Leasing

leasing
leasing
1. Concept
2. Difference between lease & rent
3. Steps involved in leasing
4. Types of lease
5. Leasing Industry in India
6. Advantages and disadvantages
Concept of leasing
◦Leasing is an contract between two parties. The leasing

company called lessor &the user called lessee. The former
arranges to buy capital equipment for the use of the later
for an agreed period of time in return for the payment
called rent. The rent is predetermined & payable at fixed
intervals of time
Difference between Lease & Rent
lease rent
meaning
It is a contract renting land, buildings, etc., to another; a The periodic payment made to the owner of a property for
contract or instrument conveying property to another for the use of said property, as determined by a lease(rental)
a specified period agreement.
Length of agreement
Often 6-12 months, but can be set for any length of time Payment is made for at least as long as the lease requires
that two or more parties agree to in the lease. it.
Managed by
Property owner Tenant who pays rent to use the property
Definition(Wikipedia)
A lease is a contractual arrangement calling for the lessee Renting, also known as hiring or letting, is an agreement
to pay the lessor(owner)for use of an asset where a payment is made for the temporary use of a good
, service or property owned by another
Steps involved in leasing
1. Deciding the required asset, make, price, supplier
2. Entering into agreement with lessor containing:
◦ The basic period
◦ Timing &amount of rent
◦ Detail of renewal option if any
◦ Details of maintenance & repairs , taxes
3. After signing above agreement, lessor request supplier to supply
asset to lessee.
Types of lease
Financial lease : Under finance lease all risks and rewards of ownership of
asset are transferred to lessee. The ownership or title may or may not be
transferred. A finance lease is somewhat like a hire purchase agreement. Under
finance lease the lessee after paying agreed number of installments, is entitled
to exercise an option to become the owner of asset.
Leverage lease: used for those assets which required huge capital outlay . the
cost varies from rs.50 lakhs to 2 crores &economic life is of 10 years or more. In
this lease three parties are involved viz. lesser, lessee& lender. The position
lessee is same as in the case of other type. The assets leased out by this lease
are coal mines, pipe lines, electricity generating plant etc.
Types of lease
Sale & lease: under this type, asset owner sell the same to leasing company &
gets it back on lease. Assets sold at market price. Firm received sale price in
cash, to satisfy his current working capital needs or for further expansion.
Operating Lease: According to International Accounting Standard (IAS-17) the
operating lease is one which is not a finance lease. Under operating lease, the
lessor gives the right to lessee to use the asset or property for a specified period
of time, but risks and rewards of ownership are retained by the lesser.
Cross border lease: also known as transactional lease. For e.g. air India decided
to have air bus from USA company on lease.
Income tax, Sales tax & Accounting
treatment
Income tax: lessee can claim lease rental tax-deductible
expenses. For lessor it is taxable income from business or
profession. The lessor can claim on the investment made.
Sales tax : The lessor is not entitled for the confessional
rate of C.S.T. the 46th Amendment act has brought lease
transaction under the purview of sale.
Accounting: Leased asset shown in the B/S of lesser. In
lessee’s B/S it will appear as foot note.
Leasing Industry in India
Leasing industry in India is of recent origin. It was pioneered in 1973 when for the first time
‘Leasing Company of India’ was set up in Madras. For almost seven years in the country, this
company was the sole leasing company. In 1980 another leasing company known as “20th
Century Leasing” came into existence. Both these leasing companies were promoted by
management — qualified professionals from city bank.
At present, there are about 300 leasing companies in the country. Apart from these, many
companies engaged in other businesses are also leasing out mainly to employ their investible
surplus in tax-benefit. Over the period 1980-88, gross leased assets of these companies
expanded by Rs.700
crores indicating the extent to which leasing companies have played significant role in asset
formation. This is a basic fact that requires recognition and encouragement by the government.
It is most intriguing to note that the leasing industry is being singled out for discriminatory
practices.
• Leasing is coming of age in India, as is evidenced by phenomenal growth of leasing industry by over 100 per
cent in recent few years. Against only Rs. 3000 crore of lease deals done during 1993-94, the buzz in the
leasing industry puts leasing volume in 1994-95 at close to Rs. 7000 crores.
• A large part of this unprecedented growth was contributed by the Public Sector Units (PSUs). For instance,
the IDBI single handedly did a Rs. 50 crores lease deal for the Shipping Corporation of India for financing the
acquisition of a single ship.
• SBI capital markets syndicated a Rs. 240 crore lease deal for Mangalore Refinery and Petrochemical Ltd.
Similarly, Infrastructural Leasing and Financial Services Ltd. syndicated a Rs. 200 crore lease deal for
Maharashtra State Electricity Board (MSEB).
• KDTK Mahindra Finance Ltd. has structured Rs. 300 crore transmission and distribution equipment’s lease
deal for MSEB.
• IDBI Sanctioned Lease finance to the tune of Rs. 1007 crore in 1997-98 which was more than what was
provided during 1994-95. The institution is looking at financing leasing of small aircraft for spraying
pesticides and ferrying executives and large allocation for shipping. Telecom and the power sector.
• A syndicate of leasing companies provided Rs. 250 crore lease finance to the Rajasthan State Electricity
Board.
Advantages of leasing
•Alternative use of funds: as the asset is available without paying actual cost firm
can utilized the remaining portion for other activities.
•Faster & cheaper credit: depending on tax structure of lessee it costs less than
other method
•Flexibility: lease rentals can be match the lessee’s cash flows
•Additional borrowings: acquisition assets under lease doesn’t alter debt-equity
ratio. Hence lessee can go for additional borrowings.
•Portion against obsolescence: entering into operating lease agreement firm can
avoid risk of same.
Disadvantages of leasing
1. It is not suitable for project finance.
2. Certain tax benefits may not be available. For e.g. subsidy etc.
3. The value of real asset like land, building may rise at that time the lessee
losses capital gain.
4. Cost of lease finance is generally higher than debt finance.
5. If lessee decides to stop or discontinue the business, under lease he has to
pay heavy penalties to do so.

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◦Leasing is an contract between two parties. The leasing

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