees investment behaviour and reasons for leasing . For the purpose of review
and research work, it is bifurcated into two parts:
1. Conceptual Studies
2. Research Studies
1.1

Conceptual Studies

The study of this sort provide theoretical and conceptual foundation for
equipment leasing. Conceptual studies are again categorized in to two types, viz.,
Inclusive and Exclusive conceptual studies.
The inclusive studies are books , which deals with concepts and techniques
of leasing as a part of the study of Financial Management .The text books that
belong to this category were authored by the writers like , John j. Hampton; Van
Horne and Wachowicz; R.M. Srivastava.
The existing studies on equipment financing studies on equipment leasing
belongs to the other category of conceptual studies dealt with the conceptual
framework of leasing , problems of leasing , evaluation of leasing , etc. The
exclusive studies authored by the writers like Vinod Kothari , J.C. Verma ; Premlal
Joshi; P.K. Gosh and G.S. Gupta etc.

1.2 Research Studies in India

15

Research Studies on Equipment Leasing are found to be very limited in

India compared to developed countries like USA, UK, and Germany.
The Research studies in India on Equipment Leasing can be broadly classified as:
1.
2.
3.
4.
5.
6.

Studies focusing on growth of leasing.

Studies Pin-Pointing towards accounting practices and Procedures.
Studies analyzing Lease and Borrow decision.
Studies examines the growth patterns of leasing companies.
Studies design of lease contracts.
Studies on determinants of lease rentals.

Chapter 4 : Company Profile

16

About RITES Ltd.

RITES Limited was incorporated in India in 1974 under the
Companies Act, 1956 for rendering consultancy services for
railways in India and abroad. It was incorporated as a private
limited company with the name Rail India Technical and
Economic Service Private Limited was converted into a public
limited company on February 5, 2008. The

company soon

transformed itself from a mere railway consultancy firm to the

activities

connected

with

other

modes

of

transport,

with

multidimensional activities. Today RITES Ltd. is a multi-disciplinary

organization engaged in various areas related to consultancy at
home and abroad ranging from concept to commissioning as well
as project management.
It

is

PSU,

International

multi-disciplinary

consultancy

organization rendering comprehensive professional services in

various sectors including Highways, Railways, Bridges, Urban
Development, Airports, Inland Waterways and Ports Sector. It
undertakes consultancy business along with export, lease of
locomotives, rolling stock, project management consultancy etc.
The company has been accorded the Mini Ratna Grade-1status
by the Govt. of India by virtue of operational efficiency and
financial status. It is an ISO 9001:2000 certified.
Geographical location: RITES has had operational experience in
over 55 countries across Africa, Southeast Asia, Middle East and

17

Latin America. Most of Rites foreign assignments have been for

governments and other apex organizations.
1.1 RITES MISSION STATEMENT
To be one of the most admired companies in India and
abroad, rendering state of the art consultancy,
engineering and project management services, in the
field of transportation, infrastructure and related
technologies.
The company would aim at leadership in every business
by synergizing value, integrity, drive for technology and
innovative spirits, ensuring value for money to its clients
and benefits to society at large.
1.2 BUSINESS OF RITES LTD.
Consultancy,
procurement
management
and
engineering services to railroads and other
infrastructure sectorsin India as well as in abroad.
Leasing and export of rolling stocklocomotives,
coaches and after sales services including spare
parts related to the same.
Operating railway systems and corridors in other
countriesprimarily Africa- through joint ventures
and subsidiaries, under long term concession
agreements.
A CONSULTING PROJECTS: Presently, the company has
over 600 on-going projects in India, besides over 30
ongoing projects overseas. RITES Ltd. has undertaken
projects in over 50 countries, primarily in Africa, Latin
America, the Middle East and Asia. Its domestic as well
as overseas clients are typically national governments
18

and public sector enterprises. In India, its clients

include various Central and State government
ministries, other government bodies, public sector
undertakings including IRCON, Konkan Railway
Corporation Limited, DMRC, IOCL, NTPC Limited,
NALCO, SAIL and NHAI as well as various private
companies including Jindal Steel Limited.
B OTHER BUSINESS: Besides consulting, the company
is engaged in Expotech division like, export of
locomotives, coaches, DMUs and other rolling stock as
well as their spare parts to various countries and
provides maintenance support for these assets to its
clients abroad. RITES Ltd. is a nominated agency to
export rolling stock and components manufactured by
the Indian Railways, excepting exports to Malaysia,
Indonesia and Thailand.

1.3 EVOLUTION OF RITES LTD.

RITES Ltd. offers a wide range of services to several
infrastructure sectors; but primarily in transportation.
RITES has evolved from being a primarily Railway related
consultant to a multidisciplinary firm with a diversified
portfolio in various sectors.

19

Figure 2.3 Evolution of RITES Ltd.

2. RESOURCES OF RITES LTD.

RITES employs nearly 2000 staff including over 1000
specialists of high professional standing in the fields of
engineering, management and planning. Besides full time
professionals, RITES also has on its panel a large number
of experts, whose services can be drawn upon short
notice. This provides the Company an unmatched
strength in meeting the needs of clients worldwide.

2.1 INTERNATIONAL FUNDINGS & COLLBORATION

RITES Ltd. is registered with international funding
organizations such as:

World Bank
Asian Development Bank
African Development Bank
United Nations Office for Project Services (UNOPS)
United
Nations
Industrial
Development

Organization
United Nations development Programme
Kuwait Fund for Arab Economic Development.

20

2.2 Financial Performance of

Rites Ltd. in

2013-

14
Figure 2.1: showing sector wise business

Sector wise Business

11%
4%
5%
Railway infrastruture

29%
Export and leasing

Bulidings

Highway/Ports/Airports

8%

Urban Infrastructures

Quality Assurance

43%

Table 1: Turnover & Profits of RITES Ltd. Over the years

YEAR
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

TURNOVER
(Rs. In Crore)
285
240
426
566
661
672

PROFIT (after tax)

(Rs. In Crore)
48
41
99
118
104
94

21

2009-10
2010-11
2011-12
2012-13
2013-14

623
881
934
1076
1246

112
244
164
245
264

Figure 2.2: Graph showing Turnover of the Rites Ltd.

Turnover (in crores)

1400

1246

1200

1076

1000

881

800
566

600
400285

661

672

934

623

Turnover

426
240

200
0

Figure 2.3: Graph showing Profits of the Rites Ltd

22

Profit (in crores)

300
250
200

264

164

150
99

100
50

245

244

48

118

104

94

Profit

112

41

Figure 2.4 showing turnover

Net worth (in crores)

1600

1397

1400

1195

1200

1001
876

1000
800
600
400283 311

387

460

539

610

695

Net worth

200
0

Figure 2.5: Earnings of Rites Ltd. (2013-14)

23

Earnings
(Rs. 1246 crores )

15

Domestic Consultancy
414

465

Foreign Consultancy
Turnkey Workshops
Quality Assurance
Export and Leasing

13

Other income

96

105

Figure 2.6: Spending of Rites Ltd. (2013-14)

Spending
(Rs. 860 crores )

Staff & Travel

Cost of Export &
Leasing
72

38 40
344

89

277

Cost of Turnkey
Workshops Projects
Cost of Services
Depriciation &
Provisions
Administrative &
Others

24

2.3 ORGANISATIONAL STRUCTURE

25

CHAIRMAN

BOARD OF
DIRECTORS

VIGILANCE

MANAGING

PRIVATIZATION &

DIRECTOR

CONCESSIONING

CORPORATE
SERVICES

DIRECTOR

DIRECTOR

DIRECTOR

(TECHNICAL)

(PROJECTS)

(FINANCE)

HRD
EXPOTECH

RAIL INFRA

QUALITY

BUILDING &

ASSURANCE

AIRPORT

CORP. FIN.

