Final Project Report

On

“FROM HIRE PURCHASE TO LEASING OF STEEL

COMPANIES”

IN Partial Fulfillment of the requirements

For the degree of
Master of Business Administration
2007-2009
Of
Punjab Technical University

Submitted by

CENTRE FOR MANAGEMENT TRAINING & RESEARCH

KHARAR-140301, DISTT. MOHALI (PB.)
 Certificate of Completion

Certified that the project report entitled “FROM HIRE PURCHASE TO LEASING OF
STEEL COMPANIES” submitted by Gurvinder Singh for the partial fulfillment of the
requirements for the degree of Masters of Business Management is a Bona fide work to
the best of my knowledge and may be placed before the examiners for their
consideration.

Dated: Directing Faculty

2
 DECLARATION

I, Gurvinder Singh hereby declare that the project entitled “FROM HIRE PURCHASE
TO LEASING OF STEEL COMPANIES.”

I did my project for the partial fulfillment of MBA degree from Punjab Technical
University. It is the original report done by me and the information provided in the study
is authentic to the best of my knowledge.”

This study has not been submitted to any other institution or university for the award of
any other degree/diploma.

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 ACKNOWLEDGEMENT

Research projects provide a practical perspective to the knowledge that the students
acquire during their MBA Programme.

I put across my gratitude to Mr. Vipin K. Diwan, Director Centre for Management
Training and Research for extending his support and cooperation for this project and for
facilitating us with the whole lot for the completion of the project.

I am heartily grateful to Dr. J. M. Jerath, (Business Statistics) for making us well

equipped with the immense knowledge that has abet us all the way while carrying out
the research.

I owe a debt of thanks to Dr. Shabnam Priyadarshini, (Research Methodology) for

bestowing us a deep insight into the study and sparing their valuable time for helping us
to solve the intricacies involved in the process.

I also want to acknowledge Mr. Kapil Dev for their significant contribution for aiding us
in the technical aspects of the concern study and put across our thanks to Mrs. Disha,
Mr. Ajit Singh(Library) and Mr. Daljit Singh for their consistent support

Last but not the least a big vote of thanks to all the mentors, Management students and
our family members for helping us materialize the research project.

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 PREFACE

Project work is conducted as an integral part of the management

Course it provides an opportunity to apply the theoretical aspect in practical it givers on
excellent opportunity to a student to apply his ability, capability,
intellect, knowledge, brief reasoning and mantle by giving a solution to the assigned
problem, which reflects his caliber.

One cannot depend upon theoretical knowledge it has to be coupled with

practical for it to be faithful. Classroom, lecture has a significance role play in the
subject of business management. To develop managerial and administrative skill, it is
necessary that they combine their classroom learning with the knowledge of real
business environment.

I did my Research Project on “FROM HIRE PURCHASE TO LEASING OF

STEEL COMPANIES” In this project I collected the information through websites,
library, and magazines.

5
 Table of Contents

S.N. Title Pg Nos.

1 EXECUTIVE SUMMARY 8
2 OBJECTIVES OF THE STUDY 14
3 RESEARCH METHODOLOGY 15
4 REVIEW OF LITERATURE 16
5 HIRE PURCHASE FINANCING 19
6 LEASE FINANCING 34
7 THE STEEL INDUSTRY IN INDIA 44
8 STEEL AUTHORITY OF INDIA 49
9 TATA STEEL 52

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10 JINDAL STEEL AND POWER LTD 56
11 JINDAL STAIN LESS 58
12 ISPAT INDUSTRIS 61
13 CASE STUDY OF BHUSAN STEEL 63
14 LEASE FINANCE PETTARN OF LEASING CO & 70
INDUSTRIS
15 GRAPHICAL PRESENTION OF THE TOPIC AT A 74
GLANCE
16 RESEARCH FINDINGS 81
17 RECOMMENDATIONS 83
18 CONCLUSION 85
19 BIBLIOGRAPHY 87

