By G.Venkatachalam M.Com,MBA,M.Phil,(Ph.

D) Assistant Professor/Finance/JIT
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What is leasing?
Leasing is an arrangement between two parties the leasing company( lessor ) and the user/(lessee) , where by the lessor arranges to buy the capital equipment for the use of the lessee for an agreed period of time in return for the payment of rent.

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

Why leasing not buying?

Buying office equipment involves:
An initial outlay of cash, or the need to get a loan. The equipment may become obsolete. Some equipment has a low resale value. Leasing involves: No outlay of cash initially. minimal initial expenditures.

Rental pays (by lessee) are

tax deductible .

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

Process of leasing:
Seller Lessor= owner of asset
Purchase the Business Asset

Lessee= user of asset

Lessor
Agreement to give asset Pays Rent

Lessee Uses Business Asset

After agreed period ,lessor takes the asset back

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 4

Types of lease :
lease

Financial lease

Operating lease

Leverage lease

Sale and lease back

Cross border

lease
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G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

Financial lease
Capital lease, long term lease, net lease or close lease.

The lessee enters into on irrevocable / non cancelable

contract with the lessor The lessee uses the equipment, maintains it, insures, bears the risk of obsolescence etc. Lease with a purchase option where lessee purchases the equipment after the lease period is over/lease for full economic life of the equipment
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 6

Operating lease
Service lease, short terms lease or true lease. Lease for a limited period Can be terminated by notice.

Maintenance expenses borne by lessor

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

DIFFERENCE BETWEEN FINANCIAL LEASE AND OPERATING LEASE

Period Settlement Maintenance Risk Assumption Delivery & Disposal

Leverage lease
Leasing of those assets which requires huge capital Three parties, lessor lessee & lender. Lessor borrows money from the lender to purchase the asset. Lessor provides 20% to 30% finance to own the asset.

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

Sale and lease back

A firm first sells the asset to lessor & then takes it on lease.

Asset sold at market value so, the lessee gets cash & as well as right to use the asset.

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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Cross border house:

International leasing/ transnational leasing.

Lease transaction between lesser & lessee of two different

countries includes expert leasing.

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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TYPES OF LEASE AGREEMENTS contd

Direct Lease - Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself. The major types of direct lessor include manufacturers, finance companies, independent lease companies, special purpose leasing companies etc Dry Lease Under dry lease agreement the asset owner (LESSOR) provides the asset without the energy required to operate the asset. Wet Lease - Under wet lease agreement the asset owner (LESSOR) provides the asset with the energy required to operate the asset. Mostly in practice in the Airline industry.
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Why has Leasing Grown so Fast?

Beneficial to both lessee and lessor:

For Lessee:
Leasing may be the only source of financing No outside security/collateral needed Low documentation cost Leasing can finance a higher % of equipment than bank loans Governments allow lessees to deduct full lease payments from their income before tax.
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 13

For Lessor:
Ownership of asset Transaction costs lower Lighter regulations, because they are not deposit taking institutions.

Tax incentives and depreciation shield.

Better control on utilization of funds.
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 14

Disadvantages
Not suitable mode of project finance as project does not generate cash immediately to pay rent. Lease does not get the benefit of capital gain by selling the asset. The cost of lease finance is higher than debit financing ( high rentals ). If rent is not paid regularly then lessor suffer from loss.
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 15

ADVANTAGES OF LEASING

1. SAVING OF CAPITAL: Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin Manufacturer Lessor. 2. FLEXIBILITY AND CONVENIENCE: The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees. 3. PLANNING CASH FLOWS: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets. 4. IMPROVEMENT IN LIQUADITY: Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique.
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ADVANTAGES OF LEASING

you don't have to pay the full cost of the asset up front, so you don't use up your cash or have to borrow money you pay for the asset over the fixed period of time that you use it you can spread the cost over a longer period of time, and ease your cash flow by matching payments to your income the business can usually deduct the full cost of lease rentals from taxable income

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ADVANTAGES OF LEASING

you won't have to worry about an overdraft or other loan being withdrawn at short notice, forcing early repayment if you use an operating lease or contract hire, you may not have to worry about maintenance the leasing company carries the risks if the equipment breaks down on long-funding leases (over seven years, and sometimes over five years) you can claim capital allowances on the cost of the asset

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REGULATORY AUTHORITY
No specific Act or Authority regulates leasing in India. Some of the Acts which indirectly governs are :

Income Tax Act, 1962 Indian Contract Act, 1872 Indian Stamp Act, 1899 Motor vehicles Act, 1988 Recovery of Debts due to Bank and Financial Institutions Act, 1993 Registration Act, 1908 Reserve Bank of India Act, 1934
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 19

REGULATORY AUTHORITY CONTED

Sale of Goods Act, 1930 Sick Industrial Companies (Special Provisions) Act, 1985 Transfer of Property Act, 1882 Companies Act, 1956 Consumer Protection Act, 1986 Easements Act, 1882 Foreign Exchange Management Act, 2000. Hire Purchase Act, 1972
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 20

PLAYERS IN LEASING
Financial Institutions (FIs): Commercial Banks: Foreign banks: Non-banking Finance Companies (NBFCs): Foreign Institutional Investors (FIls):

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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Income tax treatment of lease:

For lessee:
Lease rentals are tax-deductible expenses.

