LEASING

Prof. Sarbesh Mishra

NICMAR’s CISC
Hyderabad – 84.

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Concept
o Arrangement between two parties, the
leasing company or lessor and the user or
lessee.
o The lessor buys the capital equipment for the
use of the lessee for an agreed period of time
in return for the payment of the rent.
o The rentals are pre-determined and payable
at fixed interval of time.
o Lessor remains the owner of equipment.
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Leasing as Source of Finance
Leasing company finance for:
o Modernization of Business
o Balancing equipment
o Cars, scooters and other vehicles and
durables
o Items entitled to 100% of 50%
depreciation
o Assets which are not being financed by FIs.

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Types of Lease
o Financial Lease
o Operating Lease
o Leverage Lease
o Sale and Lease back
o Cross Border Lease

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Advantages of Lease
o Permit alternative use of funds
o Faster and cheaper credit
o Flexibility
o Facilitate additional borrowing
o Protection against obsolescence
o Hundred percent financing
o Boon to small firm
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Financial Lease
o 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 sales
service and warranty backing it.
o Lessee bears the risk of obsolescence as it
stands committed to pay for entire lease
period.
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Contd….
o Financial lease with the purchase option,
where at the end of pre-determined
period, the lessee has the option to buy
the equipment / asset at a pre-determined
value.
o The leasing company / lessor charges
nominal service charges to lessee towards
legal and other costs.
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Operating Lease
o Contractual period between lessor and
lessee is less than full economic life of
equipment i.e. short-term in nature.
o The lease is terminable by giving
stipulated notice as per the agreement.
o The risk of obsolescence is enforced on
the lessor who will also bear the cost of
maintenance and other relevant expenses.
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Leverage Lease
o Arrangement for assets of huge capital
outlay.
o Parties involved are (a) Lessor (Max. 20 –
50% stake) (b) Lessee (As in operational
lease) (c) Lenders (Rest stake holders)
o Lessor acquires the asset with maximum
contribution upto 50% and rest is financed
by lenders secured by mortgage of the
asset besides assignment of leased rental
payments.
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Sale and Lease Back
o Arrangement where a firm which has an asset
sells it to leasing company / lessor and gets it
back on lease.
o Lessee gets the sale price in the market value
and gets the right to use the asset during the
lease period. Title of the asset remains with
the lessor.
o Lease back agreements are on net basis i.e.
lessee pays the maintenance, property tax and
insurance premium.
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Cross Border Lease
o It is international leasing and is referred
otherwise as transactional leasing.
o Relates to lease transaction between
different a lessor and lessee domiciled in
different countries.
o Illustration:- Leasing company in USA
makes available Air Bus on lease to Air
India.
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Disadvantages of Leasing
o Lease rentals are payable soon after
entering into lease agreement while in
new projects cash generation may start
after gestation period.
o The cost of financing is higher than debt
financing.
o If the lessee defaults in payment, lessor
would suffer a loss.
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Legal Aspects of Leasing
o 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 use
the asset.
o The lessee has the obligation to pay the
lease rentals as per lease agreement, to
protect lessor’s title, to take reasonable care
of the asset, and to return the leased asset
on the expiry of lease period.
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Income Tax Provisions Relating to Leasing
o The lessee can claim lease rentals as tax -
deductible expenses.
o The lease rentals received by lessor are
taxable under the head of “Profits and
Gains of Business or Profession”
o The lessor can claim investment
allowance and depreciation on the
investment made in leased assets.
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Accounting Treatment of Lease
o The leased asset is shown on the balance
sheet of the lessor.
o Depreciation and other tax shields
associated with leased asset are claimed
by the lessor.
o The entire lease rental is treated as an
income in the books of the lessor and
expense in the books of lessee.
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Problems of Leasing
o Unhealthy Competition
o Lack of qualified personnel
o Tax Considerations
o Stamp Duty
o Delayed Payments and Bad Debts

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Growth of Leasing Industry
The growth of equipment leasing is of recent
origin and is volume in India is quite modest.
Lease financing organisations in India include
many private sector non-banking financial
companies, some private sector manufacturing
companies, Infrastructure Leasing and Financial
Services Limited (IL&FS), ICICI Bank, Industrial
Reconstruction Bank of India (IRBI), IFC, LIC,
GIC, HDFC Bank, State Industrial Investment
Corporations (SIICs), and many other
organisations.
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