y Meaning ot Leasing A lease may. be detined as"a covitnactual arrangement Ctransactien ) in which party cuning an asset (equipment (lesser) te use the prevides the asset or usete ancther (transterthe right te use the equipment te the user (lessee)ever certain(ter an agreed peried o¢ time)por consideration inthe porm oe Cin retumn forpeniedic payment (rentals) with on witheut a gurther payment premium)” Atthe end of the period of covtnadl (lease peried)the asset (equipment) reverts back te the lessor unless there is a provision gorthe renewal othe covtract. & Scanned with OKEN ScannerDetinition of Leasing "Leasing separates ewnership and use as tue economics activities and ,acilitates asset use Without eunenship, According te Miller. MH and CW uptren Features ot leasing ©Competentte contract © De net provide rer transten ef ewnership ©The greds ane delivered te the lessee por a specitied purpose and period, The lease rentals ane payable generally in equated / level mevithLy. installmvonts month . atthe beginning ef every. @ scanned with OKEN ScannerMajor players i im easing jhe can be gategenined inte six, gneups: in tice ioe he hem, Yeas Semel ve fie rgucial echnical collaber Some will g tem ha mayice ies —a Lange number of, o1 easing cee a eadvanta meas : fa iter thre pave ily pa ers die to pronbete thi a tthe "3 bustness te es eo their Gu pr ©4- Financial institutions- The development pinance eolustitutiens beth all India and level, provide leasing gacility. ©5-In-heuse lesser-Some big business houses have ormed captive leasing companies por providing lease ginance te group companies, ©6-Commercial Banks —with e1 eect prom 1994: 95, banks. have been permitted te directly. canny on leasing and hire —purchase business. @ scanned with OKEN ScannerParties invelved in leasin Fellewing are the twe parties invelved in leasing- @Lessee @Lesson Lessee a @The user or revter of the Leas ass ae fie dept fr fe the fessek wi pa lenses thd lece nee alee = ¢ of, Lessee C1 lewint are the types of, lessee: credit pangs, ° fp ba allertgek ii 336 “ul ef ‘ane sane nbabte, ek age ut bib Cee oak a ate nae his Reset a ae a Mei sheet ally tes heir nequinemerd its are igual ye wled te te ease (tase, @ scanned with OKEN ScannerMid-Market Companies: The mid-market Companies, ie, companies with reasonably goed creditworthiness but with lewer public progile have resorted te lease inancing basically as ait alternative te banb/ institutional pinancing, which te them is time- consuming and tedious. iv) Consumens: Retail punding gor consumer durables was grewned-upen al one point ef time, but necent bad experience with corporate ginancing has *pocused attention tewands consumer durables which incidentally, is the alltime faveunite op binanclens world-ever, Mest of the Langer companies have expressed. interest in consumer funding, vith ticket size going as lew as 5000. a © Can Custemens: Car Leasing werld-ever is avery big market, and the same is true cor India, Se Leng, mor car leases were plain-vanilla financial leases but ene new pinds pew instances o4 value-added can lease ial Ve have always relied upen punding by hire-purchase cenmpariet The Customer tretileralges «rem lange {leet eunens te individual truckers, © Earth Meving Machinery Custemens. These custemens have alse traditionally relied upen lease financing Rights é cbligations ot lessee e obligation te pay the Lease rentals peniedically obligation te keep the asset insured at alltimes per an amount equal te pull insurable value of assel © obligation te return the leased asset te the lesser upent expiration or earlier termination ot this lease agreement © Responsibility por the damage caused by using the lease asset. @ scanned with OKEN ScannerCSSor © Ouner onthe title holder of the leased asset on preperty. the Lesser is alse called the lender and secure party in case et capital lessor and epreating leases. In case ot Leveraged leases, hewever athind party. (the lender) and net the lesser held this title. Types of lesson © Specialized leasing companies: Till recently , most ot the leasing companies were disversitied pinancial houses. ettecting several pund —based and new-fund, based financial services. © Banks and, Bank — subsidiaries —In Feb|994 the RBI allewed banks te directly enter Leasing. Se Leng only bank subsidiaries were allowed te engage in leasing eperations which was regarded by the RBI as a non- banking activity. @ scanned with OKEN ScannerSpecialized nancial institutions -There is a wide variety. ee bitancial institutions atthe central as well asthe state level in India, apart «rem the apex gitayictal institutions viz, the Industrial development ank of India and ICICI