ABSTRACT

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 In the current competitive scenario where the acquisition of fixed assets like
plant, land and machinery are having deterministic affect on the bottom line of the
companies the problem of cutting down the cost by means of leasing or hire purchase is
the major issue. These contracts and their attributes vice-versa. The industry practice is
very important to be considered. To analyse this problem analysis of there of the
companies financials in leasing and hire purchase and bhushan steel as an example
are analysed. Reference to the discussions and perspective of various personnel is
examined. ‘

The steel industry and its major companies lease financing contracts pattern brings into
highlight the trend which is being examined in this high capital intensive industry. The
companies are using these leasing contracts to control their input costs so that financing
of these assets can be utilized to the maximum output. There has been exponential
increase in the leasing contracts been entered into by the corporate for various assets.

These trends are worth highlighting which has directly affected the financials of
the company. Thus, a healthy bottom line by reducing the overall cost of financing and
the tax implication have contributed to the rapid growth of leasing business to meet the
ever increasing & demanding needs of the company.

INTRODUCTION

8
 In order to start and sustain a business one needs finance. The process involves
making a list of all the assets, identifying the sources of supply, estimating the cost of
acquisition when the assets are to be acquired on outright basis. Then investment
requirements as well as entrepreneur’s fear will increase. To scare away the
entrepreneur’s fear, the emphasis should be given to resources and not to the
ownership and here comes the role of some financial innovations like leasing and hire
purchase.

The steel sector which right now is suffering from the burnt of high input costs &
these costs being not passed to the end users which is being adopted by the
government as an inflationary control measure, has brought down the margins even of
the major companies who enjoys economies of scale. These companies are entering
into more of leasing contracts as one of the successful approach being applied as a
measure to shelter this cost push effect.

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. In other words, lease is a contract between the owner of an asset (the
lessor) and its user (the lessee) for the right to use the asset during a specified period in
return for a mutually agreed periodic payment (the lease rentals). The important feature
of a lease contract is separation of the ownership of the asset from its usage.

Lease financing is based on the observation made by Donald B. Grant:

“Why own a cow when the milk is so cheap? All you really need is milk and not the
cow.”

Attributes of classifying lease allowance:

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 ♦ Finance and Operating Lease
♦ Sales and lease back & Direct lease
♦ Single Investor & Leveraged lease
♦ Domestic lease & International lease

Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly
1% 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 of land and building has
been in existence in India for a long time, while equipment leasing has become very
common in the recent times.

With no entry barriers and buoyant growth in capital expenditure by companies a

high growth is seen in the use of leasing as a financing mode. The taxation policy has
also led to the growth of leasing as there is deduction of depreciation from his taxable
income. Optimistic capital markets have also contributed to the growth of the leasing.

Leasing industry plays an important role in the economic development of a country

by providing money incentives to lessee. The lessee does not have to pay the cost of
asset at the time of signing the contract of leases. Leasing contracts are more flexible
so lessees can structure the leasing contracts according to their needs for finance. The
lessee can also pass on the risk of obsolescence to the lessor by acquiring those
appliances, which have high technological obsolescence. To day, most of us are
familiar with leases of houses, apartments, offices, etc.

On the other hand 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.

10
Under this transaction, 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 hire purchase system is regulated
by the Hire Purchase Act 1972.

Leasing is a good option for businesses that need equipment for short periods of
time. For instance, you may require a special machine for a project. After the project,
you will have no need for the machine. In such cases, it would be more cost effective to
lease the machine for the duration of the project instead of purchasing it. Increasingly,
many small businesses are beginning to lease computers, photocopiers and fax
machines. Not only does it help to reduce the upfront cash needed to purchase these
items, but it also shifts the responsibility and cost of maintenance and servicing to the
supplier. You do not need large sums of cash to acquire equipment you need for only
short periods. The rental you pay is fixed, making it easier to draw up a budget and
project your cash flow .By leasing, the responsibility of maintaining and servicing the
equipment falls on the person renting the equipment to you. You can always rent the
latest and most advanced equipment or assets as and when you need them.

