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) ENR No: 07861203913

Organization: RITES LTD. Batch: 2013-15

Submitted To: MRS. SAKSHI SAXENA

Banarsidas Chandiwala Institute of Professional Studies, Dwarka, New Delhi

(Affiliated to Guru Gobind Singh Indraprastha University)

1

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

,

2

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:

3

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 KUMAREnroll. No.: 07861203913

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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 toMrs. 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

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TABLE OF CONTENT

Sr. no. TOPIC PAGE NO.1. Chapter 1: Introduction 8

2. Chapter 2: Objective & Scope of study 12

3 Chapter 3: Literature Review 14

4 Chapter 4: Company Profile 17

5 Chapter 5: Leasing Concept 34

6 Chapter 6: Leasing Accounts & Rentals 44

7 Chapter 7: Research Methodology 50

8 Chapter 8: Data Collection & Analysis 52

9 Chapter 9: Conclusion & Suggestions 68

10 Annexures 73

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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.

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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.

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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.

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BackgroundA lease is an agreement allowing one party to use another’s 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 lessee’s 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

11

in connection with the acquisition of the leased property. National banks may act 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 IndiaSection 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.

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Chapter 2 : Objective and Scope of Study

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

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2. Scope of Study

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

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Chapter 3 : Literature Review

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 lessee’s investment behaviour and reasons for leasing . For the purpose of review and research work, it is bifurcated into two parts:

1. Conceptual Studies2. 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.

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1.2 Research Studies in IndiaResearch 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. Studies focusing on growth of leasing.2. Studies Pin-Pointing towards accounting practices and Procedures.3. Studies analyzing Lease and Borrow decision.4. Studies examines the growth patterns of leasing companies.5. Studies design of lease contracts. 6. Studies on determinants of lease rentals.

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Chapter 4 : Company Profile

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 a 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-1’status 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 Latin America. Most of Rites’

foreign assignments have been for governments and other apex organizations.

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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 sectors—in India as well as in abroad.

Leasing and export of rolling stock—locomotives, coaches and after sales services including spare parts related to the same.

Operating railway systems and corridors in other countries—primarily 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 and public sector enterprises. In India, its clients include various Central and State government ministries, other government bodies, public sectorundertakings including IRCON, Konkan Railway Corporation Limited, DMRC, IOCL, NTPC Limited, NALCO, SAIL and NHAI as well as various private companies including Jindal Steel Limited.

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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.

Figure 2.3 Evolution of RITES Ltd.

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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.

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2.2 Financial Performance of Rites Ltd. in 2013-

14

Figure 2.1: showing sector wise business

29%

43%

8%

5%4%

11%

Sector wise Business 

Railway infrastruture

Export and leasing

Bulidings

Highway/Ports/Airports

Urban Infrastructures

Quality Assurance

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

YEAR TURNOVER(Rs. In Crore)

PROFIT (after tax)(Rs. In Crore)

2003-04 285 482004-05 240 412005-06 426 992006-07 566 1182007-08 661 1042008-09 672 94

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2009-102010-11

623881

112244

2011-12 934 1642012-13 1076 2452013-14 1246 264

Figure 2.2: Graph showing Turnover of the Rites Ltd.

2003-042004-052005-062006-072007-082008-092009-102010-112011-122012-132013-14

0

200

400

600

800

1000

1200

1400

285 240

426566

661 672 623

881 9341076

1246

Turnover (in crores)

Turnover

Figure 2.3: Graph showing Profits of the Rites Ltd

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2003-042004-052005-062006-072007-082008-092009-102010-112011-122012-132013-14

0

50

100

150

200

250

300

48 41

99118

104 94112

244

164

245264

Profit (in crores)

Profit

Figure 2.4 showing turnover

2003-042004-052005-062006-072007-082008-092009-102010-112011-122012-132013-14

0

200

400

600

800

1000

1200

1400

1600

283 311387

460539

610695

8761001

1195

1397

Net worth (in crores)

Net worth

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

23

414

1396

105

465

15

Earnings(Rs. 1246 crores )

Domestic ConsultancyForeign ConsultancyTurnkey WorkshopsQuality AssuranceExport and Leasing Other income

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

344

277

89

7238 40

Spending (Rs. 860 crores )

Staff & TravelCost of Export & Leasing Cost of Turnkey Workshops Projects Cost of Services Depriciation & ProvisionsAdministrative & Others

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2.3 ORGANISATIONAL STRUCTURE

25

Figure 2.4: Flow Chart of Organizational Structure at RITES Ltd.