For lessor:

Lease rentals received by the lessor are taxable under the

head of 'Profits and Gains of Business or Profession'. The lessor can claim investment allowance and

depreciation on the investment made in leased assets

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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Accounting treatment of lease:

The leased asset is shown on the balance sheet of the

lessor.
Depreciation and other tax shields associated with the leased asset are claimed by the lessor. The entire lease rental is treated as income in the books of the lessor and as expense in the books of the lessee.

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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Leasing industry in India:

In the year 1973 Leasing finance started in India. First company was set up by the Chidambaram Groups in 1973 at Madras. Governed in India as per Indian contract Act (Sec.148Bailment)

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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PUBLIC SECTOR LEASING:

Financial institutions

Financial institutions like ICICI, IFCI, has set up leasing divisions.

Subsidiaries of bank

bank establishes subsidiaries for leasing such SBI started in 1986.

Other public sector organization

Public sector manufacturing companies like Bharat Electronic ltd. (BHEL), ECIL have started leasing equipment.
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 25

PRIVATE SECTOR LEASING

Pure leasing Companies Independent company without link with any other organization. The twentieth century finance corporation ltd. & Grover

leasing ltd.
Hire purchase & finance Companies Companies prior to 1980 do hire purchase & financing of vehicles, but after 1980 it was extended to leasing. Sundaram finance ltd. & General Finance ltd.
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 26

What is Hire purchase?

Hire purchase is a method of selling goods where by the

goods are let out on hire by a creditor (hiree) to the hire

purchase customer (hirer). The buyer is required to pay an agreed amount in periodical installments during a given period. The ownership of property remains with the creditor (hiree)

and passes on to hirer only after the payment of last

installment. Hire purchase is regulated under the Hire Purchase Act 1972
G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT 27

Features
Under hire purchase system, the buyer takes possession of goods immediately & agrees to pay the total hire purchase price in instalments Each instalments is treated as hire charges The ownership of goods passes from buyer to seller on the payments of the last instalments In case the buyer makes any default in payments of any instalments the seller has right to repossess the goods Normally a deposit is requested i.e. 10%

Difference between leasing and hire purchase:

BASIS
ownership

LEASE FINANCING
The ownership sets with the lessor throughout the agreement.

HIRE-PURCHASE
ownership lies with the hiree till the last instalment is paid

by the hirer.
Method of financing Its a method of financing business assets. Its a method of financing both business assets and consumer articles Purchase option is there with hirer.

Option to user

No option is given to lessee to buy the leased assets.(except in financial lease)

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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Contd
BASIS
Maintenance

LEASE FINANCING

HIRE-PURCHASE

It is borne by lessee in It is borne by hirer. financial lease and lessor in operating lease. Rentals are revenue expenditure and entire rental is tax deductible. Only interest on installment is revenue in nature and tax deductible not the entire installments. Hirer, after being the owner of the asset enjoys the salvage value of the assets .

Nature of expenditure

Salvage value

Lessee not being the owner of the asset, doesnt enjoy the salvage value of the asset.

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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Standard provisions according to HP ACT 1959

To be valid, hire purchase agreements must be in writing and signed by both parties. They must clearly set out the following information in a print that all can read without effort: a clear description of the goods the cash price for the goods the HP price, i.e., the total sum that must be paid to hire and then purchase the goods the deposit the monthly instalments and a reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period). The right of the hirer to terminate the contract when he feels like doing so with a valid reason

The owner's rights

The owner usually has the right to terminate the agreement where the hirer defaults in paying the instalments or breaches any of the other terms in the agreement. This entitles the owner to forfeit the deposit to retain the instalments already paid and recover the balance due to repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid) to claim damages for any loss suffered.

The hirer's obligations

The hirer usually has the following obligations: to pay the hire instalments to take reasonable care of the goods (if the hirer damages the goods by using them in a non-standard way, he or she must continue to pay the instalments and, if appropriate, compensate the owner for any loss in asset value) to inform the owner where the goods will be kept.

Advantages of Hire Purchasing Cash flow: payment by instalments. Writing down allowances apply. Hire purchase is an alternative funding line to bank overdrafts Attracts fixed rate interest. Others same as Outright
Purchase.

Disadvantage of hire purchasing Inflexible: difficult to escape the outstanding settlement if say, a vehicle is no longer required. High deposit compared to contract hire. Business hire purchase appears as a debt on the balance sheet which could inhibit future borrowing. More expensive than contract hire Burden of controlling and running fleet

ANY QUESTION

G.Venkatachalam M.Com, MBA,M.Phil,(Ph.D)/AP/Finance/JIT

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