The Indian economy is broadly divided into three different segments/ industries:
1. Service Industry
2. Manufacturing Industry
3. Agricultural Industry

I have studied inter industry comparison, when it comes to leasing and Hire
Purchase. I have taken service as well manufacturing industry for my consideration. The
capital involvement in Agriculture industry is quite less when compared with the other
two segments.

Nowadays, its being seen that Indian economy is going places to places largely
due to service industry and manufacture sector .Again example of our booming
economy is our increasing growth rate which is showing an upward trend.

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 Coming to the topic concerned all the companies whether from service or
manufacturing are on a lookout for expression and on the way to achieve higher
margins. To achieve all this, companies’ need higher capital, there are many ways raise
capital, like private equity, IPO, FDI …But, when it comes to procuring resources there
are ways like hire purchase and leasing.

Now, coming to industry and service industry as I mentioned earlier, the capital
involvement is much higher in manufacturing industry when compare to service
industry, though are exceptions in service industry and airlines industry, they involve
higher cost.

When it is about expansion of a manufacturing unit, the cost of land, equipment

building and even raw material procurement, involves high cost. Here Lease comes as
a rest rite usually lease is being given for a higher time period and the companies
talking lease deep perspective in mind when it comes to time period .In service industry
the capital investment is less hence, leasing system is not so much popular among
service industry

Off lately, it is being observed that the hire purchase trend has got less and less popular
among corporate sector, and lease system has got prevalence. Especially in
manufacturing industry the corporate interest has largely shifted towards leasing, it is
apparent that manufacturing industry had got the higher involvement of capital, say in
acquiring land, factory, equipments and ever raw material. There all items, involve big
times capital, and to tackle this problem, Lease hold system has come out as a big
relief. There, are several examples prevailing in the market , like, Tata steel, Bhushan
steel, oil refineries, food proceeding units, hardware industries, and so on, the list is
endless. There has been many lease hold dealing taking place in recent times, heavy
machineries are being taken on lease due to high capital involvement, kind of hire
purchase system has got limited to be a part of college curriculum, only

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If we look upon in the retail management, still Hire Purchase is popular when it comes
to purchase/won small items such as Household and small office environment in simple
words Hire Purchase is still quite popular in small income segment. Though there is this
clear indication that leasing has become a more viable option rather then Hire Purchase
on a large scale but when it comes to economies of scale Hire Purchase is quite
popular.

But, again when it comes to corporate sector, there is prevalence of lease hold
system rather then Hire Purchase, It nearly exists there.

HIRE PURCHASE FINANCING

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Hire purchase (frequently abbreviated to HP) is the legal term for a contract developed
in the United Kingdom, and now found in India, Australia, New Zealand, and other
states which have adopted the English law concept. (In North America, where the word
hire most commonly refers to employment, the comparable system is called closed-end
leasing.) In cases where a buyer cannot afford to pay the asked price for an item of
property as a lump sum but can afford to pay a percentage as a deposit, a hire-
purchase contract allows the buyer to hire the goods for a monthly rent. When a sum
equal to the original full price plus interest has been paid in equal installments, the
buyer may then exercise an option to buy the goods at a predetermined price (usually a
nominal sum) or return the goods to the owner.

FEATURES

Payment to be made in installment over a specified period.

The possession is delivered to the hirer at the time of entering the contract.

The property in goods passes to the hirer on payment of last installment]

• Each installment is treated as a hire charge so that if default is made in payment

of any installment, the seller becomes entitled to take away the goods.
• The installments in hire purchase include interest as well as repayments of
principal.

Standard provisions
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:

1. a clear description of the goods

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2. the cash price for the goods
3. the HP price, i.e., the total sum that must be paid to hire and then purchase the
goods
4. the deposit
5. 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
6. a reasonably comprehensive statement of the parties' rights (sometimes
including the right to cancel the agreement during a "cooling-off" period).
7. The right of the hirer to terminate the contract when he feels like doing so.

