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Leasing

What is leasing?
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contractual arrangement lessor provides the asset for use to lessee for an agreed period of time for a consideration in form of periodic payments

At the end of period the asset reverts back to the lessor unless there is a provision for renewal of the contract. The real function of lessor is not renting of an asset, but lending of funds.

Essential elements:
1. Parties: owner and user - lessor and lessee - lease-broker - lease financier 2. Asset: subject matter of a lease contract 3. Ownership separated from user 4. Term of lease: definite period 5. Lease rentals: compensate lessor for depreciation, interest, repairs, etc. 6. Options on termination: - lease is renewed - reverts to lessor - sells to third party - sells to lessee

Lease agreement:
Nature of lease Description of equipment Delivery and re-delivery Period Lease rentals Use Title Repairs and maintenance Alteration: no alteration without written consent
Prohibition of sub-leasing

Finance Lease Lessor transfers to lessee substantially all risks and rewards Lessor is only a financier, not interested in asset
- ownership is transferred to lessee by the end of lease term - lessee has an option to purchase the asset - lease term is for a major part of the useful life of asset - present value of lease payments > fair market value of asset If lessee cancels the lease, lessors losses are borne by lessee

Lessee selects the equipment Lessee negotiates price, delivery schedule, installation, Warranty, etc.
Primary Lease: when the full cost of an asset is amortized in one lease agreement. Secondary lease : when to amortize full cost of an asset more than one lease agreement is required.

Operating lease / service lease


- Lessor does not transfer all risks and rewards - Cost of asset is not fully amortized during primary lease period - Lessor provides services attached to leased asset - Generally for a period significantly shorter than economic life - Lease is cancelable by either party - Lease rentals: comparatively low - Lessor does not rely on the single lessee

Examples: mobile cranes, chartering of air crafts, Hiring of computers, taxi for a particular travel

Sale and Lease Back


Indirect form of leasing Owner sells asset to leasing company, which leases it back to owner Seller receives purchase consideration and also retains the use of the asset in return for periodic lease payments

Direct Lease:

Bipartite Lease: only two parties Tripartite Lease: equipment supplier, lessor and lessee

Leveraged Lease
- Lessor (equity investor), lender and lessee - Lessor buys asset through substantial borrowing - Trustee - Trustee remits debt service component to lender and balance to lessor

Domestic Lease
International Lease: lessor, lessee, equipment
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supplier import lease Cross-border lease

Lease Rental structures


Equated Lease Rentals: Equal lease rentals Stepped Lease Rentals: Either in increasing or decreasing manner

Ballooned Lease Rentals: In initial less and at termination high


Deferred Lease Rentals: decided by the lessor

Contract Act:
(A) General provisions: 1. Contract 2. Legal obligation 3. Lawful considerations 4. Free Consent 5. Discharge of contract under following conditions: By performance By frustration By mutual agreement By operation of law

Contd.
(B) Special provisions: 1. Liabilities of lessee: Reasonable care no unauthorized use, to return good To insure and repair the goods 2. Liabilities of Lessor Delivery of goods Peaceful possession Fitness of goods To disclose the defects

Structure of leasing in India

Major players are: Independent leasing companies Manufacturer- lessor Financial institutions In-house lessor big companies Commercial banks

Advantages and limitations

Advantages: to lessee
Financing of capital goods Additional source of finance Less costly Avoids conditionality Flexibility in structuring rentals Simplicity Obsolescence risk is averted

Advantages: to lessor

Full security - Tax benefits - High profitability - Trading on equity

Contd.

Limitations Restrictions on use of equipment Loss of residual value Consequences of default Understatement of lessees asset Double sales tax: while purchasing and given for lease as well.

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