Download VTU (Visvesvaraya Technological University) MBA 3rd Semester (Third Semester) 16MBAFM302-Financial Services FS Notes Unit 6 Important Lecture Notes (MBA Study Material Notes)
Leasing and Hire Purchasing
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
FirstRanker.com - FirstRanker's Choice
Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
FirstRanker.com - FirstRanker's Choice
Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
FirstRanker.com - FirstRanker's Choice
Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
Advantages of Leasing
To the Lessor
? Full security
? Tax benefit
? High Profitability
? Trading on Equity
? High Growth potential
To Lessee
? Financing of capital goods
? Additional source of finance
? Less costly
? Ownership preserved
? Avoids conditionality
? Flexibility in structuring of rentals
? Simplicity
? Tax Benefits
? Obsolescence risk
? Other benefits
FirstRanker.com - FirstRanker's Choice
Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
Advantages of Leasing
To the Lessor
? Full security
? Tax benefit
? High Profitability
? Trading on Equity
? High Growth potential
To Lessee
? Financing of capital goods
? Additional source of finance
? Less costly
? Ownership preserved
? Avoids conditionality
? Flexibility in structuring of rentals
? Simplicity
? Tax Benefits
? Obsolescence risk
? Other benefits
Problems in Leasing
? Resource constraint
? Risk of obsolescence
? Non availability of sales tax consideration
? Cut-throat competition
? Lack of qualified personnel
? Delay in rental payment
? Attitude of government
Factors influencing buy or borrow decision
? Capital and cost of borrowing
? Availability of freehold or leasehold interest
? Interest on capital employed
? To show increase in capital
? Taxation
? Obsolescence risk
? Future returns
? Depreciable asset
? Non-depreciable asset
? Other factors
? Operating factors
? Legal factors
? Financial factors
FirstRanker.com - FirstRanker's Choice
Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
Advantages of Leasing
To the Lessor
? Full security
? Tax benefit
? High Profitability
? Trading on Equity
? High Growth potential
To Lessee
? Financing of capital goods
? Additional source of finance
? Less costly
? Ownership preserved
? Avoids conditionality
? Flexibility in structuring of rentals
? Simplicity
? Tax Benefits
? Obsolescence risk
? Other benefits
Problems in Leasing
? Resource constraint
? Risk of obsolescence
? Non availability of sales tax consideration
? Cut-throat competition
? Lack of qualified personnel
? Delay in rental payment
? Attitude of government
Factors influencing buy or borrow decision
? Capital and cost of borrowing
? Availability of freehold or leasehold interest
? Interest on capital employed
? To show increase in capital
? Taxation
? Obsolescence risk
? Future returns
? Depreciable asset
? Non-depreciable asset
? Other factors
? Operating factors
? Legal factors
? Financial factors
Hire Purchase
A contract of hire between a vendor and a purchaser, with an option to purchase
the asset at the end of fixed term of hire; by the purchaser provided he pays all the
rentals regularly.
Terms: Payment will be made in instalments, Possession of the goods is
transferred to the buyer immediately, ownership remains with the vendor till the
payment of last instalment, Seller can repossess the goods if the buyer fails to pay
the instalment, each instalment is treated as hire charges till the last instalment is
paid.
Features
? Transfer of asset from vendor to hire purchaser immediately at the beginning of
the contract
? Purchaser pays agreed rentals at agreed intervals to the vendor
? Vendor continues to own the asset till the last instalment is paid by the
purchaser.
? Hire purchaser may make a down payment upon signing the agreement
?If the purchaser defaults a payment, even the last one, the vendor has a right to
take back the asset without having to pay any compensation.
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
Advantages of Leasing
To the Lessor
? Full security
? Tax benefit
? High Profitability
? Trading on Equity
? High Growth potential
To Lessee
? Financing of capital goods
? Additional source of finance
? Less costly
? Ownership preserved
? Avoids conditionality
? Flexibility in structuring of rentals
? Simplicity
? Tax Benefits
? Obsolescence risk
? Other benefits
Problems in Leasing
? Resource constraint
? Risk of obsolescence
? Non availability of sales tax consideration
? Cut-throat competition
? Lack of qualified personnel
? Delay in rental payment
? Attitude of government
Factors influencing buy or borrow decision
? Capital and cost of borrowing
? Availability of freehold or leasehold interest
? Interest on capital employed
? To show increase in capital
? Taxation
? Obsolescence risk
? Future returns
? Depreciable asset
? Non-depreciable asset
? Other factors
? Operating factors
? Legal factors
? Financial factors
Hire Purchase
A contract of hire between a vendor and a purchaser, with an option to purchase
the asset at the end of fixed term of hire; by the purchaser provided he pays all the
rentals regularly.
