Framework of Leasing

Slideshow Transcript

1. Slide 1: Framework of Leasing Dr Saif Siddiqui Assistant Professor Centre for Management Studies Jamia Millia Islamia (A Central University) New Delhi - 110025
2. Slide 2: Lease -Defined  A lease is a contractual arrangement  in which a party owning an asset (lessor)  provide the asset for use to another party (lessee)  for a agreed period of time  in consideration of a periodic payment (rentals).  At the end of the contract (lease period ), the asset reverts back to the lessor,  unless there is a provision for the renewal of the contract
3. Slide 3: Essential elements:  Parties to the contract  Essentially two parties : lessor and lessee  Both can be individuals, partnerships, joint stock companies  Joint lessor and lessee , where amount is enormous  Contract may involve lease financiers , who refinance lessor
4. Slide 4: Essential elements: cont…  Asset  The asset is the subject matter of the contract  Asset must be of lessee’s choice , suitable for his business needs.  Separation of ownership from user  Term of lease  The time period for which lease remain operational  A definite time period is required otherwise , it will be legally inoperative  The period may stretch over the entire economic life of the asset
5. Slide 5: Essential elements: cont…  Lease rentals  So structured as to compensate the lessor for the investment made in the asset
6. Slide 6: Classification basis :  The lease transaction can differ on the basis of :  The extent to which risk and reward of ownership are transferred  Risk refers to possibility of loss for under utilization or technological obsolescence of the equipment  Reward mean cash flow generated from the usage of equipment and residual value  No. of parties to the transaction  Domicile of lessor and lessee
7. Slide 7: Types of leasing:  Finance lease and operating lease  Sales and lease back and direct lease  Single investor lease and leveraged lease  Domestic lease and international lease
8. Slide 8: Finance lease and operating lease  Finance lease:  The lessee select the equipment and negotiate with manufacturer  Lessor purchase the equipment and lease  Lessor retain the title , lessee uses it  lessor transfer all the risk and reward of the asset  Involves payment of rental over an obligatory non- cancelable lease period  Lessor is a financer , not interested in assets  Lessor recover its investment and earn profit  Example : ships, aircraft etc.
9. Slide 9: Finance lease and operating lease  Operating lease:  It is one which is not a finance lease  It is also known as service lease  Lessor provides for the services attached as maintenance  Lessor bears the risk of obsolescence , lessee can cancel the lease any time  The lease rental is cost of service provided  Lessor does not depend on single lease to cover its entire cost  examples: car , computers , charter planes
10. Slide 10: Sale and lease back and Direct lease  Sale and lease back:  Indirect form of leasing  Owner sell it to leasing company and take the same on lease  Direct lease  Bipartite lease :  equipment supplier cum lessor and lessee  Tripartite lease :  equipment supplier , lessor and lessee
11. Slide 11: Single investor lease and leveraged lease  Single investor lease  Two parties involved :lessor and lessee  Leasing company fund the entire investment  leveraged lease  Three parties involved : lessor, lender and lessee  Leasing company buy assets by borrowing  Transaction is routed through a trustee , who look after interest of lessor and lender
12. Slide 12: Domestic lease and international lease  Domestic lease  If all the parties (lessor, lessee and equipment supplier) are domiciled in the same country  International lease  Import lease  If equipment supplier is domiciled in different country  Cross border lease  If lessor and lessee are domiciled in different countries
13. Slide 13: Advantage of leasing to the lessee  Financing of capital goods  Less costly  Ownership preserved  Equity may dilute ownership  Avoid conditionality  Institutional finance come with restrictions like dividend representation on board, etc  Flexibility in structuring of rentals
14. Slide 14: Advantage of leasing to the lessee cont…  Simplicity  Simple to negotiate  Lesser documentation  Obsolescence risk is averted
15. Slide 15: Advantage of leasing to the lessor  Full security  Lessor remain the owner  Higher profitability  Rate of return is more than the rate of borrowing  Trading on equity  Lessor can use substantial amount of borrowed funds  High growth potentials  Leasing is done even in recessionary periods