Implied warranties and conditions to protect the hirer

15
The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the
following are usually present:

1. the hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will
interfere with the hirer's possession during the term of this contract
2. the owner will be able to pass title to, or ownership of, the goods when the
contract requires it
3. that the goods are of merchantable quality and fit for their purpose, save that
exclusion clauses may, to a greater or lesser extent, limit the Finance Company's
liability
4. where the goods are let by reference to a description or to a sample, what is
actually supplied must correspond with the description and the sample.

The hirer's rights

The hirer usually has the following rights:

1. the hiree(vendor) cannot terminate the hire purchase agreement for default in
payment of hire or due to an unauthorised act or breach of expressed conditions
unless a notice in writing in this regard is given to the hirer.the period of notice will
be one week where the hire is payable weekly or less than that interval and two
weeks in other cases.
2. the right to repossess the goods will not exist unless sanctioned by court in the
following cases:

a)where the hire purchase price is less than 15000,one half of the hire purchase price
has been paid

b)where the hire purchase is not less than 15000,three fourth of hire purchase price has
been paid.

However this proportion in case of motor vehicles is as under:

a)one half,where the hire purchase price is less than Rs 5000

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b) three fourths,where the hire purchase price is not less than Rs 5000 but less than Rs
15000

c)three fourth or such higher proportion not exceeding nine-tenth where the hire
purchase price is not less than Rs 15000

3)the hirer has a right of receiving a statement from the owner against a payment of
rupee one showing the amount paid by or on behalf of the hirer,the amount which has
become due under the agreement but remains unpaid and the date upon which each
unpaid instalment became due and the amount of each such instalment and the date or
the mode of determining the date upon which each future instalment is to become
payable,and the amount of each such instalment.

4) if the amount paid by the hirer till the date of repossession of the goods or the value
of the goods on the date of repossession of goods exceeds the total hire purchase price
the excess payment made by the hirer will be returned to the hirer by the owner of the
goods. The owner or vendor ,for the purpose of calculating the value of the good, has
the right to deduct the reasonable expenses for repossessing the goods,for storing the
goods,or repairing them,for selling them and for payment of arrears of taxes.

The hirer's obligations

The hirer usually has the following obligations:

1. to pay the hire installments

2. to take reasonable care of the goods (if the hirer damages the goods by using
them in a non-standard way, he or she must continue to pay the installments
and, if appropriate, compensate the owner for any loss in asset value)
3. to inform the owner where the goods will be kept.

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 The owner's rights
The owner usually has the right to terminate the agreement where the hirer defaults in
paying the installments or breaches any of the other terms in the agreement. This
entitles the owner:

1. to forfeit the deposit

2. to retain the installments already paid and recover the balance due
3. to repossess the goods (which may have to be by application to a Court
depending on the nature of the goods and the percentage of the total price paid)

to claim damages for any loss suffered.

Legal Framework

There is no exclusive legislation dealing with hire purchase transaction in India. The
Hire purchase Act was passed in 1972. An Amendment bill was introduced in 1989 to
amend some of the provisions of the act. However, the act has been enforced so far.

18
The provisions of are not inconsistent with the general law and can be followed as a
guideline particularly where no provisions exist in the general laws which, in the
absence of any specific law, govern the hire purchase transactions. The act contains
provisions for regulating:
1. The format / contents of the hire-purchase agreement
2. Warrants and the conditions underlying the hire-purchase
agreement,
3. Ceiling on hire-purchase charges,
4. Rights and obligations of the hirer and the owner.
In absence of any specific law, the hire purchase transactions are
Governed by the provisions of the Indian Contract Act and the
Sale of Goods Act.