2.4 AWARDS & CERTIFICATES

26

CHAIRMAN

BOARD OF

DIRECTORS

MANAGING

DIRECTOR

VIGILANCE

PRIVATIZATION &

CONCESSIONING

CORPORATE

SERVICES

HRD

M&CS

ADMIN.

TRAINING

DIRECTOR

(TECHNICAL)

EXPOTECH

QUALITY

ASSURANCE

TECHNICAL

SERVICES

DIRECTOR

(PROJECTS)

RAIL INFRA

BUILDING &

AIRPORT

URBAN INFRA

TRANSPORT

INFRA

DIRECTOR

(FINANCE)

CORP. FIN.

CS

LEGAL

IT

FIN. SERVICES

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.

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SUBSIDIARY COMPANIES

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

2) M/s Tanzania Railway Limited, Established in Tanzania.

JOINT VENTURES

1) M/s RICON - Established in India2) M/s Ganga Expressway Consultants Private

Limited (“GECPL”), Established in India3) 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.

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3. UNDERSTANDING BUSINESS

3.1 Consultancy Business

The Company’s 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: The main activities undertaken include:

Project Management Consultancy. Independent consultant services.

E. Quality   Assurance   services: The main activities undertaken involve:

Third party inspection. Vendor assessment.

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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 activities undertaken involve assisting the client in:

Installing Commissioning Proof testing the equipment procured

3.2 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 taken equity either directly or through its subsidiaries or joint ventures.

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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.

3.3 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.

3.4 Sectors of Operation

SECTORS OF OPERATION

RAILWAYS

HIGHWAYS

BRIDGES & TUNNELS

GEOTECHNOLOGY

AIRPORTS

BUILDINGS

URBAN TRANSPORT

URBAN DEVELOPMENT

PORTS & WATER

RESOURCES

ROPEWAYS

INFORMATION

TECHNOLOGY

FINANCIAL SERVICES

RITES SERVICE SPECTRUM

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Airport Engineering

Architecture & Design

Bridge & Tunnel Engineering

Design – Mechanical, Civil,

Electrical

Electrical Engineering

Engineering Survey

Environmental Engineering

Export and Leasing

Financial Management

Geo-technology

Highway Engineering

Human Resources

Development

Information Technology

Material System

Management

Operation & Maintenance

Ports & Harbours

Privatization & Concessions

Quality Assurance

Ropeways

Signalling & Telecom

Traffic Logistics & Economics

Training

Urban Development &

Transport

Water Resources &

Waterways

           

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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.

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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. Inability to prevent staff attrition and recruit desired competencies

resulting in manpower resource constraints adversely affect the performance and development of SBU’s /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 SBU’s and to impart professional know-how & skills in relevent work areas.

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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. PSU’s ,

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 .

Taking up of EPC projects as prmitted with recent amendments to articles of association of RITES.

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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 ConceptLeasing 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 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'.

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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

(c) Lease term which can be short as a month or as long as the parties wants.

(d) Lease rentals which the lessee is obliged to pay according to the contract between the parties.

1.3 Process of LeasingThe 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 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.

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1.4 Legal ProceduresLease 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. Lessee’s obligation towards payments of various charges such as maintenance of equipment, repairs, registration, license fee, rates and taxes and lessor’s rights on lessee’s 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.

5. Determination of lease when equipment damaged beyond repair. Theft of equipment, lessee’s 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 lessee’s assets without lessor’s consent.

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2 TYPES OF LEASING Lease contracts can be classified in to various types:

1. Financial LeaseFinancial 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 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 non-cancellalbe period. When risk and rewards incident to ownership of of an asset remain with the lessor it is treated as

39

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 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

40

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 parties- lessor, 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 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

41

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 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.

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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.

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 Lessee1. 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.

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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.

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.

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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;

(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.

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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 Lessor’s books of accounts Leasing companies in India are maintaining the following books of accounts at their head offices and branch offices:-

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1. Journal (Annexure 1)2. Cash Book3. Bank Book4. Ledger 5. Hire Purchase Rental register 6. Lease rental register7. Investment register 8. Fixed assets register

1.3        CONSOLIDATION AND COMPILATION OF ACCOUNTS                               

Accounting Unit

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 vouchersB. Journal vouchers

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

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VOUCHERS

ACCT.BOOKS

ACC. LEDGER

After that those ten day books are combined and journal ledger is made out of those books.

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.