M&CS
CS

ADMIN.
TECHNICAL
SERVICES
TRAINING

URBAN INFRA

TRANSPORT
INFRA

LEGAL

IT

FIN. SERVICES

Figure 2.4: Flow Chart of Organizational Structure at RITES

Ltd.

2.4 AWARDS & CERTIFICATES

26

As a public sector undertaking, RITES Ltd. has been

accorded Mini Ratna Grade-I status by the GOI by virtue
of its operational efficiency and financial strength, which
affords greater operational freedom and autonomy in
decision-making and inter alia, permits the Board to:
Establish joint ventures and subsidiaries in India with
equity investment limited to Rs. 500 crore in one
project subject to maximum of 15% of net worth or
30% of net worth in all joint ventures and
subsidiaries; and
Undertake works of capital nature not exceeding Rs.
500 crores or equal to the net worth of the Company,
whichever is less.
CDC National Award for Excellence by H. E. the
President of India, 12th October 2004.
RITES Ltd. has also received MoU Awards from the
Ministry of Heavy Industries and Public Enterprises
for Fiscals 2002, 2003 and 2004.

2.5 SUBSIDIES & JOINT VENTURE

Table 2.3: Subsidies & Joint Venture of RIRES Ltd.
27

SUBSIDIAR
Y
COMPANIE
S
JOINT
VENTURES

1 M/s RITES (AFRIKA) (Pty) Ltd.,

Established in Botswana
2 M/s
Tanzania
Railway
Limited,
Established in Tanzania.
1 M/s RICON - Established in India
2 M/s Ganga Expressway Consultants
Private
Limited
(GECPL),
Established in India
3 M/s Companhia Dos Caminhos De
Ferro De Beira, SARL, Beria (CCFB) Established in Mozambique

2.6 RITES LTD. OFFICE

Registered Office. The registered office is located
at SCOPE Minar, Core I, 12th Floor, Laxmi Nagar,
Delhi 110 092. The office space covering an area of
approximately 19,804 square feet has been handed
over to the companyon January 11, 2005 by the
Standing Conference of Public Enterprises on a
perpetual lease basis.
Corporate Office. The corporate office is located at
Plot No.1, Sector-29, Gurgaon, Haryana- 122002. The
office space covering an area of approximately
1,56,615 square feet has been conveyed to the
companyvide conveyance deed dated January 7,
1999 and a supplementary conveyance deed dated
August 29, 2003 by the Haryana Urban Development
Authority.

28

3. UNDERSTANDING BUSINESS
3.1 Consultancy Business
The Companys consultancy services include pre-project
activities, design engineering studies, procurement
assistance consultancy, PMC including independent
consultancy services, inspection, quality assurance
services, construction supervision and commissioning
support.
A Pre-project activities: The main activities include:
Feasibility Study.
Detailed Project Report.
B Design engineering activities: The main activities
undertaken include:
Design of equipment or structures.
Architecture and Environment planning.
C Procurement Assistance: The main activities
undertaken include helping the client to prepare
specifications of materials to be purchased,
assistance in tendering for the item, evaluating
tenders and verifying payments to the supplier.
D Project management activities:
activities undertaken include:

The

main

Project Management Consultancy.

Independent consultant services.
E Quality Assurance services: The main activities
undertaken involve:
Third party inspection.
29

 Vendor assessment.
Consultancy to obtain quality certifications
such as International Standards Organisation
(ISO) ISO 9001, ISO 1401, Operational Health
and Safety (OHSAS) 18001, ISO 22000 and
IEC 17025.
F Construction supervision: The main activities
undertaken involve actual construction monitoring
and ensuring that the procedures and specifications
in the contract are being strictly followed by the
contractor during the construction process.
G Commissioning support: The main
undertaken involve assisting the client in:

activities

Installing
Commissioning
Proof testing the equipment procured
2

Concession Business
The concessions business was started in Fiscal 2000, to
capture the emerging business related to transport
infrastructure privatization, and currently is in four
distinct areas, namely:
Providing full in-house advisory support (including
technical and financial due diligence) to the company
management while participating as equity partner or
consortium or joint venture member to secure
infrastructure projects being offered in PPP format.
Carrying out works or services contracts including
technical assistance, reconstruction or rehabilitation
of infrastructure and leasing of rolling stock secured
from concession companies where RITES Ltd. has
30

taken equity either directly or through its subsidiaries

or joint ventures.
Providing support to its concession companies in
completing
pre-takeover
activities
including
arranging
of
finance,
other
technical
and
management
support
during
operation
or
rehabilitation stage and monitoring performance of
concession companies to initiate corrective actions, if
required.
Providing advisory services for arranging PPP in
infrastructure
projects
including
bid
process
management, project structuring studies for PPP,
services of independent engineer.
3

Secured Projects
RITES Ltd. has secured the following three railway
concession projects till date:
Colombia Railway Concession Project, Columbia.
Beira Rail Corridor Concession, Mozambique.
Tanzania Concession, under its subsidiary TRL,
Tanzania.

Sectors of Operation
SECTORS OF OPERATION

RAILWAYS
HIGHWAYS
BRIDGES & TUNNELS
GEOTECHNOLOGY
AIRPORTS
BUILDINGS

URBAN TRANSPORT
URBAN DEVELOPMENT
PORTS
&
WATER
RESOURCES
ROPEWAYS
INFORMATION
TECHNOLOGY
31

 FINANCIAL SERVICES
RITES SERVICE SPECTRUM
Airport Engineering
Architecture & Design
Bridge
&
Tunnel

Information Technology
Material
System

Engineering
Design Mechanical,

Management
Operation

&

Maintenance
Ports & Harbours
Privatization

&

Civil, Electrical
Electrical Engineering
Engineering Survey
Environmental

Engineering
Export and Leasing
Financial Management
Geo-technology
Highway Engineering
Human
Resources
Development

Concessions
Quality Assurance
Ropeways
Signalling & Telecom
Traffic
Logistics

&

Economics
Training
Urban Development &
Transport
Water
Resources

&

Waterways

32

Some interesting facts about the company:

1 RITES Limited is the first Indian company to operate
railways systems abroad on concession basis.
2 Its services have been instrumental in getting the first
ever ISO 9001:2000 certificate in Afghanistan for ARDS.
3 600 ongoing projects in India and over 30 ongoing
projects overseas.
4 One of the consortiums for the Delhi, Mumbai and Kolkata
Metro.
5 Its clients include various Central and State government
ministries,

other

government

bodies,

public

sector

undertakings including IRCON, NALCO, Konkan Railway

Corporation Limited, DMRC, IOCL, NTPC Limited, SAIL and
NHAI as well as various private companies including Jindal
Steel Limited.
6 As a public sector undertaking, the company has been
accorded the
Mini Ratna Grade-I status by the Government of India by
virtue of
Operational efficiency and financial status.
7 RITES

Limited

was upgraded from Schedule B to

Schedule A on July 11, 2007.