Sale of Goods Act

In a contract of hire purchase, the element of sale is inherent as the hirer always has
the option to purchase the movable asset by making regular payment of hire charges
and the property in the goods passes to him on payment of the last installment. So in

19
this context we will discuss the provisions of Sales of Goods Act, which apply to hire
purchase contract.
Contract of Sale of Goods: A contract of sales of goods is a
contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price. It includes both an
actual sale and an agreement to sell.

Essential Ingredients of a Sale: A contract of sale is constituted

of following elements:
i. Two parties: namely the buyer and the seller, both competent to contract to effectuate
the sale.
ii. Goods: The subject matter of the contract.
iii. Money consideration: price of the goods.
iv. Transfer of ownership: of the general property in goods from the seller to the buyer.
v. Essentials of a valid contract under the Indian Contract Act.

Doctrine of Caveat Emptor (Let the Buyer Beware): If the buyer relies on his own
skill and judgment and takes the risk of the suitability of the goods for his purpose, it is
no part of the seller’s obligation to caution the buyer of the defects in the goods or to
give to the buyer an article suitable for his purpose. If the buyer relies on his own skill
and judgment and the
goods turn out to be defective; he cannot hold the seller responsible for the same.

This is known as the ‘doctrine of caveat emptor’ or ‘let the buyer beware’. This applies
to all sale contracts invariably, except in following cases:
a. When the buyer makes known to the seller the particular purpose for which he
requires the goods and relies on the seller’s skill and judgment.

20
b. When the goods are sold by description by a manufacturer or seller who deals in
goods of that description, the seller is bound to deliver the goods of merchantable
quality.
c. When the purpose for which the goods are purchased is implied from the conduct of
the parties or from the nature or description of the goods, the condition of quality or
fitness for that particular purpose is annexed by the usage of trade.
d. When the seller either fraudulently misrepresents or actively conceals the latent
defects.

Transfer of Property in goods: The property in goods is said to be transferred from

the seller to the buyer when the latter acquires the proprietary rights over the goods and
the obligations linked thereto. The transfer of property in goods is the essence of a
contract of sale.
The moment when the property in goods passes from the seller to the buyer is
significant from the point that risks associated with the goods follow the ownership,
irrespective of the delivery. If the goods are damaged or destroyed, the loss is borne by
the person who is the owner of the goods at the time of damage or destruction. The two
essential requirements for
transfer of property in the goods are
a. Goods must be ascertained and
b. The parties must intend to pass the property in the goods.
Performance of a sale contract: Performance of a sale contract implies, as regards the
seller to deliver the goods, and as regards the buyer to accept the delivery and make
payment for them, in accordance with the terms of the contract. Unless there is a
contract to the contrary, delivery of the goods and payment of the price are concurrent
conditions and are to be performed simultaneously.

Hire Purchase Agreement

A hire purchase agreement is in many ways similar to a lease agreement, in so far as
the terms and conditions are concerned.
The important clauses in a hire purchase agreement are:

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1. Nature of Agreement: Stating the nature, term and commencement of the
agreement.
2. Delivery of Equipment: The place and time of delivery and the hirer’s liability to bear
delivery charges.
3. Location: The place where the equipment shall be kept during the period of hire.
4. Inspection: That the hirer has examined the equipment and is satisfied with it.
5. Repairs: The hirer to obtain at his cost, insurance on the equipment and to hand over
the insurance policies to the
owner.
6. Alteration: The hirer not to make any alterations, additions and so on to the
equipment, without prior consent of the owner.
7. Termination: The events or acts of hirer that would constitute a default eligible to
terminate the agreement.
8. Risk: of loss and damages to be borne by the hirer.
9. Registration and fees: The hirer to comply with the relevant laws, obtain registration
and bear all requisite fees.
10. Indemnity clause: The clause as per Contract Act, to indemnify the lender.
11. Stamp duty: Clause specifying the stamp duty liability to be borne by the hirer.
12. Schedule: of equipments forming subject matter of agreement.
13. Schedule of hire charges.
The agreement is usually accompanied by a promissory note signed by the hirer for the
full amount payable under the agreement including the interest and finance charges. So
far we discussed the legal aspect, let’s now discuss the taxation aspect of the hire
purchase agreement.