in mest states tee,thene ane multiple pinancing agencies er generic on Gecused, cause, © One —e44, lessons —Seme ot the companies. ed in seme ether business uukicl give them huge taeable protits have reseped te one-ett the leasing ena casual basis te deter thein taxes. These pesple ane interested owly Leasing high — depreciatiew items, pretenably these entitted 1001 depriciaticn oMapugacturer ~lessen — this part of the lessor. industry is in highly. under-grewn Gorm in India por simple reasons. verider leasing is.a preduct oa competition inthe preduck marbet ghits and Obligaticns et the lessen + Obligations o4 acquiring the lease asset accerding te the lessee’s specigicalsions Rights te claim depreciation en the asset Right o, cwnership ot the leased asset. + Right te receverthe rentals + Rightte ensure that the asset is pulte pair use and uithin the Limitations include inthe agheement Right te reimbursement of damages in case oy misuse of leased assets. @ scanned with OKEN ScannerSS ae LEASING PROCESS ‘The important steps invelved in a Leasing transaction can be summarized e¢ Leasing as polleus: © Lease Decision: The lessee has te take a decision abeut the asset required and determine the. manutactuner- onthe supplier He alse decides about his ether requirements, viz_the design specitications, price, warranties terms ot delivery, installation and servicing 2; then inte: “Beer teeta iatatenananet ° above The lease agreement cptains the obligations of the 1) The batie (er primary} lease peried duning which the lease is irrevocable fp Thefinigcnd amu periedical rental payments during asic Lease. . Se ere eee eal moe cenit oa et eit ceca aia coe laa mainland rode Cate yr dice did elf Seven in i eveichncatee sstowuce erie caren, ie Cen © 3) Lease Deliveny and Payment: aiter the lease agreement is sighed. the Lesson contacts the meunupactuner er supplier te Supply the asset tthe lessee the Lesser mabes payment te the manutacluner er-the supplion agten the asset has been delivered tested and accepted by the lessee @ scanned with OKEN ScannerPc, ot, Leasing Options versus Bernewing See RS ee ee rere e analy x ese ed urna luted patel © Lessee's Point of View once a tirmhas evaluatedthe econemic viability of Leste ito Vou once ras saath ecenei a censideraferuate methods eg ivarcingthe iestnent Heuer. mating cree eed etext ty eee searing re tthe aa ste ina air ing he tsiteaher thas Rana comparing eg ath big thee, erg tenant ele come et gee teufel sure ce uancig i ded Se pre (ieceagS tac teach eects dle sully opreptite cemparisen te compare the cea of easing ti that ey only agree camparnen ite comme ta ceate eg th hat buying eptions primarily inelse comparisen between the cest of financing and lease financing ©The evaluation of lease ginancing decisions grem the print eg view of the Lessee invelvcethe gelleuing steps | Calculate the present value of net-cash glow ey the buying eption, called NPV (8), © 2Calculate the present value of net cash glow et the leasing option. called N VCL) © 3 Decide whether te buy or Lease the asset or reject the prepesal altegether. by applying the yolleuing critenien: © i) I, NPV(8) is pesitive and greater than the NPV(L), purchase the asset SS ei) I, NPV(L)is pesitive and greater-than the NPV(B), lease the asset ‘ii) If, NPV(B) as well as NPV (L) beth ane negative, rejectthe prepesal altegether: Since many ginancial analysts argue thatthe lease financing decisions arise etly atten the pinm has made an accept-reject decision about the investment; it is enly the cempanisen et cest et leasing and berreuing ceptions. Uewing steps ane invelved in such an analysis:1) Sctormins the present value ey agtentax cash eutplews under the Leasing eptien @ scanned with OKEN Scanner© 2Determine the present value of agter-tax cash cutplews under the buying or as option, ©3) Compare the present value of cash oul plows prem leasing eption with that of buying/berrowing option, ©4) Select the option with Lewer present value o¢ agter- tax cash cuttlows. Lessors peint of view eThe tinancial viability of leasing eut an asset prem ‘the point ey view 04 lebser can be evaluated with the belated mated coal budgeting. IPresent value methed Livternal Rate et return methed 1) Preserit Value Methed: On evaluation of a.