33

4. SWOT Analysis (RITES Ltd.)

1 Strength
A well established organisation with a good track record endowed
with a large pool of highly qualified and experienced technical
perrsonnel.
Ability to take up projects requiring multi-deciplinary work force.
One stop shop providing value added and integrated services in
railways & other sectors of transport, which is difficult to replicate
by other players.
Access to the expertise, manpower resources and infrastructure
facilities of Indian Railways.
Extensive experience in working with multilateral funding agencies
and other international organisation.
High international visibly and reputation earned through work
experience in 63 countries across globe.
In-house ability of sophisticated software, equipment and facilities
for undrtaking complex design work for bridges, highways , rolling
stock etc.
Unique inspection organization with in-house material testing
laboratories.
2 Weakness
Heavy dependence on Government And PSU.
Lack of adequate experience in handling mega projects.

34

 Inability to prevent staff attrition and recruit desired competencies

resulting in manpower resource constraints adversely affect the
performance and development of SBUs /Division.
Increaing difficulty in obtaining Railways officers in certain
categories.
Lack of systematic training and processes to assess gaps in the
competency profile of the SBUs and to impart professional knowhow & skills in relevent work areas.
Insufficient marketing outreach and networking to develop
systematically adequate signals and business leads in public &
private sector alike for leveraging by the concerned SBUs/
Division.
3 Threats
Jobs getting increasingly put through he tendering process instead
of being awarded on nomination basis to RITES.
Increasing competition from wide range of players viz. PSUs ,
Indian companies and International Consultants.
Getting out priced particularly due to high overheads and
comptition from small players.
The scale of projects being tendered is becoming larger in size
attracting international consultants .
Tendencies of domestic clients to opt for foreign consultants or a
consortium associating foreign consulants in the case of major
projects.
Business becoming more sophisticated and clients are increaingly
putting a price tag on reliability and quality of service.
4 Opportunities
Major investments expected to be made in the coming period in the
infrastructure setor , both in the transport and non- transport sector.
Significant investments are expected to be made in SAARC
countries , Middle East, South- East Asia and Africain coming
years.
Moving up the vlaue chain through equity participation in
BOT/PPP projects in infrastrucure Sector .
35

 Taking up of EPC projects as prmitted with recent amendments to

articles of association of RITES.

36

Chapter 5 : Leasing Concepts

1.1

Lease

A legal document outlining the terms under which one

party agrees to rent property from another party. A lease
guarantees the lessee (the renter) use of an asset and guarantees
the lessor (the property owner) regular payments from the lessee
for a specified number of months or years. Both the lessee and
the lessor must uphold the terms of the contract for the lease to
remain valid.

1.2

Concept

Leasing refers to a contractual arrangement between two

parties whereby one (the lessee) acquires the right to use an
equipment or capital goods on payment of a periodical amount to
other who owns the property (the lessor). It is a contract whereby
the owner of an asset gives to another party the exclusive right to
use the asset, usually for an agreed period of a time in return for
payment of rent. Equipment Leasing Association (India) also
expresses the similar views when it states that leasing is "a
contract between the lessor and the lessee for hire of a specific
asset selected from a manufacturer or a vendor of such asset by
the lessee. The lessor retains the ownership of the asset, the
lessee has the possession and use the asset on payment for a
specific period."
International Accounting Standard (IAS-17) has attempted to
explain the concept of leasing in a very precise manner. As per
IAS-17, lease is "an agreement whereby the lessor conveys to
37

lessee in a return for rent the right to use an asset for an agreed
period of time." Leasing therefore enables a firm to avail the
services of plant or equipment without making the investment or
incurring debt obligation. The firm can use the asset by paying a
periodic amount called 'lease payments'.

The word lease is associated with immovable property, leasing

relates to equipment leasing and lease financing is a means of
financing.
So essential elements of leasing are:
(a) Contract between parties
(b) Asset which is subjected to leasing
as the

(c) Lease term which can be short as a month or as long

parties wants.

(d) Lease rentals which the lessee is obliged to pay

according to
the contract between the parties.

1.3 Process of Leasing

The customer (lessee) approaches to the lessor for the
equipment which he requires. He selects the required asset from
the manufacturer or vendor. Payment of the given asset is made
by the lessor. Against this, manufacturer of the asset transfers the
ownership of the asset to the lessor whereas the possession of
the asset is given to the lessee. According to the contract lessee
makes the periodic payments to the lessor. At the end of the lease
contract lessee returns the asset to the lessor. Both the parties
can also renew the contract for the same asset and lessor can sell
38

the asset to the lessee at very nominal price. Besides this lessor
may also sell the asset to the third party or can sell to others.

1.4 Legal Procedures

Lease is a contractual arrangement between the lessor and the lessee and as
such the contract signed by the parties gives rise to their rights and obligations.
Therefore it is necessary that the lease agreement should be properly worded and
constructed as a legal document depicting clearly the intentions of the parties to
lease transactions. A lease agreement should reflect the following important terms
and conditions:1 The amount of the rentals payable by lessee, the time and place of
payments, grace period available for late payments, rate of penalty
interest payable, liquidated damages, etc.
2 Lessees obligation towards payments of various charges such as
maintenance of equipment, repairs, registration, license fee, rates
and taxes and lessors rights on lessees failure to discharge their
obligation.
3 Date , place, time , mode of delivery of lease equipment and
payments of costs associated with the delivery responsibility to pay
insurance charges, types of insurance , receipt of insurance moneys
under policy , rights and liabilities of parties in case of damage to
leased property .
4 Variation clause to accommodate certain changes like revision in
rentals due to external factors like bank interest rates, depreciation
rates , allowance of certain fiscal incentives e.g. investment
allowance by the Government.
39

5 Determination of lease when equipment damaged beyond repair.

Theft of equipment, lessees default in payments of rentals,
bankruptcy of lessee, winding up of lessee business.
6 Indemnification of the lessor by the lessee for all damages etc.
against third party risk.
7 Restriction of lessee to hypothecation, sub lease, renting mortgaging,
creating a charge on the lessees assets without lessors consent.

TYPES OF LEASING
Lease contracts can be classified in to various types:
1. Financial Lease

Financial lease can be regarded as any leasing arrangement

whose purpose is to finance the use of equipment for major part
of its life. International Accounting Standard Committee has
defined financial lease as alease that transfers substantially all
risks and rewards incidental to ownership of an asset. Title may or
may not eventually transferred.
In finance lease , lessor merely finances the asset for acquisition
but does not provide the services of repairs and maintenance and
bears no insurance or other expenses related to asset. That
means the lessee has to bear all expenses of maintenance, repair
and insurance but will not get legal title of the property. Under
Finance lease, the lease rentals paid by lessee cover the cost of
equipment , lessors's profit icluding inerest on capital invested in
equipment. Finance lease is also called as full payt out lease
because the return to the lessor is generally sufficient to cover
the asset cost, the cost of financing , the leassors overhead and
rate of rreturn accepable to lessor. Here the lease period
coincides with the economic life of the asset. So normally lessor
and lessee enters into non-cancellable lease agreement for a
40