Taxation Aspects
The taxation aspects of hire purchase transaction can be divided into three parts (a)
Income Tax, (b) Sales Tax and (c) Interest Tax.
Income Tax Aspect

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Hire purchase, as a financing alternative, offers tax benefits both to the hire-vendor (hire
purchase finance company) and the hirer. Income tax assessment of the Hire purchase
or hirer: The hirer is entitled to
(i) The tax shield on depreciation calculated with reference to the cash purchase price
and
(ii) The tax shield on the finance charges. Even though the hirer is not the owner he
gets the benefit of depreciation on the cash price of the asset/equipment. Also he can
claim finance charges (difference of hire purchase price and cash price) as expenses. If
the agreement provides for the option of purchasing the goods as any time or of
returning the same before the total amount is paid, no deduction of tax at source is to be
made from the
consideration of hire paid to the owner. Income tax assessment of the Owner or
financer: The consideration for hire/hire charges / income received by the hire vendor /
financer is liable to tax under the head profits and gains of business and profession
where hire purchase constitute the business (mainstream activity) of the assessee,
otherwise as income from other sources. The hire income from house property is
generally taxed as income from house property. Normal deduction (except depreciation)
are allowed while computing the taxable income.

Sales Tax Aspect

The salient features of sales tax pertaining to hire purchase transactions after the
Constitution (Forty Sixth Amendment) Act, 1982, are as discussed in following points:
a. Hire purchase as Sale: Hire purchase, though not sale in the true sense, is deemed
to be sale. Such transactions as per se are liable to sales tax. Full tax is payable
irrespective of whether the owner gets the full price of the goods or not.
b. Delivery v/s Transfer of property: A hire purchase deal is regarded as a sale
immediately the goods are delivered and not on the transfer of the title to the goods.
The quantum of sales tax is the sales price, thus the sales tax is charged on the whole
amount payable by the hirer to the owner. The sales tax on a hire purchase sale is
levied in the state where the hire purchase agreement is executed.

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c. Rate of tax: The rate of sales tax on hire purchase deals vary from state to state.
There is, as a matter of fact, no uniformity even regarding the goods to be taxed. If the
rates undergo a change during the currency of a hire
purchase agreement, the rate in force on the date of the delivery of the goods to the
hirer is applicable.

Interest Tax
The hire purchase finance companies, like other credit / finance\ companies, have to
pay interest tax under the Interest Tax Act, 1974. According to this Act, interest tax is
payable on the total amount of interest earned less bad debts in the previous year at a
rate of 2 percent. The tax is treated as a tax deductible expense for the purpose of
computing the taxable income under the Income Tax.

LEASE FINANCING

INTRODUCTION

24
In order to start and sustain a business one needs finance. In the unit one on feasibility
study, you have already seen the process of estimating financial requirements. The
process involved
(a) Making a list of all the assets
(b) Identifying the sources of supply
(c) Estimating the cost of acquisition when the assets are to be acquired on outright
basis. Then investment requirements as well as entrepreneur’s fear will increase. To
scare away the entrepreneur’s fear, the emphasis should be given to resources and not
to the ownership. In this unit we intend to familiarize you with some important financial
innovations i.e., leasing, hire purchase and factoring.
After going through this unit we will develop an understanding about:-

• The meaning of leasing

• Explain the role and importance of lease financing in economic development of a
Country
• Distinguish between the various types of leases
• Describe the meaning of hire purchase
• Distinguish between leasing and hire purchase

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 MEANING 0F LEASE FINANCING

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. In other words, lease is a contract between the owner of an asset (the lessor)
and its user (the lessee) for the right to use the asset during a specified period
in return for a mutually agreed periodic payment (the lease rentals). The important
feature of a lease contract is separation of the ownership of the asset from its usage.
Lease financing is based on the observation made by Donald B. Grant: “Why own a cow
when the milk is so cheap? All you really need is milk and not the cow.”