Terms: Payment will be made in instalments, Possession of the goods is
transferred to the buyer immediately, ownership remains with the vendor till the
payment of last instalment, Seller can repossess the goods if the buyer fails to pay
the instalment, each instalment is treated as hire charges till the last instalment is
paid.
Features
? Transfer of asset from vendor to hire purchaser immediately at the beginning of
the contract
? Purchaser pays agreed rentals at agreed intervals to the vendor
? Vendor continues to own the asset till the last instalment is paid by the
purchaser.
? Hire purchaser may make a down payment upon signing the agreement
?If the purchaser defaults a payment, even the last one, the vendor has a right to
take back the asset without having to pay any compensation.
Contents
? Nature of agreement: stating the nature, term and commencement of the
agreement
? Delivery/handing over of assets: place, time of delivery of asset and the hirer
will pay the delivery charges, installation responsibilities etc
? Location: place where the asset will be kept during the period of the hire
agreement.
? Inspection: the hirer has examined the equipment and is satisfied with it.
? Insurance: that the hirer will pay for insurance and hand over the policies to
the owner.
?Alterations: the hirer is not authorised to make any alterations/modifications
to the machinery without prior consent of the owner.
?Repairs: the hirer will pay for all repairs required during the contract period
.
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
Advantages of Leasing
To the Lessor
? Full security
? Tax benefit
? High Profitability
? Trading on Equity
? High Growth potential
To Lessee
? Financing of capital goods
? Additional source of finance
? Less costly
? Ownership preserved
? Avoids conditionality
? Flexibility in structuring of rentals
? Simplicity
? Tax Benefits
? Obsolescence risk
? Other benefits
Problems in Leasing
? Resource constraint
? Risk of obsolescence
? Non availability of sales tax consideration
? Cut-throat competition
? Lack of qualified personnel
? Delay in rental payment
? Attitude of government
Factors influencing buy or borrow decision
? Capital and cost of borrowing
? Availability of freehold or leasehold interest
? Interest on capital employed
? To show increase in capital
? Taxation
? Obsolescence risk
? Future returns
? Depreciable asset
? Non-depreciable asset
? Other factors
? Operating factors
? Legal factors
? Financial factors
Hire Purchase
A contract of hire between a vendor and a purchaser, with an option to purchase
the asset at the end of fixed term of hire; by the purchaser provided he pays all the
rentals regularly.
Terms: Payment will be made in instalments, Possession of the goods is
transferred to the buyer immediately, ownership remains with the vendor till the
payment of last instalment, Seller can repossess the goods if the buyer fails to pay
the instalment, each instalment is treated as hire charges till the last instalment is
paid.
Features
? Transfer of asset from vendor to hire purchaser immediately at the beginning of
the contract
? Purchaser pays agreed rentals at agreed intervals to the vendor
? Vendor continues to own the asset till the last instalment is paid by the
purchaser.
? Hire purchaser may make a down payment upon signing the agreement
?If the purchaser defaults a payment, even the last one, the vendor has a right to
take back the asset without having to pay any compensation.
Contents
? Nature of agreement: stating the nature, term and commencement of the
agreement
? Delivery/handing over of assets: place, time of delivery of asset and the hirer
will pay the delivery charges, installation responsibilities etc
? Location: place where the asset will be kept during the period of the hire
agreement.
? Inspection: the hirer has examined the equipment and is satisfied with it.
? Insurance: that the hirer will pay for insurance and hand over the policies to
the owner.
?Alterations: the hirer is not authorised to make any alterations/modifications
to the machinery without prior consent of the owner.
?Repairs: the hirer will pay for all repairs required during the contract period
.
? Termination: what conduct of the hirer would lead to a termination of
the agreement?
