ANKIT MALDE 33
ANUSHRI MODI 39
-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.
a) Financial lease
b) Operating lease
c) Sale and lease
d) Leveraged leasing
e) Direct leasing
f) Sub lease
g) Wet lease & Dry
TYPES OF LEASE
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
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.
•This Lease agreement gives to the
lessee only a limited right to use the
•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
•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
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
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
SALE AND LEASE
•Under this transaction, the seller assumes the role
of a lessee and the buyer assumes the role of a
•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
SALE AND LEASE
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.
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
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.
•A wet lease is any
whereby a company
agrees to provide an
aircraft and at least one
pilot to another
•‘Dry lease’ on the other
hand, refers to leasing
only the aircraft.
WET LEASE AND DRY
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
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
BALANCE SHEET CONSIDERATIONS
DISAVDVANTAGES OF LEASING
HIGHER CREDIT REQUIREMENTS
LONG TERM EXPENSE
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
An MNC would prefer to lease space as this would involve minimum capital
commitment, maximum flexibility and easier exit strategy.
COS PROVIDING LEASING & HIRE
Hire purchases are used to acquire
houses, automobiles, furniture,
computers, industrial machinery,
equipment and other large items
that generally cannot be paid in a
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.
The owner delivers possession of goods thereof
to a person on condition that:
Such person pays the agreed amount in
The property in the goods is to pass to such
person on the payment of the last of such
Such person has a right to terminate the
agreement at any time before the property so
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
The interest rate can vary from low to high,
depending on the institution granting the
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
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.
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
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.