Published on March 20, 2014
KALAWATI BARAI 03 TARVEEN BINDRA 06 ANKIT MALDE 33 ANUSHRI MODI 39 NAMRATA VIKAM 64 GROUP MEMBERS
-Donald B. Grant “Why own a cow when the milk is so cheap? All you really need is milk and not the cow.”
A lease transaction is a commercial arrangement whereby an equipment owner or manufacturer conveys to the equipment user the right to use the equipment in return for a rental. LESSOR- owner of the asset LESSEE- user of the asset In India, he the First Leasing Company was set up in Madras in 1973. WHAT IS LEASING???
a) Financial lease b) Operating lease c) Sale and lease back d) Leveraged leasing e) Direct leasing f) Sub lease g) Wet lease & Dry lease TYPES OF LEASE AGREEMENTS
Long-term, non-cancellable lease contracts are known as Financial Leases. Essential Condition : the Lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. An option is given to the lessee to purchase the asset he has used at the expiry of the lease. Under this lease, the Lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. FINANCIAL LEASE
Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the Lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the Lessor. Financial lease is also known as ‘Capital Lease’. In India, financial Leases are very popular with high-cost and high technology equipment. FINANCIAL LEASE
•This Lease agreement gives to the lessee only a limited right to use the asset. •The Lessor is responsible for the upkeep and maintenance of the asset. •The lessee is not given any uplift to purchase the asset at the end of the lease period. •Normally the lease is for a short period and even otherwise is revocable at a short notice. •Mines, Computers hardware, trucks and automobiles are found suitable for Operating Lease because the rate of OPERATING LEASE
It is a sub-part of Finance Lease. Under this, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of lease rentals. However, under this arrangement, the assets are not physically exchanged but it all happens in records only. This is nothing but a paper transaction. Sale and lease back transaction is suitable for those assets, which are not subjected depreciation but appreciation, say land. The advantage of this method is that the lessee can satisfy himself completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement. SALE AND LEASE BACK
•Under this transaction, the seller assumes the role of a lessee and the buyer assumes the role of a Lessor. •The seller gets the agreed selling price and the buyer gets the lease rentals. •It is possible to structure the sale at agreed value (below or above the fair market price) and to adjust difference in the lease rentals. Thus the effect of profit /loss on sale of assets can be deferred. SALE AND LEASE BACK
LEVERAGED LEASING Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. The Lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The Lessor, the owner of the asset is entitled to depreciation allowance associated with the asset. The lease back transaction can be expressed with the help of the following figure.
STRUCTURE OF A LEVERAGED LEASE
DIRECT LEASING Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself. The major types of direct Lessor include manufacturers, finance companies, independent lease companies, special purpose leasing companies etc.
A transaction in which leased property is released by the original lessee to a third party, and the lease agreement between the two original parties remains in effect. SUB-LEASE
•A wet lease is any leasing arrangement whereby a company agrees to provide an aircraft and at least one pilot to another company. •‘Dry lease’ on the other hand, refers to leasing only the aircraft. WET LEASE AND DRY LEASE
Air India, the national carrier that is in line for a Rs5,000 crore government rescue, will lease out seven of its medium- and long-haul aircraft to improve asset utilization and increase revenues. Air India, which is struggling with a debt of at least Rs16,000 crore and needs to pay for a multi-billion dollar aircraft order to replace its ageing fleet, will lease out three of its intercontinental Boeing 777-200LR planes, each costing in excess of $230 million (Rs1,092.5 crore now). The lease period will be at least two years starting in the middle of next year.
SAVING OF CAPITAL FLEXIBILITY AND CONVENIENCE PLANNING CASH FLOWS IMPROVEMENT IN LIQUIDITY 100 % FINANCING FIXED PAYMENTS TAX ADVANTAGES BALANCE SHEET CONSIDERATIONS ADVANTAGES OF LEASING
DISAVDVANTAGES OF LEASING EARLY TERMINATION INSURANCE COST HIGHER CREDIT REQUIREMENTS NO OWNERSHIP LONG TERM EXPENSE MAINTENANCE
I T CO’s PREFER LEASING IT MNCs such as Accenture, EDS, IBM, Motorola and Dell have ramped up their business operations in India more by leasing built-up space rather than building own campuses. Lease evolves into a more viable proposition for IT and ITES companies as they offer more flexibility in terms of relocation and expansion in a fast evolving business environment. Pressure on curtailing cost and time, and the operational flexibility, which the leasing route offers are being touted as reasons for this trend. ownership of property is not core to the activities of a company and the capital invested in ownership could be better utilised for retiring debt or used in mainstream operations where the company can achieve a higher return on capital employed. An MNC would prefer to lease space as this would involve minimum capital commitment, maximum flexibility and easier exit strategy.
COS PROVIDING LEASING & HIRE PURCHASE SERVICES SREI International Finance Sundaram Finance Cholamandalam Finance Mahindra & Mahindra GE Capital Shriram Finance Tata Finance Countrywide Finance Citicorp
Hire purchases are used to acquire houses, automobiles, furniture, computers, industrial machinery, equipment and other large items that generally cannot be paid in a lump sum. Hire purchases function as legal documents for which the lender can legally hold the title until the item is paid in full.
Hire purchase is a type of installment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. The hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last installment is paid. HIRE PURCHASE
The owner delivers possession of goods thereof to a person on condition that: Such person pays the agreed amount in periodic installments. The property in the goods is to pass to such person on the payment of the last of such installments, and Such person has a right to terminate the agreement at any time before the property so passes”.
FEATURES OF HIRE PURCHASE Under hire purchase system, the buyer takes possession of goods immediately and agrees to pay the total hire purchase price in installments. Each installment is treated as hire charges. The ownership of the goods passes from the seller to the buyer on the payment of the last installment. In case the buyer makes any default in the payment of any installment the seller has right to repossess the goods from the buyer and forfeit the amount already received treating it as hire charges.
A hire purchase can be for a few months up to many years. The interest rate can vary from low to high, depending on the institution granting the agreement. To be valid, a hire purchase must be signed by both parties. It should contain a description of the item, the price paid, the deposit (if any), monthly amounts due, statement of each party's rights, and requirements, if any, for early termination.
The hirer has the right to terminate the agreement any time before the property passes. That is, he has the option to return the goods in which case he need not pay installments falling due thereafter. However, he cannot recover the sums already paid as such sums legally represent hire charges on the goods in question.
STANDARAD PROVISIONS A clear description of the goods The cash price for the goods The monthly installments (most states require that the applicable interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions) and A reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period). The right of the hirer to terminate the contract when he feels like doing so with a valid reason. To be valid, HP agreements must be in writing and signed by both parties. They must clearly set out the following information in a print that all can read without effort:
DISADVANTAGES OF HIRE PURCHASE You end up paying more for the asset than you would have if you paid outright. On top of that, you have to service the interest on the loan. The seller can take back the asset if you fail to make a scheduled repayment. This is true even if you have already paid a substantial amount for the asset.
Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly1% of the industrial investment in India is covered by the lease finance, as against 40% in USA and 30% in UK and 10% in Japan. The prospects of leasing in India are good due to growing investment needs and scarcity of funds with public financial institutions. This type of lease finances is particularly suitable in India where a large number of small companies have emerged more recently. Leasing in the sphere ofland and building has been in existence in India for a long time, while equipment leasing has become very common in the recent times. CONCLUSION
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