? Risk: risk of damage and loss to be borne by the hirer
? Indemnity clause: clause which necessitates the hirer to make good
the loss/damage incurred by the lender on the asset
? Stamp duty: the hirer will pay the stamp duty
?Registration and fees: the hirer is responsible to follow all laws, obtain
necessary registrations and pay the fees
? Schedule: schedule of equipment, hire charges etc forming part of the
agreement
? Guarantee: usually the agreement is accompanied by a bank guarantee
or a promissory note given by the hirer for the full amount of the asset
including interest and finance charges.
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
Advantages of Leasing
To the Lessor
? Full security
? Tax benefit
? High Profitability
? Trading on Equity
? High Growth potential
To Lessee
? Financing of capital goods
? Additional source of finance
? Less costly
? Ownership preserved
? Avoids conditionality
? Flexibility in structuring of rentals
? Simplicity
? Tax Benefits
? Obsolescence risk
? Other benefits
Problems in Leasing
? Resource constraint
? Risk of obsolescence
? Non availability of sales tax consideration
? Cut-throat competition
? Lack of qualified personnel
? Delay in rental payment
? Attitude of government
Factors influencing buy or borrow decision
? Capital and cost of borrowing
? Availability of freehold or leasehold interest
? Interest on capital employed
? To show increase in capital
? Taxation
? Obsolescence risk
? Future returns
? Depreciable asset
? Non-depreciable asset
? Other factors
? Operating factors
? Legal factors
? Financial factors
Hire Purchase
A contract of hire between a vendor and a purchaser, with an option to purchase
the asset at the end of fixed term of hire; by the purchaser provided he pays all the
rentals regularly.
Terms: Payment will be made in instalments, Possession of the goods is
transferred to the buyer immediately, ownership remains with the vendor till the
payment of last instalment, Seller can repossess the goods if the buyer fails to pay
the instalment, each instalment is treated as hire charges till the last instalment is
paid.
Features
? Transfer of asset from vendor to hire purchaser immediately at the beginning of
the contract
? Purchaser pays agreed rentals at agreed intervals to the vendor
? Vendor continues to own the asset till the last instalment is paid by the
purchaser.
? Hire purchaser may make a down payment upon signing the agreement
?If the purchaser defaults a payment, even the last one, the vendor has a right to
take back the asset without having to pay any compensation.
Contents
? Nature of agreement: stating the nature, term and commencement of the
agreement
? Delivery/handing over of assets: place, time of delivery of asset and the hirer
will pay the delivery charges, installation responsibilities etc
? Location: place where the asset will be kept during the period of the hire
agreement.
? Inspection: the hirer has examined the equipment and is satisfied with it.
? Insurance: that the hirer will pay for insurance and hand over the policies to
the owner.
?Alterations: the hirer is not authorised to make any alterations/modifications
to the machinery without prior consent of the owner.
?Repairs: the hirer will pay for all repairs required during the contract period
.
? Termination: what conduct of the hirer would lead to a termination of
the agreement?
? Risk: risk of damage and loss to be borne by the hirer
? Indemnity clause: clause which necessitates the hirer to make good
the loss/damage incurred by the lender on the asset
? Stamp duty: the hirer will pay the stamp duty
?Registration and fees: the hirer is responsible to follow all laws, obtain
necessary registrations and pay the fees
? Schedule: schedule of equipment, hire charges etc forming part of the
agreement
? Guarantee: usually the agreement is accompanied by a bank guarantee
or a promissory note given by the hirer for the full amount of the asset
including interest and finance charges.
Banks and Hire Purchase
? Banks extend consumer loans and instalment credit to buyers and sellers
?Not been able to extend credit to hire-purchasers directly. Hence provide term
credit to owners or refinance financing companies or associate concerns of
manufacturers against hire-purchase contracts
? In case of commercial vehicles banks extend OD or cash credit against
hypothecation of first charge of vehicles covered under hire-purchase
agreements. Also, secured by indemnity insurance policies in favour of the bank.
? Banks maintain a margin of 25%-30% on instalments due by hirers to financiers.
? They usually do not accept hire agreements of amounts exceeding Rs 1 lakh
IDBI
? IDBI indirectly participates in hire-purchase business by way of discounting
usance bills/promissory notes arising out of sale of indigenous machinery on
deferred payment basis.
