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LEASINGProf. Sarbesh Mishra

NICMAR’s CISCHyderabad – 84.

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Concepto Arrangement between two parties, the

leasing company or lessor and the user orlessee.

o The lessor buys the capital equipment for theuse of the lessee for an agreed period of timein return for the payment of the rent.

o The rentals are pre-determined and payableat fixed interval of time.

o Lessor remains the owner of equipment.

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Leasing as Source of FinanceLeasing company finance for:o Modernization of Businesso Balancing equipmento Cars, scooters and other vehicles and

durableso Items entitled to 100% of 50%

depreciationo Assets which are not being financed by FIs.

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Types of Leaseo Financial Leaseo Operating Leaseo Leverage Leaseo Sale and Lease backo Cross Border Lease

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Advantages of Leaseo Permit alternative use of fundso Faster and cheaper credito Flexibilityo Facilitate additional borrowingo Protection against obsolescenceo Hundred percent financingo Boon to small firm

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Financial Leaseo Irrevocable and non-cancelable

contractual agreement.o Lessee uses the asset exclusively for a

relatively longer period, maintains it,insures and avails of the after salesservice and warranty backing it.

o Lessee bears the risk of obsolescence as itstands committed to pay for entire leaseperiod.

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Contd….o Financial lease with the purchase option,

where at the end of pre-determinedperiod, the lessee has the option to buythe equipment / asset at a pre-determinedvalue.

o The leasing company / lessor chargesnominal service charges to lessee towardslegal and other costs.

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Operating Leaseo Contractual period between lessor and

lessee is less than full economic life ofequipment i.e. short-term in nature.

o The lease is terminable by givingstipulated notice as per the agreement.

o The risk of obsolescence is enforced onthe lessor who will also bear the cost ofmaintenance and other relevant expenses.

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Leverage Leaseo Arrangement for assets of huge capital

outlay.o Parties involved are (a) Lessor (Max. 20 –

50% stake) (b) Lessee (As in operationallease) (c) Lenders (Rest stake holders)

o Lessor acquires the asset with maximumcontribution upto 50% and rest is financedby lenders secured by mortgage of theasset besides assignment of leased rentalpayments.

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Sale and Lease Backo Arrangement where a firm which has an asset

sells it to leasing company / lessor and gets itback on lease.

o Lessee gets the sale price in the market valueand gets the right to use the asset during thelease period. Title of the asset remains withthe lessor.

o Lease back agreements are on net basis i.e.lessee pays the maintenance, property tax andinsurance premium.

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Cross Border Leaseo It is international leasing and is referred

otherwise as transactional leasing.o Relates to lease transaction between

different a lessor and lessee domiciled indifferent countries.

o Illustration:- Leasing company in USAmakes available Air Bus on lease to AirIndia.

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Disadvantages of Leasingo Lease rentals are payable soon after

entering into lease agreement while innew projects cash generation may startafter gestation period.

o The cost of financing is higher than debtfinancing.

o If the lessee defaults in payment, lessorwould suffer a loss.

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Legal Aspects of Leasingo Under Section 148 of Indian Contract Act

leasing is executed.o The lessor has the duty to deliver the asset

to lessee, legally authorizes lessee to usethe asset.

o The lessee has the obligation to pay thelease rentals as per lease agreement, toprotect lessor’s title, to take reasonable careof the asset, and to return the leased asseton the expiry of lease period.

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Income Tax Provisions Relating to Leasingo The lessee can claim lease rentals as tax -

deductible expenses.o The lease rentals received by lessor are

taxable under the head of “Profits andGains of Business or Profession”

o The lessor can claim investmentallowance and depreciation on theinvestment made in leased assets.

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Accounting Treatment of Leaseo The leased asset is shown on the balance

sheet of the lessor.o Depreciation and other tax shields

associated with leased asset are claimedby the lessor.

o The entire lease rental is treated as anincome in the books of the lessor andexpense in the books of lessee.

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Problems of Leasingo Unhealthy Competitiono Lack of qualified personnelo Tax Considerationso Stamp Dutyo Delayed Payments and Bad Debts

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Growth of Leasing IndustryThe growth of equipment leasing is of recentorigin and is volume in India is quite modest.Lease financing organisations in India includemany private sector non-banking financialcompanies, some private sector manufacturingcompanies, Infrastructure Leasing and FinancialServices Limited (IL&FS), ICICI Bank, IndustrialReconstruction Bank of India (IRBI), IFC, LIC,GIC, HDFC Bank, State Industrial InvestmentCorporations (SIICs), and many otherorganisations.