fixed period of time called primary period depending upon useful

life of the equipment. Lessor recovers almost total investment
during primary period. After the expiry of primary period either
the asset is returned to lessor or contract is renewed at a nominal
rental.
2. Operating Lease
In operating lease the asset is not wholly amortised during
the noncancellble period, if any , of the lease and where the
lessor does not rely for his profit on the rentals in the noncancellalbe period. When risk and rewards incident to ownership
of of an asset remain with the lessor it is treated as operating
lease. The period of lease can be of few days or of few months
depending on the requirement. Operating lease is preferred where
the equipment is such that there is rapid obsolescence or where
tthe lessee is interseted in tiding over short period. The lease
teerm is significantly less than the economic life of the asset as
lease is for short period. Same asset is hired to a number of users
ane after other. The payment made under one lease contract are
not sufficient to recover the full cost of the equipment. Operating
lease provides services such as repairs ,maintenennce , technical
advice, etc. It involves higher payments of rentals.This type of
lease is also called as maintenence lease or servise lease.
International Accounting Standard 17 has explained operating
lease and finance lease as under:
3. Sale and Lease Back
It is an agreement through which owner of the asset enters
into an agreement with the leasing company to sell its assets to
the lessor company approximately at the market value . Under
the same agreement, the lessor leases it back to the seller, i.e.
the lessee at he predetermined rate for an agreed period. Under
this arrangement, the sold and leased back asset is not physically
exchanges but it all happens in the records only. This type of lease
41

is always advantgeous to the lessee because addittional cash is

available to the lessee and still he has the use of the asset. This
type of lease is adopted by the loss-making comapanies. They sell
the asset to the profit making companies. In this type of
trasaction both lessor and lessee are benefitted , the lessor in
terms of high depriciation and lessee in terms of immediate cash
inflows and lower lease rentals.
4. Leveraged Lease
In leverage lease , the contract is between a group of parties
who contributed by way of equity capital or long term loans
towards purchase of assets to be leased. Under this type of lease,
equipment is generally purchased by leasing company (Lessor) by
providing 20 to 40 % of the cost equipment. The remaining
amount is borrowed from insitutional investors such as banks,
financil;a institutions or any other investment companies. The
loans are invariably secured by a mortgaged of the asset or by
the assignment of the lease payments. Inthis lessor can claim all
tax benefits incidental to ownership of the leased asset even
though the lessor provides only 20 to 40 % of the capital needed
to purchase the asset. This type of lease involves three partieslessor, lessee and the lender . Thus leveraged lease is considerd
to be the most sophisticated finacial technique to fund the assets.
The lessor provides a part of the equity needed to finance the
equipment and raise 'debt' for the balance amount.

5. Cross Border Lease

Cross-border leasing is a leasing arrangement where lessor and
lessee are situated in different countries. It is a leveraged lease
between a lessors who is national of a country other than that of
the lessee. Because of this feature this lease is referred as "export
and import lease. These leases are usually leveraged lease.
Although billions of dollars worth equipment is are leased in cross
42

border transactions each year, yet it has not been popularized

because legal obstacles standing in its way: viz. the different legal
classification of leasing from one country to another and the
uncertainty affecting the legal consequences to the lessor.

3.

Advantages of Leasing

3.1 To Lessors
Lessors also benefit in several ways. Compared to lessees,
they are often able to acquire equipment at a low cost, liquidate
efficiently, and obtain acceptable financing terms. These
advantages result from various economies of scale, such as
increased buying power with sellers of equipment. Lessors are
also better positioned to take advantage of certain tax laws, such
as depreciation allowances and investment tax credits. They can
count on a set amount of rental income according to the terms of
the lease. They can make their money over and over again by
renting the property out to new lessees. Lessors own the property
and can take advantage of appreciation over time either by
raising the rent on it or by selling it at a profit.
3.2 To Lessee
The chief advantage to leasing is that it provides an
alternative to ownership. The party that leases also benefits from
not having its resources invested in equipment. Indeed, many
companies that lease equipment do so because they believe
higher productivity and profits are derived from productive use of
equipment, rather than its ownership. In companies that lease
equipment to others believe that they can do a better job of
buying, financing, servicing, and selling. Most leases do not
require a down payment, or a much smaller down payment than a
traditional purchasing down payment. This sometimes allows
people with little money in savings or with poor credit scores to
43

purchase a high-priced item they would otherwise not be able to

afford..
But there are also numerous logistical motivations behind leasing.
A company that leases an office machine, for example, avoids the
risk of investing its resources in an asset that may soon become
technologically obsolete. The company may also benefit from
having access to the machine for only a short time, to complete a
big project without having to invest larger sums in the equipment
and soon after dispose of it. In addition, companies can reduce
their apparent debt burden by leasing. Finally, for individuals who
cannot afford to buy or who are unable to obtain loans for
consumer goods such as furniture, leasing provides an important
financing alternative.
Importantly, lessees also benefit from a number of tax
advantages. A firm that leases equipment or real estate, for
example, will be able to deduct its lease payments from its
taxable income immediately rather than deducting the cost of
purchasing equipment as depreciation over time.

4. Disadvantages
4.1

To Lessor

1. Overall cost- The biggest disadvantage of leasing is

that your costs over the life of the asset are generally going to be
higher than if you purchased the asset. This is because your
rental payments must compensate the lessor not only for
acquisition and financing costs, but also for the lessor's retained
risk of continuing ownership. Performing a thorough cash analysis
is useful in estimating the actual cost differential between leasing
and purchasing.
44

2. No ownership interest- Your lease payments generally

do not establish any equity in your leased equipment. In other
words, at the end of the lease you won't have a tangible asset to
show for your payments. This can be especially painful if you've
grossly underestimated what the equipment would be worth at
the end of the lease. Negotiating a purchase option under which a
portion of your lease payments are credited to the purchase price
is one way to effectively create equity in leased property.
3. Lost tax benefits- Assuming that the IRS doesn't
characterize your lease as a purchase for tax purposes, a
potential disadvantage of leasing is losing the tax benefits of
depreciation deductions that come with ownership. This
disadvantage may be insignificant, however, if the "lost" benefits
are offset by your ability to deduct your rental payments or if you
have insufficient income or tax liability to be offset by the lost
deductions and credits.
4. Commitment to property- Once you sign a lease
agreement, you're generally committed to making payments for
the entire lease period even if you stop using the property. Most
equipment leases are either non-cancelable or impose a stiff
penalty for early termination.
4.2 To Lessee
1. Lessee has an obligation to continue making lease rent
payments even if he is not economically using the asset because
of decline in his business.
2. Even though lessee is not the owner, he is still responsible
for repair and maintaining the asset as specified by the contract.
3. Purchase is likely to be preferred to lease if the asset is
planned to be used for a long duration of time without renewal of
asset.

45

4. If the business no longer requires an asset or if the asset

becomes obsolete before the end of the lease term, it may be
expensive and very difficult to terminate the lease before the end
of the contract. If asset is owned, it may be easier to make
appropriate arrangements to sell or rent out the unnecessary or
obsolete asset.
4. Although the initial large cash outlay is avoided, over the
long-term the lease may account for a larger capital outlay than if
firm purchased an asset instead.

5.

Rights and liabilities

5.1

Of the Lessor

(a) The lessor is bound to disclose to the lessee any material defect in the property,
with reference to its intended use, of which the former is and the latter is not
aware, and which the latter could not with ordinary care discover;
(b) The lessor is bound on the lessee's request to put him in possession of the
property;
(c) The lessor shall be deemed to contract with the lessee that, if the latter pays the
rent reserved by the lease and performs the contracts binding on the lessee, he may
hold the property during the time limited by the lease without interruption.
The benefit of such contract shall be annexed to and go with the lessee's interest as
such, and may be enforced by every person in whom that interest is for the whole
or any part thereof from time to time vested.