IMPORTANCE 0F LEASE FINANCING

Leasing industry plays an important role in the economic development of a country by

providing money incentives to lessee. The lessee does not have to pay the cost of asset
at the time of signing the contract of leases. Leasing contracts are more flexible so
lessees can structure the leasing contracts according to their needs for finance. The
lessee can also pass on the risk of obsolescence to the lessor by acquiring those 229
appliances, which have high technological obsolescence. To day, most of us are
familiar with leases of houses, apartments, offices, etc.

26
Essential elements of leasing:-
1) No. of parties to the contract: there are always two parties to a contract:
• the owner or the lessor
• the user or the lessee
2) Asset: - the subject matter of a lease financing contract may be an asset, property,
land and building.
3) Consideration: - the right to use an asset is given to lessee for a consideration called
the lease rental. It is determined by the lessor taking into consideration the capital
invested in the asset, depreciation etc
4) Lease period:-a contract of leasing is usually undertaken for a fixed period. At the
expiry of the lease period the asset reverts back to the lessor who is the legal owner of
the asset.
5) Ownership: - during the term of lease, ownership of the asset remains with the lessor
where as the possession of asset lies with the lessee. He is allowed to use the asset
during the tenure of lease agreement.
6) Termination of contract: - the lease contract comes to an end after the expiry of lease
period. After termination-
1) The contract may be renewed for another definite period.
2) The lessee may buy the asset.
The asset reverts to the lessor who can further lease to third party.

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 TYPES OF LEASE AGREEMENTS

Lease agreements are basically of two types. They are

(a) Financial lease and
(b) Operating lease. The other variations in lease agreements are
(c) Sale and lease back
(d) Leveraged leasing and
(e) Direct leasing.

FINANCIAL LEASE

Long-term, non-cancelable lease contracts are known as financial leases. The essential
point of financial lease agreement is that it contains a condition whereby the lessor
agrees to transfer the title for the asset at the end of the lease period at a nominal cost.
At lease it must give an option 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 asset. The lease agreement is irrevocable. 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.

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 OPERATING LEASE

An operating lease stands in contrast to the financial lease in almost all aspects. This
lease agreement gives to the lessee only a limited right to use the asset. 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 lease period. 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 obsolescence is very high in this kind of assets. Key Words explain the meaning
of ‘long term,’ ‘nominal cost,’ and economic life Activity a on the basis of above
description of financial lease and operating lease, find out three main differences
between two.

SALE AND LEASE BACK

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 land. 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 arrangement. Under this transaction, the seller
assumes the role of a lessee and the buyer assumes the role of a lessor. 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 BUYER SELLER LESSOR

29
LESSEE Market price) and to adjust difference in the lease rentals. Thus the effect of
profit /loss on sale of assets can be deferred.

LEVERAGED LEASING

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.

DIRECT LEASING

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 manufacturer itself. The
major types of direct lessor include manufacturers, finance companies, independent
lease companies, special purpose leasing companies etc

30
 ADVANTAGES OF LEASING

There are several extolled advantages of acquiring capital assets on lease:

(1) SAVING OF CAPITAL: Leasing covers the full cost of the equipment used in the
business by providing 100% finance. The lessee is not to provide or pay any margin
Manufacturer Lessor Lessee Lender money as there is no down payment. In this way
the saving in capital or financial resources can be used for other productive purposes
e.g. purchase of inventories.

(2) FLEXIBILITY AND CONVENIENCE: The lease agreement can be tailor- made in
respect of lease period and lease rentals according to the convenience and
requirements of all lessees.

(3) PLANNING CASH FLOWS: Leasing enables the lessee to plan its cash flows
properly. The rentals can be paid out of the cash coming into the business from the use
of the same assets.

(4) IMPROVEMENT IN LIQUADITY: Leasing enables the lessee to improve their

liquidity position by adopting the sale and lease back technique.