? Under the IDBI scheme bills/pro notes should be drawn in favour of
manufacturer who can discount them at banks and other financial institutions
who can further re-discount them at IDBI.
?Deferred payment period is generally up to 5 years or 7 years under exceptional
cases.
? Manufacturers of cotton and sugar machinery, machine tools, electrical
machinery, oil solvent extraction plants, and some other agro industries make
use of this facility.
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
Advantages of Leasing
To the Lessor
? Full security
? Tax benefit
? High Profitability
? Trading on Equity
? High Growth potential
To Lessee
? Financing of capital goods
? Additional source of finance
? Less costly
? Ownership preserved
? Avoids conditionality
? Flexibility in structuring of rentals
? Simplicity
? Tax Benefits
? Obsolescence risk
? Other benefits
Problems in Leasing
? Resource constraint
? Risk of obsolescence
? Non availability of sales tax consideration
? Cut-throat competition
? Lack of qualified personnel
? Delay in rental payment
? Attitude of government
Factors influencing buy or borrow decision
? Capital and cost of borrowing
? Availability of freehold or leasehold interest
? Interest on capital employed
? To show increase in capital
? Taxation
? Obsolescence risk
? Future returns
? Depreciable asset
? Non-depreciable asset
? Other factors
? Operating factors
? Legal factors
? Financial factors
Hire Purchase
A contract of hire between a vendor and a purchaser, with an option to purchase
the asset at the end of fixed term of hire; by the purchaser provided he pays all the
rentals regularly.
Terms: Payment will be made in instalments, Possession of the goods is
transferred to the buyer immediately, ownership remains with the vendor till the
payment of last instalment, Seller can repossess the goods if the buyer fails to pay
the instalment, each instalment is treated as hire charges till the last instalment is
paid.
Features
? Transfer of asset from vendor to hire purchaser immediately at the beginning of
the contract
? Purchaser pays agreed rentals at agreed intervals to the vendor
? Vendor continues to own the asset till the last instalment is paid by the
purchaser.
? Hire purchaser may make a down payment upon signing the agreement
?If the purchaser defaults a payment, even the last one, the vendor has a right to
take back the asset without having to pay any compensation.
Contents
? Nature of agreement: stating the nature, term and commencement of the
agreement
? Delivery/handing over of assets: place, time of delivery of asset and the hirer
will pay the delivery charges, installation responsibilities etc
? Location: place where the asset will be kept during the period of the hire
agreement.
? Inspection: the hirer has examined the equipment and is satisfied with it.
? Insurance: that the hirer will pay for insurance and hand over the policies to
the owner.
?Alterations: the hirer is not authorised to make any alterations/modifications
to the machinery without prior consent of the owner.
?Repairs: the hirer will pay for all repairs required during the contract period
.
? Termination: what conduct of the hirer would lead to a termination of
the agreement?
? Risk: risk of damage and loss to be borne by the hirer
? Indemnity clause: clause which necessitates the hirer to make good
the loss/damage incurred by the lender on the asset
? Stamp duty: the hirer will pay the stamp duty
?Registration and fees: the hirer is responsible to follow all laws, obtain
necessary registrations and pay the fees
? Schedule: schedule of equipment, hire charges etc forming part of the
agreement
? Guarantee: usually the agreement is accompanied by a bank guarantee
or a promissory note given by the hirer for the full amount of the asset
including interest and finance charges.
Banks and Hire Purchase
? Banks extend consumer loans and instalment credit to buyers and sellers
?Not been able to extend credit to hire-purchasers directly. Hence provide term
credit to owners or refinance financing companies or associate concerns of
manufacturers against hire-purchase contracts
? In case of commercial vehicles banks extend OD or cash credit against
hypothecation of first charge of vehicles covered under hire-purchase
agreements. Also, secured by indemnity insurance policies in favour of the bank.
? Banks maintain a margin of 25%-30% on instalments due by hirers to financiers.
? They usually do not accept hire agreements of amounts exceeding Rs 1 lakh
IDBI
? IDBI indirectly participates in hire-purchase business by way of discounting
usance bills/promissory notes arising out of sale of indigenous machinery on
deferred payment basis.
? Under the IDBI scheme bills/pro notes should be drawn in favour of
manufacturer who can discount them at banks and other financial institutions
who can further re-discount them at IDBI.