5.2 Of the Lessee

(a) If during the continuance of the lease any accession is made
to the property, such accession shall be deemed to be comprised
in the lease;
46

(b) if by fire, tempest or flood, or violence of an army or of a mob,

or other irresistible force, any material part of the property be
wholly destroyed or rendered substantially and permanently unfit
for the purposes for which it was let, the lease shall, at the option
of the lessee, be void:
(c) if the lessor neglects to make, within a reasonable time after
notice, any repairs which he is bound to make to the property, the
lessee may make the same himself, and deduct the expense of
such repairs with interest from the rent, or otherwise recover it
from the lessor;
(d) if the lessor neglects to make any payment which he is bound
to make, and which, if not made by him, is recoverable from the
lessee or against the property, the lessee may make such
payment himself, and deduct it with interest from the rent, or
otherwise recover it from the lessor;
(e) the lessee may even after the determination of the lease
remove, at any time whilst he is in possession of the property
leased but not afterwards all things which he has attached to the
earth; provided he leaves the property in the state in which he
received it;
(f) the lessee may transfer absolutely or by way of mortgage or
sub-lease the whole or any part of his interest in the property, and
any transferee of such interest or part may again transfer it. The
lessee shall not, by reason only of such transfer, cease to be
subject to any of the liabilities attaching to the lease;
(g) the lessee is bound to keep, and on the termination of the
lease to restore, the property in as good condition as it was in at
the time when he was put in possession,
(h) The lessee may use the property and its products (if any) as a
person of ordinary prudence would use them if they were his own;
but he must not use, or permit another to use,(i) on the
termination of the lease, the lessee is bound to put the lessor into
possession of the property.

47

Chapter 6: Lease Accounting & Rentals

1 Lease Accounting
According to the accounting practices followed by leasing companies in
India, the machinery/ equipment acquired for leasing out is initially capilalised and
depreciation is charged in the books as required under the companied act 1956,
Generally, the leasing companies charge depreciation on straight line method over
the specialized period as defined under the companies act 1956, which in some
cases beyond primary lease period. The asset is classified as part of the fixed assets
of the leasing companies but the same is not put into use by the leasing company.
Instead its full value is recovered during the lease period along with the interest
and profits by way of lease rentals.
1.1 Current accounting practices for giving account treatment
to machinery given on lease by the leasing companies is as
follows:
a Machinery and equipment leased out is treated as fixed asset and is
classified as accordingly in the balance sheet of the company.
b The charge on account of depreciation is debited to the profit and loss
account of the company for the financial year. Equivalent straight line
rate is applied on the assets for whole year.
c Lease rentals arising out of the lease are treated as income receivable and
are credited to the profit and loss account of the company for the
financial year on the accrual basis.
d The necessary taxes and insurance are debited to the lessee and are
recovered on due dates.
1.2 Lessors books of accounts
Leasing companies in India are maintaining the following books of
accounts at their head offices and branch offices:48

1.
2.
3.
4.
5.
6.
7.
8.

Journal
(Annexure 1)
Cash Book
Bank Book
Ledger
Hire Purchase Rental register
Lease rental register
Investment register
Fixed assets register

1.3

CONSOLIDATION AND COMPILATION OF

ACCOUNTS
Accounting Unit

VOUCHERS

The first step in consolidation is the

maintenance of vouchers using the FMIS
system of the company in the form of various
software modules developed by the company.
The two main forms of vouchers used by the
company are:
A. Payment vouchers
B. Journal vouchers
ACCT.BOOKS

After preparation of vouchers ten ledger

books are made
out of those vouchers
example:
A. Bank day book from payment voucher
B. Journal day book from journal voucher
ACC. LEDGER

49

After that those ten day books are combined

and journal ledger
is made out of those
books.
TRIAL BALANCE

COMBINED
T/BAL.

CLUBBING

BALANCE SHEET

MIS

COSTING

From the information by analysis of journal

ledger combined trial balance is made in
corporate office of company it comprise of all
the data from various offices of the company
It is prepared combining all units. It includes
foreign units if any converted into rupee
terms. This serves the basis of making final
accounts. Schedules of balance sheet are
prepared with its help.
After that clubbing of trail balance is done in
the form of schedules. All similar accounts of
one category will club together and be shown
under one major head under P&L or B/S.
However few clubbed accounts are first
transferred to schedules, and the total of
particular schedule is transferred to P&L or
B/S as case may be.
Using schedules final balance sheet is made
in corporate office of the company.
It is a presentation of balance sheet of the
company segment wise of corporate level it
also shows the result of the company. It also
serves as the accountability center because it
depicts the position of the company SBU
wise. It also reports the divisional
performance of the company.

50

It is done according to SBU of the company.

All the cost involved in each projects of the
SBU is done in the costing. It includes the
breakup all the overheads of each SBUs.

PROJECTS

It includes the cost of various projects of

every SBU it takes into consideration various
overheads involved in each project by that it
depicts the cost of projects of SBUs
individually.

The final product after going through the consolidation and

compilation process of accounts is the balance sheet of the
company which comprise of the following heads:
Directors report.
Report on corporate governance.
Management discussions and analysis
Auditors report
Financial statements.
Consolidated financial statements.
Financial statements of subsidiary
company.

51

1 Rentals (Fixation of Rentals)

Pricing of lease equipment is important from the angle of meeting cost of
providing leasing facility and earning a handsome return on investments made by
the owners of funds. Basic inputs in leasing activity is the FUND i.e. money
which may be owners or borrowers or boths money.

Pricing can be fixed by the following methods:

1 Mark-up pricing
In leasing business, the pricing has to be done on the basis of cost of
funds and realizing a mark-up to achieve target profit margin. Pricing of
lease facility is known as fixing lease rentals which is done on the basis
of cash flows analysis with a mark- up on cost of funds.
2 Lease Rentral Concept
Lease rental are quoted generally as Rs. .. Per Rs.1000 of cost of the
leased asset.
3 Flat Rate Concept

52

Flat rate ignores the fact that lessors capital investment reduces during
the lease term. It also does not explain the implicit interest rate.
4 Fixed or Variable Rentals
For small or medium ticket leases, the lease rentals are fixed, neither of
the lessor nor the lessee could change the amount of rental payments. But
there are certain causes which necessitate to incorporate variations at
different stages in lease rental. Such causes include the changes in
exchange rates, interest rates, monetary controls, tax rates and
depreciation allowances etc.
In big ticket lease it is desirable to incorporate these changes and vary
the lease rentals. One way to sort out the problem is that the lease rentals
may be fixed by combining two elements viz. fixed charges recoverable
on account of lessors investment of capital. Another way to give effect to
variations by calculating actual yield and assumed yield and the
difference between can be recovered from the lessee.
5 For the rental calculations
Formulae can be used to calculate rentals in different situation as given
below:

Rentals ( pmt )=

True rate=

pv
a

interest100
Where pmt
= rental amount
cost of equipmentNo
. of primary
pv = present
valueyears
a= rental factor

Flat rate=(True rate2)1

53

For Calculating a:

1
a=

1
( 1+c )n
i

a = rental factor
c = interest/12
n = no. of periods in lease term

Situation 1: where the rentals are paid in arrears

Situation 2: where lease rentals are paid in advance:

1
a=

1
( 1+c )n x
+x
i

a = rental factor
c = interest/12
n = no. of periods in lease term
x= no. of rentals payable in advance.

54

Chapter 7 : Research Methodology

1. Methodology

The data used in this project report is secondary sources only.

The secondary data has been collected from:
Understanding the nature of leasing business and the business of
the company, the working of the company by going through the
company journals, annual reports and other documents.
Discussions with the company mentor and other key persons.
Attending the discussions involved if feasible.
Emphasis on learning the practices and procedures involved in
general course of business and not specific to RITES Ltd. This has
helped in understanding the overall business.
Working with employees in the organization has given me an
insight into the practical working of the organization.