It is done according to SBU of the company. All the cost involved in each projects of the SBU is done in the

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TRIAL BALANCE

CLUBBING

BALANCE SHEET

MIS

COSTING

COMBINED T/BAL.

costing. It includes the breakup all the overheads of each SBUs.

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:

Director’s report.

Report on corporate governance.

Management discussions and analysis

Auditor’s report

Financial statements.

Consolidated financial statements.

Financial statements of subsidiary company.

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PROJECTS

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 both’s 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 Flat rate ignores the fact that lessor’s capital investment reduces during

the lease term. It also does not explain the implicit interest rate.

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Truerate= interest∗100cost of equipment∗No. of primary years

Flat rate=(True rate∗2)−1

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 calculationsFormulae can be used to calculate rentals in different situation as given below:

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Rentals ( pmt )= pva

Where pmt = rental amount

pv = present valuea= rental factor

For Calculating ‘a’:

Situation 1: where the rentals are paid in arrears

Situation 2: where lease rentals are paid in advance:

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a=1− 1

(1+c )n

i

a = rental factorc = interest/12

n = no. of periods in lease term

a=1− 1

(1+c )n−x

i+x

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

x= no. of rentals payable in advance.

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.

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1.1 Brief Approach to Study

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.

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GUIDING CONSIDERATION

Discussions with RITES Personnel

Review of Secondary

information

Analysis of information

obtained fromRITES

Discussions with

internal Experts

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 Riska. Funding Sourcesb. Debt Funding and Financial Leveragec. Return on Capital Employedd. Return on Investment

2. Important measures of returna. Time Value of Moneyb. Future Value or Terminal Value of moneyc. Compounding with additional uniform paymentsd. Compounding more than once a year

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e. Future value of a series of paymentsf. Future value of an annuityg. Doubling the moneyh. Present Valuei. Cost of capital

3. Computation of Cost of Capitala. Cost of equity capitalb. Cost of preference capitalc. Cost of debtd. Cost of retained earningse. Cost of depreciationf. Weighted cost of capital

4. Return on Investment Methodsa. Pay-back periodb. Rate of Return Methodc. IRR methodd. 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.

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

New Leasing Contract with TRL

New Leasing Contract with CCFB (for coal cargo)

25

10

0

29

10

12

17

29

10

18

27

29

10

20

29

Total 35 68 83 87

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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 FY11E FY12E FY13E

Consultancy Fee 400 475 477 499 495

Export Sales 166 189 200 210 307

Quality Assurance 56 69 89 99 110

Lease Services 9 10 18 25 46

Other Income 48 57 66 75 90

TOTAL 679 800 850 908 1048

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

Tanzania  

Existing Lease (No.) (1300HP) 25 25 25 25 30

New Lease (Nos.) 0 7 10 10 10

Value of Existing Lease (Rs. Cr.) 25 25 25 25 25

Value of New Lease (Rs. Cr.) 0 12 18 19 19

Existing No. of Coaches 20 20 20 20 20

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Value of Contract (Rs. Cr.) 4 4 4 4 4

Total Lease Value for Tanzania 29 41 47 48 60

Mozambique  

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) 0 10 15 15 15

Value of New Lease (Rs. Cr.) 0 17 27 28 35

Total Lease Value for Mozambique 10 27 37 38 40

Lease Revenue - Total 39 68 83 85 90

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

(Rs. In Crores)

S.No. Particulars 2009 2010 2011 Total

1 Leasing of 1350 HP Locomotives to TRL

20.00 0 0 20

2 Leasing of 2300 HP Locomotives to TRL

33.10 31.90 0 65

3 Leasing of sleeper coaches to TRL

6.90 0 0 6.90

4 Leasing for handling Coal Traffic

0 500 225 725

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TOTAL 60 531.90 225 816.90

The break up of capital expenditure for leasing rolling stock to CCFB, Mozambique as under:

S.No. Particulars 2009 2010 2011 Total

1 Leasing of 3000 HP Locomotives to CCFB

10.00 35.10 54.90 100

2 Leasing of sleeper coaches to CCFB

0 3 0 3

TOTAL 10 38.10 54.9 103

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

S.No. Particulars 2009 2010 2011 Total

1 TRL 60 531.90 225 816.90

2 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 – Costing $ 63 m

25

2 In Service Coaches on dry Lease basis for 10 years – Costing $ 10 m

23

IN PROCESS OF AWARD

3 2000-2300 HP Locomotives on wet Lease basis for 5 years – Costing $ 22 m

10

59

4. Passenger Coaches on dry Lease basis for 5 years – Costing $ 20 m

16

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

2. In case separate entity is required to be formed, the legal status of that entity needs to be defined.

3. The location where the above separate legal entity is to be formed needs to be decided.

Pre-Requisites

1. Willingness of Management / Management Decision2. Formation of Separate group of managerial persons as matters of decision

will be entirely different from current consultancy business3. Expert Manpower for handing operations4. Fund Management / Raising of Resources for Leasing Operations