?Deferred payment period is generally up to 5 years or 7 years under exceptional
cases.
? Manufacturers of cotton and sugar machinery, machine tools, electrical
machinery, oil solvent extraction plants, and some other agro industries make
use of this facility.
Difference between Leasing and Hire purchase
? Down payment
? Reporting
? Maintenance of Assets
? Sustainability
? Nature of Assets
? Receipts
? Income
Difference between Installment sale and Leasing
? Nature
? Ownership of the assets
? Tax Benefits
? Appearance in the Balance sheet
? Overall cost of the Asset
? Duration
? Maintenance support of the Asset
? Reduced initial cash outlay
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Unit ? 6
Leasing and Hire Purchasing
Leasing
? A contractual arrangement in which owner of an asset (lessor) transfers
the right to use the asset to another party (lessee) for an agreed period of
time for consideration in the form of periodic rentals.
? At the end of the lease the asset goes back to the lessor unless the
contract is renewed.
As per IAS -17 lease is ? an agreement where by the lessor conveys to
the lessee in return for rent the right to use an asset for an agreed period of
time.?
Features
? Parties must be competent to contact
? No transfer of ownership to the lessee
? Goods are transferred for a specific purpose
? Lessee should return exactly the same goods
? Lease rentals are payable in monthly installments
? Equipment leases are for capital investment not exceeding Rs. 100 laks
? Equipment leasing covers a wide range of equipments such as plant &
machinery, vehicle, office equipment, computers, automobiles etc.
Parties involved in Lease
Lessor
Owner or lender
Specialised leasing companies
Banks
Specialised financial institutions
One-off lessors
Manufacturer lessors
Lessee
User or renter or tenant
Corporate customers
PSUs
Consumers
Mid cap companies
Commercial vehicles
Earth-moving machinery customers
Govt departments
Contents of Leasing agreement
? Particulars of the parties
? Description of the asset
? Effective date, Primary period and renewal
? Initial deposit, rental and payment terms
? Manufacturer?s warranty
? Ownership
? Delivery and installation terms
? Repair and alteration
? Insurance
? Sub-lease
? Surrender
? Default
? Arbitration
? Taxes and govt dues
? Termination clause
? Restricted activity
Steps in Leasing agreement
? Lessee has to decide about the type of asset required
? Lessee has to determine the manufacturer of the asset
? Lessee has to enter into a lease agreement with regard to
? irrevocability during basic lease period
? amount and timing of rental payment
? option of renewal/purchase at the end of the basic lease period
? responsibility to pay for repairs, taxes, insurance, expenses etc
? After the agreement manufacturer has to supply the asset
? After the asset is delivered and accepted by the lessee, the
lessor has to make payment to the manufacturer.
Types of Lease
? Operating or service lease
? Financial lease
? Sale and lease back
? Direct Lease
? Bipartite lease
? Tripartite lease
? Single investor lease
? Leveraged lease
? Domestic lease
? International lease
? Import lease
? Cross boarder lease
Legal Frame work
? No separate statue regarding leasing
? Laws relating to bailment are applicable
? Provisions of the sections 150-168 of the Indian contract act are
applicable
? Lessor has the duty to deliver the asset to the lessee
? Authorise the lessee to use the asset
? Leave the asset in the possession of the lessee
? Lessee has obligation to pay the lease rentals as specified in the
lease agreement
? Lessee has the obligation to protect the lessors title to the asset
? Take reasonable care of the asset
? Return the leased asset on the expiry of the lease period
Advantages and disadvantages of leasing ? Presentation by Sujith
Legislative framework relating to Depreciation and Tax -
Presentation by Karon D?souza & Sharon D?souza
Advantages of Leasing
To the Lessor
? Full security
? Tax benefit
? High Profitability
? Trading on Equity
? High Growth potential
To Lessee
? Financing of capital goods
? Additional source of finance
? Less costly
? Ownership preserved
? Avoids conditionality
? Flexibility in structuring of rentals
? Simplicity
? Tax Benefits
? Obsolescence risk
? Other benefits
Problems in Leasing
? Resource constraint
? Risk of obsolescence
? Non availability of sales tax consideration
? Cut-throat competition
? Lack of qualified personnel
? Delay in rental payment
? Attitude of government
Factors influencing buy or borrow decision
? Capital and cost of borrowing
? Availability of freehold or leasehold interest
? Interest on capital employed
? To show increase in capital
? Taxation
? Obsolescence risk
? Future returns
? Depreciable asset
? Non-depreciable asset
? Other factors
? Operating factors
? Legal factors
? Financial factors
Hire Purchase
A contract of hire between a vendor and a purchaser, with an option to purchase
the asset at the end of fixed term of hire; by the purchaser provided he pays all the
rentals regularly.