55

1.1

Brief Approach to Study

Discussi
ons with
RITES
Personne
l

Discussio
ns with
internal
Experts

GUIDING
CONSIDERATION

Review of
Secondar
y
informati
on

Analysis
of
informati
on
obtained
fromRITE
S

2.

Limitations of the Study

The company being a Public sector undertaking
cannot provide entire information as some aspects
are kept confidential.
Since there are projects in progress, some of the
document are in making thus are not available for
study.

Since this is alive project, the schedule may vary

according to the actual processes being carried on in
the company, i.e. delay in the process can cause lag
in reporting schedule.
56

Chapter 8: Data Collection & Analysis

In this chapter the data ascertained through various means are analyzed and
interpreted with the help of appropriate accounting and statistical tools.
Few of the countries are not in the position to fund import of rolling stock is
resorting to leasing methodology to meet their rolling stock demands. This
business is going to pick up and accordingly RITES is focusing its attention to tap
such business opportunities. The company also envisages significant leasing
business from its joint venture/subsidiary companies in Mozambique and Tanzania
where presently it is operating and maintaining the railway system.
There was a major expansion in leasing activities in recent past. RITES was
awarded the first ever leasing contract for MG passenger coaches with a contract
for lease of 23 in-service passenger coaches to Tanzania Railway Limited. In
addition, the Division secured a contract for leasing of 23 in-service passenger
coaches and 25 in-service diesel locomotives from TRL, Tanzania where already
10 in-service locomotives had been operating on lease from RITES for the past 10
years. Lease of 10 in-service locomotives to CCFB, Mozambique and another 10
in-service locomotives to CFM (South), Mozambique is also continuing.
Important aspects of finance are:1. Capital Structure and Corporate Risk
a.
Funding Sources
b.
Debt Funding and Financial Leverage
c.
Return on Capital Employed
d.
Return on Investment
2. Important measures of return
a.
Time Value of Money
b.
Future Value or Terminal Value of money
c.
Compounding with additional uniform payments
d.
Compounding more than once a year
57

e.
f.
g.
h.
i.

Future value of a series of payments

Future value of an annuity
Doubling the money
Present Value
Cost of capital

3. Computation of Cost of Capital

a.
Cost of equity capital
b.
Cost of preference capital
c.
Cost of debt
d.
Cost of retained earnings
e.
Cost of depreciation
f.
Weighted cost of capital
4. Return on Investment Methods
a.
Pay-back period
b.
Rate of Return Method
c.
IRR method
d.
NPV method

FINANCIAL FIGURES

The expected revenue which will likely to be generated from leasing business from existing
concessinares are tabled below:Leasing Business

2009

2010

2011

2012

Existing leasing contract with TRL for 5 years @ Rs. 30 Cr. /Yr.

25

29

29

29

Existing leasing contract with CCFB for 5 years @ Rs. 10 Cr. / Yr.

10

10

10

10

New Leasing Contract with TRL

12

18

20

17

27

29

68

83

87

New Leasing Contract with CCFB (for coal cargo)

Total

35

58

The projected Statement of Financial Statement in respect of Profit & Loss

Account for next five years after introduction of leasing business will be as under:-

Income Segment

FY09E

FY10E

Consultancy Fee

400

475

477

499

495

Export Sales

166

189

200

210

307

Quality Assurance

56

69

89

99

110

Lease Services

10

18

25

46

Other Income

48

57

66

75

90

679

800

850

908

1048

TOTAL

FY11E

FY12E

FY13E

The total no.s of rolling stock and locomotives required in TRL and CCFB for next
five years has been tabled below. However, it have been envisaged that an amount
of Rs. 750 crore will further be required for Tanzania Coal business in a phased
manner in year 2009-10 & 2010-11 and same has not been included in the below
table.
Contract / Country

FY09E

FY10E

FY11E

FY12E

FY13E

Existing Lease (No.) (1300HP)

25

25

25

25

30

New Lease (Nos.)

10

10

10

Value of Existing Lease (Rs.

Cr.)

25

25

25

25

25

Value of New Lease (Rs. Cr.)

12

18

19

19

Existing No. of Coaches

20

20

20

20

20

Value of Contract (Rs. Cr.)

Tanzania

59

Total Lease Value for Tanzania

29

41

47

48

60

Existing No. of Locos (for GC)

15

15

15

15

15

Value of Existing Lease (Rs.

Cr.)

10

10

10

10

10

Additional Requirement (For

coal)

10

15

15

15

Value of New Lease (Rs. Cr.)

17

27

28

35

Total Lease Value for

Mozambique

10

27

37

38

40

Lease Revenue - Total

39

68

83

85

90

Mozambique

The breakup of expenditure for leasing rolling stock to TRL, Tanzania is as

under :(Rs. In Crores)
S.No.

Particulars

2010

2011

Total

Leasing of 1350 20.00

HP Locomotives to
TRL

20

Leasing of 2300 33.10

HP Locomotives to
TRL

31.90

65

Leasing of sleeper 6.90

coaches to TRL

6.90

Leasing
handling
Traffic

500

225

725

531.90

225

816.90

TOTAL

2009

for 0
Coal
60

60

The break up of capital expenditure for leasing rolling stock to CCFB, Mozambique as under:
S.No.

Particulars

2009

2010

2011

Total

Leasing of 3000 10.00

HP Locomotives to
CCFB

35.10

54.90

100

Leasing of sleeper 0
coaches to CCFB

TOTAL

38.10

54.9

103

10

The year wise break up of likely capex towards leasing of locomotives is as under:

S.No.

Particulars

2009

2010

2011

Total

TRL

60

531.90

225

816.90

CCFB

10

38.10

54.90

103

TOTAL

70

570

279.90

919.90

Requirement of Locomotives in Tanzania

S.No.

Particulars

Nos

ONGOING
1

1350 HP Locomotives on wet Lease basis for 10 years 25

Costing $ 63 m

In Service Coaches on dry Lease basis for 10 years 23

Costing $ 10 m
IN PROCESS OF AWARD

2000-2300 HP Locomotives on wet Lease basis for 5 years 10

Costing $ 22 m

4.

Passenger Coaches on dry Lease basis for 5 years 16

Costing $ 20 m
61

TOTAL

74

In view of the certainty of growth in leasing business and in particular for RITES
business segment, a business decision requires attention regarding future strategy.

1.
2.
3.

Whether to continue the leasing business in RITES Ltd as is operating

right now.
In case separate entity is required to be formed, the legal status of that
entity needs to be defined.
The location where the above separate legal entity is to be formed needs
to be decided.

Pre-Requisites
1.
2.
3.
4.

Willingness of Management / Management Decision

Formation of Separate group of managerial persons as matters of decision
will be entirely different from current consultancy business
Expert Manpower for handing operations
Fund Management / Raising of Resources for Leasing Operations

Various Alternative Models

62

RITES

Private
equity
firm

Separate Entity

Wholly
owned
Subsidiary

Subsidiar
y

JV/Associat
e
Company

LOCATION

In

OUT SIDE

The decision regarding above issues will primarily depends upon aspects with
regard to
63

A. Business operation
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.

Growth Prospects
Funding Requirements
Capital Structure
Strategic Decision Making Process
Logistic Support
Availability of Experts
Political Stability
Technology Requirement

B. Economic Reasons
i.
Source County
ii.
Future Markets
iii.
Cost of Technology
iv.
Manpower Cost
C. Regulations & Statutory Requirements
i.
Taxation Laws prevailing in the County Direct & Indirect
ii.
Legal requirements for new formation
iii.
Govt. Rules & Regulations
iv.
DTAA arrangements

However, the key / Core factors which will influence the decision are as
under :-

1.
2.
3.
4.
5.