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In INDIA OUT SIDE INDIA

Various Alternative Models

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RITES

Private equity firm Separate Entity

Wholly owned Subsidiary

Subsidiary JV/Associate

Company

LOCATION

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

A. Business operation

i. Growth Prospectsii. Funding Requirementsiii. Capital Structureiv. Strategic Decision Making Processv. Logistic Supportvi. Availability of Expertsvii. Political Stabilityviii. Technology Requirement

B. Economic Reasonsi. Source Countyii. Future Marketsiii. Cost of Technology iv. Manpower Cost

C. Regulations & Statutory Requirementsi. Taxation Laws prevailing in the County – Direct & Indirectii. Legal requirements for new formationiii. Govt. Rules & Regulationsiv. DTAA arrangements

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

1. Growth Prospects and Future Markets2. Capital Structure and Funding Requirements3. Taxation Laws including DTAA arrangements4. Logistic Support including Manpower5. Political Stability and Law & Order Situation

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

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. Stabilization of Business b. Regular Contracts for existing line of businessc. Scope for New Avenues in same sectord. Scope for opening in New Sectorse. To understand the practical difficulty in operating in that

geographical areaf. Support from Govt.

Medium Term

With formation of Subsidiary Company or Associate Company with a local Partners

Long Term

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With formation of 100% Subsidiary Companies

Unit / PE

a – yes b - no

Business Reasons

In India

In Maurities

In Africa

Economic Reasons

In India

In Maurities

In Africa

Statutory Reasons

In India

In Maurities

In Africa

Growth Prospects

B B

Funds Req A A

Cap Structure

A A

Decision Making

A B

Logistic Support

A B

Availability of Experts

A B

Political Stability

A A

Technology Req

A A

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

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 =1000c

Capital =200 cr Loan = 800 cr

Impact on the balance sheet

Source of funds

Shareholders Funds:

Capital 4000

Reserve and surplus 49886.67

Loan 80000 133886.67

Total 133886.67

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Applications of Funds

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)

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The decision to either incorporate a subsidiary in foreign country or lease directly by RITES from India will depends upon

(i) the tax benefits available under both the options (ii) 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

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collection of the Centre amounted to 7.92 trillion, with direct tax and indirect tax contributing 56% and 44% respectively

PAYMENT OF ESTIMATED TAX

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

o July - September : On or before 15th Oct

o Oct – December : On or before 15th Jan

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o 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

prescribed forms as per prescribed time limit.

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

o 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.

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Chapter 9 : Conclusion & Suggestions

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.

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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.

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.

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2. Suggestion

For Leasing Business :

a) Leasing is profitable for the Lessor’s 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

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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.

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 client’s needs.

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BIBLIOGRAPHY

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

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Annexures 1. 1. Journal Entries in the Lessor’s Book

Date Particulars Dr. Cr.

Equipment 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

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(Equipment leased out to X ltd.)

Cash Dr.

To Bills Receivable

(first installment received)

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

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Sl.No.

Description of taxableservice

Percent-

age

Conditions

(1) (2) (3) (4)

1 Services in relation to financial leasing including hire purchase

10 Nil.

2 Transport of goods by rail 30 Nil.

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

30 Nil.

4 Bundled service by way of 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

70 (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.

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

40 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.

6 Renting of hotels, inns, guest houses, clubs,

60 Same as above.

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campsites or other commercial places meant for residential or lodging purposes.

7 Services of goods transport agency in relation to transportation of goods.

25 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.

8 Services provided in relation to chit

70 Same as above.

9 Renting of any motor vehicle designed to carry passengers

40 Same as above.

10 Transport of goods in a vessel

50 Same as above.

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Services by a tour operator in relation to,-

(i) a package tour

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

10 (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

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  for such accommodation.

(iii) This exemption shall not apply in such cases where the invoice, bill or challan issued by the tour operator, in 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 specified at (i) and (ii) above.

40 (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, 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

25 (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.

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