Terms: Payment will be made in instalments, Possession of the goods is
transferred to the buyer immediately, ownership remains with the vendor till the
payment of last instalment, Seller can repossess the goods if the buyer fails to pay
the instalment, each instalment is treated as hire charges till the last instalment is
paid.
Features
? Transfer of asset from vendor to hire purchaser immediately at the beginning of
the contract
? Purchaser pays agreed rentals at agreed intervals to the vendor
? Vendor continues to own the asset till the last instalment is paid by the
purchaser.
? Hire purchaser may make a down payment upon signing the agreement
?If the purchaser defaults a payment, even the last one, the vendor has a right to
take back the asset without having to pay any compensation.
Contents
? Nature of agreement: stating the nature, term and commencement of the
agreement
? Delivery/handing over of assets: place, time of delivery of asset and the hirer
will pay the delivery charges, installation responsibilities etc
? Location: place where the asset will be kept during the period of the hire
agreement.
? Inspection: the hirer has examined the equipment and is satisfied with it.
? Insurance: that the hirer will pay for insurance and hand over the policies to
the owner.
?Alterations: the hirer is not authorised to make any alterations/modifications
to the machinery without prior consent of the owner.
?Repairs: the hirer will pay for all repairs required during the contract period
.
? Termination: what conduct of the hirer would lead to a termination of
the agreement?
? Risk: risk of damage and loss to be borne by the hirer
? Indemnity clause: clause which necessitates the hirer to make good
the loss/damage incurred by the lender on the asset
? Stamp duty: the hirer will pay the stamp duty
?Registration and fees: the hirer is responsible to follow all laws, obtain
necessary registrations and pay the fees
? Schedule: schedule of equipment, hire charges etc forming part of the
agreement
? Guarantee: usually the agreement is accompanied by a bank guarantee
or a promissory note given by the hirer for the full amount of the asset
including interest and finance charges.
Banks and Hire Purchase
? Banks extend consumer loans and instalment credit to buyers and sellers
?Not been able to extend credit to hire-purchasers directly. Hence provide term
credit to owners or refinance financing companies or associate concerns of
manufacturers against hire-purchase contracts
? In case of commercial vehicles banks extend OD or cash credit against
hypothecation of first charge of vehicles covered under hire-purchase
agreements. Also, secured by indemnity insurance policies in favour of the bank.
? Banks maintain a margin of 25%-30% on instalments due by hirers to financiers.
? They usually do not accept hire agreements of amounts exceeding Rs 1 lakh
IDBI
? IDBI indirectly participates in hire-purchase business by way of discounting
usance bills/promissory notes arising out of sale of indigenous machinery on
deferred payment basis.
? Under the IDBI scheme bills/pro notes should be drawn in favour of
manufacturer who can discount them at banks and other financial institutions
who can further re-discount them at IDBI.
?Deferred payment period is generally up to 5 years or 7 years under exceptional
cases.
? Manufacturers of cotton and sugar machinery, machine tools, electrical
machinery, oil solvent extraction plants, and some other agro industries make
use of this facility.
Difference between Leasing and Hire purchase
? Down payment
? Reporting
? Maintenance of Assets
? Sustainability
? Nature of Assets
? Receipts
? Income
Difference between Installment sale and Leasing
? Nature
? Ownership of the assets
? Tax Benefits
? Appearance in the Balance sheet
? Overall cost of the Asset
? Duration
? Maintenance support of the Asset
? Reduced initial cash outlay
Comparison of Hire purchase with Credit Sale
? Governing Act
? Ownership
? Payment
? Interest
? Repossession
? Termination of the contract
? Risk of loss
? Sales tax
Link for you tube video
https://www.youtube.com/watch?v=PD8XV8Pvy0E
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This post was last modified on 18 February 2020