‘lease ve, bennew decision (er: actuisition et capital items using a etal preset cost analysis: shuld be undertabentte determine i, that isthe’ In such an analysis.ttis necessary te alld all costs that eccur Thid mothed. invelves the following steps ©i) Determine cash eulplews by deducting tax advantage ot ewning an assel such as investment allewance, if amy. Cit) Detenmine cash inglows agten-tax as belew: @ scanned with OKEN Scanner@ iti) Determine the preserit value of cash cut plews and, teton tae cash inten by discectting of weighted auonage cest oy capital ey the lesser @iv) Decide in paver of leasing cut an asset it PV of cash inglew exceeds the PV ot cash cuttlews, ic, 1, the NPV is sve ethenuise im case NPV is -ve,the lessor would lose on leasing out the asset. lvtennal Rate e4 Return Methed: © The internal nate of return can be depined as that rate of discewrt at which the present value ot cas! inglews is equal te the present value aycash oulglews. Ikean be determined with the help ot the yellowing mathematical permula, CA ©The Internal nate of return can alse be determined uith the help 04 present value tables. The gotlewin: steps ane nequinedte practice the internal rate ot return methed: Determine the pulune net cash glows ter the peried ey the Lease. the nat cash inglows are estimated pulure earnings, trem Leasing eutthe asset, Bepore depreciation but agter taxes. ©2Detenminethe nate et discount at which the present value et cash inglows is equalte the present value ot cash eutglous. This may be determined as yellows: @ scanned with OKEN Scannerer ©a) When the rai et pa — lige et, the assets. Finstl out Present Nola Factor by dntding intial outlay (cov oy the inestment) by annual cash (leu, ie, Initial eutlay. Present value gacter= Annual cash glow : alone ne ree cas! ws ae thet rake = ak eae ( fetal pr ms ie ash stati er eth os es ees eae sete fae Gear akante ete @ fant ah oe eh let ae an au ee aa, Types ot Leasing: 747. Types of L @ scanned with OKEN Scanner@l, Financial Lease “asia alin ala es me oeen ot 1 A 2 ipihel ugh ‘lessen inthe onan ot ade ¢| a e: Tt is infeber le thie type a heer Seat te e Sam e2. Operating Tease the ‘ “an pera are the esse et aye nd tl cifleuta risks, There is an eplion le, r- parc fea se agler giving notice. In this type ot lesser beans all expenses lesser. will net be able te realize the gull cost o¢ the asset specialized services ane provided by the lesser. OThis bind ot lease is preterned where the equipment is likely. suler c! selescence. ves nethonder any service. . Sale and leaseback elnasale and leaseback, a company ewning the asset sells itte the lessen. The lessor pays immediatel gor the asset but Leases the asset te the seller. Thus, the seller ot the asset becomes the lessee. The asset remains with the seller whe is a lessee bul the cwnership is with the lesser whe is the buyer. This arrangement is dene se thatthe selling compan cbtains finance ger running the business aleng with with the asset. @4Dinect Lease ©Dinect lease rezers-te a covtractual arrangement between a lesser and a lessee wherethe lessen leases eut some property (generally. equipment) te $FEe, @ scanned with OKEN Scanner©5, Leveraged and non-leveraged leases eM Leveraged and, nen-leveraged leases, the value ot the assetleased may be e¢ a huge amount which may, net be pessible yor-the lessor te ,inance. Se, the lesson invelves ene more tinancier whe will have charge over-the leased, asset. ©6 Single investor lease : @single investor Lease is atype ot, lease that compnises ota lesser and a lessee whereby the Lesser pinances the pitancial asset por acquisition through twe metheds. namely. equity. or debt, as per their duriedicllen or cn agreement withthe lessee. Under his type of lease, when the lessor detaults payments sche i lender ie not essess the asset rromthe depaulten d demand payment trem the lessee. or breaches the terms. ot, payment, tl allowed te ney butthey. shoul 7. Domestic lease: @ The Domestic Lease and, Ivilernational Lease ane the types of Leases classitied onthe basis othe places wi rethe parties te the lease agreemen reside, The lease is the agreement between the lesser and the lessee; wherein the lesser grants permission te the lessee te use his property in retunn Gor peniedical rental paymerits. ©8. International lease @Here, the parties to the lease transactions may, beleng te di,perent countries which is almost similar te cross border lease. @ scanned with OKEN Scanner@ Difference Term of the contract Ownership ‘Type of contract Burden of maintenance Risk of obsolescence Cancellation Tax advantage Purchasing ance lease Typically, a long-term contract Transferred to the lessee Loan agreement/contract, Lessee must maintain the asset Lessee Often difficult or impossible, some exceptions e: Expenses such as depreciation and financing are tax-deductible for the lessee Option to purchase the asset Operating lease Bre rec itsS Remains with the lessor Boece tad a ee een (erg Possible throughout the contract Rent deduction allowed for the lessee RO CIR aR Ce ag @ scanned with OKEN Scanner