Growth Prospects and Future Markets

Capital Structure and Funding Requirements
Taxation Laws including DTAA arrangements
Logistic Support including Manpower
Political Stability and Law & Order Situation

In view of above analysis, the RITES can go ahead in three steps:64

Short Term (Six Months to One Year)

Medium Term ( One Year to 3 Years)
Long Term ( More than 3 Years)

1.

Growth Prospects and Future Markets:-

The leasing business is gaining popularity world wide and especially in leasing of
wagons & coaches.
Although keeping in view the growth prospects of leasing, it suggests to have a
separate legal entity in the form of Subsidiary or Associate Company. But to start
with, it would be more appropriate to start with PE
Short Term
With formation of PE
Why PE in the initial stage.
a.
b.
c.
d.
e.
f.

Stabilization of Business
Regular Contracts for existing line of business
Scope for New Avenues in same sector
Scope for opening in New Sectors
To understand the practical difficulty in operating in that
geographical area
Support from Govt.

Medium Term

With formation of Subsidiary Company or Associate Company with a local

Partners

Long Term
With formation of 100% Subsidiary Companies
65

Unit / PE
a yes b - no

Business
Reasons

In
In
Indi M
a
au
rit
ies

Growth
Prospects

Funds Req A

Cap
Structure

Decision
Making

Logistic
Support

Availabilit A
y
of
Experts

Political
Stability

Technolog A
y Req

In Economic
Af Reasons
ric
a

In
In
di
a

In
M
au
rit
ies

In Statutory
Af Reasons
ric
a

I In In
n M A
au fri
I rit ca
n ie
d s
i
a

It depends upon the size of business which the company will be able to grow.

66

Case Study
1 Tender requirements of the business entity for bidding of a particular work.
Total Fund Requirement 1000 crore in a phase manner

Option- I

RITES Own business :

If the entire funds arrange by the RITES then the fund structure and
the impact of the fund structure on the balance sheet will be as under:
Total Funds
Capital =200 cr

=1000c

Loan = 800 cr

Impact on the balance sheet

Source of funds

Shareholders Funds:

Capital

4000

Reserve and surplus

49886.67

Loan

80000
Total

133886.67
133886.67

Applications of Funds
67

Fixed Assets

11765.58

Investments

6872.98

Deferred Tax Assets

3262.19

Net current assets

11910.9

Miscellaneous Expenditure

75.02

133886.67
133886.67

Lease Service :

RITES is the leading company in transport infrastructure consultancy, engineering

and project management services, with operation in India and abroad. Apart from
that RITES is engaging in providing leasing services in abroad. Some ongoing
projects are, leasing of locomotives in Tanzania and Mozambique, leasing of
passenger coaches in Tanzania.

Proposed Action: Our Company has been awarded a contract for supply of 1350
HP locomotives on wet lease basis for a period of five year, commencing from the
date of hand over of such locomotives and also entered into a contract with TRL
for dry leasing of passenger coaches for a period of five year commencing from
the date of commissioning and acceptance into service of such coaches.
Pursuant to the above, RITES is intended to incorporate a leasing company. The
options available to RITES are:
1. Leasing by RITES
2. Incorporate a subsidiary in foreign country (Mauritius / Tanzania)

The decision to either incorporate a subsidiary in foreign country or lease directly

by RITES from India will depends upon

68

(i)
(ii)

the tax benefits available under both the options

the above (i) will depends on the profit margin of RITES

Leasing by RITES: Under this, RITES purchase the locomotives & wagons and
lease them to concerned country.

Financial Implications :

1. Implications on balance sheet

(a) Effect on Assets
(b) Effects on debts
2. Tax Implications :
CORPORATE & OTHER TAXES
A means by which governments finance their expenditure by imposing charges on
citizens and corporate entities. Governments use taxation to encourage or
discourage certain economic decisions. For example, reduction in taxable personal
(or household) income by the amount paid as interest on home mortgage loans
results in greater construction activity, and generates more jobs.

Taxes in India are levied by the Central Government and the state governments.
Some minor taxes are also levied by the local authorities such as the Municipality.
The authority to levy a tax is derived from the Constitution of India which
allocates the power to levy various taxes between the Centre and the State. An
important restriction on this power is Article 265 of the Constitution which states
that "No tax shall be levied or collected except by the authority of law. Therefore
each tax levied or collected has to be backed by an accompanying law, passed
either by the Parliament or the State Legislature. In 2010-11, the gross tax
collection of the Centre amounted to 7.92 trillion, with direct tax and indirect tax
contributing 56% and 44% respectively

PAYMENT OF ESTIMATED TAX

69

The income of the company is estimated every year well in advance on best
estimated basis. As per the income tax Act 1961 advance tax against the profit
estimated has to be calculated and paid every quarter, as under:

On or before :15 June - not less than 15%of such adv. Tax

On or before: 15 September -not less than 45% as reduced by the amount, if

any, paid earlier.

On or before :15 December -not less than 75% as reduced by any amount
paid , if any, paid in earlier installment.

On or before: 15 march 100%.

TDS CERTIFICATE / WITHHOLDING TAX/OF TDS BY RITES

The TDS certificates and withholding tax certificates are collected from
various clients and benefit of the same is taken on the total income tax payable by
the company. Further the said certificates are produced as evidence at the time of
assessment U/s 143(1) of income tax act.

Rites are deducting TDS under section 194-C, 194-J, and 195 in addition to
TDS U/S 192 of the income Tax Act 1961.

The TDS certificates are also treated as cash receipts. Timely submission of
the TDS certificate would help getting due credits during the income tax
assessment of RITES. As a part of procedure, the respective DFO are required to
reconcile the TDS account periodically to avoid any loss on this account.

Quarterly statements of TDS are filed electronically with the taxation

department on or before the dues dates as under:
o

April June

: On or before 15th July

July - September : On or before 15th Oct

Oct December

: On or before 15th Jan

Jan March

: On or before 15th June

Further it is also necessary to submit the quarterly return in the prescribed

forms as per prescribed time limit.
o

For deduction U/s 194-C, 194-J, and 194-I the return in the
70

prescribed forms as per prescribed time limit.

o

For deduction U/s 192 in the prescribed form no 24Q

For deduction U/s 195 in the prescribed form no 27Q

KEY FACTORS IN TAXATION

Tax is usually provided for the services provided by the parties to whom the
services are being provided. For this purpose, certain important things to be kept in
mind:
1.
A negative list is prepared by the Government of India in which the Mega
Exemptions have been provided through which such services have been exempted.
NOTE: 39 Mega Exemptions have been provided by way of notification no.
25/2012 dated 20.06.2012 in ANNEXURE 2.
2.
Reverse Charge. FOR EXAMPLE- In case of RITES, the tax in such case
will be paid by RITES on behalf of its clients.
3.
Abatements: Certain Abatements are provided by the Central Government
w.r.t. the services
NOTE: The Percentage of Rates for Taxable Services in respect of RITES are
given in ANNEXURE 3.
4.

Part payment by both RITES and its Clients.

5.
The amount of TDS deducted during the month of March is required to be
deposited on or before next month ending 30th April and for the rest of the months,
it is to be paid on 5th of every month.

Chapter 9 : Conclusion & Suggestions

71

1 Conclusion
On the basis of study of RITES firm as whole, following areas of strengths can be
brought out which are the evidence of the efficient operations of the company:
1. It has always been a profit making company since its inception in 1974. It has
been regularly paying dividends to the government.
2. There has been a strong growth in business and in profits which can also be
attributed to diversification of the company to areas other than those related to
Railways sector.
3. The company has a strong backup of Indian Railways. Hence there is no
shortage of technical manpower. The company has a low attrition rate.
4. RITES is entering into countries where technology like our country prevails
mainly South Asian, African countries.
5. RITES is entering into newer areas like BOT (Build Own Transfer) and EPC
contracts.
6. Equipment leasing is a source of business finance and the concept of equipment
leasing emerged in Madras in 1973. When leasing business grew and met initial
success, there was a mushroom growth of leasing and finance companies offering
lease services in India.
7. Normally, assets of plant and machinery earth moving equipment, energy saving
equipment, rolling stock, wagons, locomotives, etc are leased.

Since the project has covered Lease Financing, the study has led to the formulation
of quite comprehensive checklist for certain types of lease contracts which also
serves as findings of the project.

72

The rentals of facility is also important part of the leasing Finance are included in
the project.
Tax is to be deducted at source while making payment on account of fees for
professional/technical services.

2 Suggestion

73

For Leasing Business :

a) Leasing is profitable for the Lessors as well as for the Lessee.
b) Rites should take measure to increase leasing business.
c) After careful understanding of the leasing business, observations with regard to
acceptance of terms & conditions or otherwise should be brought out clearly in the
lease proposal. These may pertain to technical parameters, financial aspects such as
escalation, commercial clauses such as meeting statutory taxes (service tax, VAT
etc.
d) Clarity about role of RITES needs to be given attention. Since implications are
far reaching.
e) While execution of Lease Contracts certain aspects require special attention such
as Maintain of equipment to substantiate extension of time, if required.
Recording of acceptance of extra work to claim remuneration beyond
contract terms duly linking this with correspondence with client.
f) In middle of lease contract, issues require attention are Commitment for maintenance period,
Handing over the equipment in terms of contract to client

Suggestions for Improving Exports in RITES

1. It is suggested that RITES take a country based approach rather
than a project based approach so that it can target various sectors.

74

2. It needs to undertake market survey of various countries so as to

understand the geopolitical scenario, investment pattern in various
sectors, potential for infrastructure development, and plans of
multilateral and bilateral agencies so as to enable it to enter new
markets in other countries.
3. It needs to tie-up with financial intermediaries that are operating in
the region so as to reduce financial risks in the leasing business.
4. It needs to strengthen expertise in maintenance and rehabilitation
of rolling stock in which companies like Alstom and Siemens are
experts.
5. It is suggested that it consolidates its existing railway concessions
business so as to reduce inherent risks and strengthen its
capabilities of forecasting and cost and operations estimation.
6. It needs to explore scope for customizing or developing rolling
stock meeting specific clients needs.

BIBLIOGRAPHY
75

JOURNALS:

Annual Report of RITES limited 20013-014

Corporate Plan of RITES limited prepared by PWC

RITES Journals

WEBSITES:

http://www.rites.com

http://www.ogc.gov.uk/documents/Contract_Management.pdf

http://www.projectsmonitor.com/detailnews.asp?newsid=13937

http://www.indianrailways.gov.in

Annexures 1.
1. Journal Entries in the Lessors Book

76

Date

Particulars

Equipment

Dr.

Cr.

Dr.

To Cash
(cash purchases of equipment)
Supplier

Dr.

To Cash/Bank
(advance payment made to supplier)
Miscellaneous

Dr.

To Cash/Bank
(other payments made to obtain the
equipment)
Equipment

Dr.

To Cash
To Advance to payment
To Misc. Payments
To Bank
(purchases of equipment)
Bank

Dr.

To Lease Management Fee

(lease management fee received)
Bills Receivable (or Xltd )

Dr.

To Equipment
(Equipment leased out to X ltd.)
Cash

Dr.

To Bills Receivable
(first installment received)
77

Interest Receivable

Dr.

To Interest income
(Being interest received at the end of first
year)
Cash

Dr.

To Bills Receivable
To Interest Receivable
(Being Second installment Received)
Cash/Bank
To Sale of Equipment
(Being residual value of equipment )

ANNEXURE 2: THE PERCENTAGE OF

RATES FOR TAXABLE SERVICES
Sl. Description of taxable
No. service

Percent- Conditions
age
78

(1)

(2)

(3)

(4)

Services in relation to
financial leasing including
hire purchase

10

Nil.

Transport of goods by rail

30

Nil.

Transport of passengers,
30
with or without
accompanied belongings by
rail

Nil.

Bundled service by way of 70

supply of food or any other
article of human
consumption or any drink,
in a premises ( including
hotel, convention center,
club, pandal, shamiana or
any other place, specially
arranged for organizing a
function) together with
renting of such premises

(i) CENVAT credit on any goods

classifiable under Chapters 1 to 22 of
the Central Excise Tariff Act, 1985 (5 of
1986) used for providing the taxable
service, has not been taken under the
provisions of the CENVAT Credit Rules,
2004.

Transport of passengers by 40
air, with or without
accompanied belongings

CENVAT credit on inputs and capital

goods, used for providing the taxable
service, has not been taken under the
provisions of the CENVAT Credit Rules,
2004.

Renting of hotels, inns,

guest houses, clubs,
campsites or other
commercial places meant
for residential or lodging
purposes.

Same as above.

60

79

Services of goods transport 25

agency in relation to
transportation of goods.

CENVAT credit on inputs, capital goods

and input services, used for providing
the taxable service, has not been taken
under the provisions of the CENVAT
Credit Rules, 2004.

Services provided in
relation to chit

70

Same as above.

Renting of any motor

vehicle designed to carry
passengers

40

Same as above.

10

Transport of goods in a
vessel

50

Same as above.

11

Services by a tour operator 25

in relation to,(i) a package tour

(i) CENVAT credit on inputs, capital

goods and input services, used for
providing the taxable service, has not
been taken under the provisions of the
CENVAT Credit Rules, 2004.
(ii) The bill issued for this purpose
indicates that it is inclusive of charges
for such a tour.

(ii) a tour, if the tour

10
operator is providing
services solely of arranging
or booking accommodation
for any person in relation to
a tour

(i) CENVAT credit on inputs, capital

goods and input services, used for
providing the taxable service, has not
been taken under the provisions of the
CENVAT Credit Rules, 2004.
(ii) The invoice, bill or challan issued
indicates that it is towards the charges
for such accommodation.
(iii) This exemption shall not apply in
such cases where the invoice, bill or
challan issued by the tour operator, in
80

relation to a tour, only includes the

service charges for arranging or booking
accommodation for any person and does
not include the cost of such
accommodation.
(iii) any services other than 40
specified at (i) and (ii)
above.

(i) CENVAT credit on inputs, capital

goods and input services, used for
providing the taxable service, has not
been taken under the provisions of the
CENVAT Credit Rules, 2004.
(ii)The bill issued indicates that the
amount charged in the bill is the gross
amount charged for such a tour.

12.

Construction of a complex, 25
building, civil structure or a
part thereof, intended for a
sale to a buyer, wholly or
partly except where entire
consideration is received
after issuance of
completion certificate by
the competent authority

(i) CENVAT credit on inputs used for

providing the taxable service has not
been taken under the provisions of the
CENVAT Credit Rules, 2004.
(ii)The value of land is included in the
amount charged from the service
receiver.

81