31
 LEASING IN INDIA

Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly
1% 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 of land and building has
been in existence in India for a long time, while equipment leasing has become very
common in the recent times.

32
 OBJECTIVES OF THE STUDY:

Objectives:

 To find out why corporate finance is moving from hire purchase towards lease
and to know the lease financing pattern of leasing companies.
 To assess the reason for increase in the leasing contracts by the corporate for
various assets.
 To study the lease business of various steel industries which has contributed a
lot in reducing the overall cost of financing and the tax implication?
 To explain the role and importance of lease financing in economic development
of a country
 To find out the year wise lease of various steel industries.
 To know the trend of leasing.

33
 RESEARCH METHODOLOGY:

Secondary data Collection:

Secondary data is that data which is already been used by some researchers or some
other experts. The online websites and search engines are the tools to get the
secondary data which was very important for findings and analysis.

RESEARCH DESIGN:-

Descriptive research design is used. The major purpose of descriptive research

is description of the state of affairs as it exists at present.
It includes conducting research by collecting facts and figures.

SAMPLING TECHINIQUE:

The sampling technique used is Probability sampling and Convenience sampling.

ANALYSIS TOOLS:-
VARIOUS TOOLS USED FOR ANALYSIS ARE:-
 TABLES
 GRAPHS
 CAGR (%)
CAGR = (FV/PV) 1/n - 1

Where FV is the future value, PV is the present value, and n is the number
of years.

34
CAGR APPLICATIONS:-
1) Calculating and communicating the average returns of investment funds.
2) Demonstrating and comparing the performance of investment advisors.

SRENGTHS:-
1) It is a useful formula to evaluate how various investments and portfolio has
performed over time.
2) Can be used for comparing and for evaluating the performance.

LIMITATIONS:-
1) CAGR assumes that an investor grew at a steady rate. In reality there is volatility.
2) CAGR is a historical measure. Historical results are not always reliable indicator of
expected returns in the future.

ASSUMPTIONS:-
CAGR assumes that an investment grows at a steady pace. This is normally not the
reality. Therefore CAGR is an imaginary conception. It describes the growth of an
investment as though it had grown at a steady pace.

35
 Limitations of the study:-

No study is free from limitations. The limitations of this study can be:

1. The result is based on secondary data that has its own limitations.
2. Time for conducting the research was less.
3. Due to time constraint, the study only covers seven companies.
4. Due to insufficient data available, study focus only on the limited information.

36
 REVIEW OF LITERATURE

The Financial Implications of Installment Purchase Contracts

and Construct-Leaseback Transactions.
Ott, Steven; Read, Dustin
(Piedmont Public Policy Institute, Charlotte, NC , Aug 2006)
Provided guidance for North Carolina communities considering installment purchase
financing and construct-leaseback transactions to build schools. The study involved
reviews of existing literature, interviews with professionals familiar with alternative
development strategies, and the construction of a financial model comparing
hypothetical lease purchase and construct-leaseback .

Public-Private Partnerships for Schools. North Carolina

Senate Bill 2009.
(North Carolina General Assembly, Jul 2006)
It provide for entering into capital leases of real or personal property for use as school
facilities. A capital lease entered into under this section may provide that the private
developer is responsible for providing, or contracting for, construction, repair, or
renovation work.

(Commonwealth of Virginia, Richmond , May 2006)

Provides guidance for submission and completion of projects under Virginia's Public-
Private Educationl Facilities and Infrastructure Act.The intent of this statute is to provide
a vehicle for Virginia's state and local agencies to create public-private partnerships to
meet a wide range of infrastructure needs, including such as construction and
renovation of elementary and secondary schools, as well as higher education facilities.
The Virginia Act is structured to reduce the time and money spent by the submission of

37
projects to extended boards of review, encourage entrepreneurial activity on the part of
the private sector, tailor a project to the particular needs of the user, and encourage the
innovative use of tax-exempt and taxable project financing.

Financing Energy-Efficient Projects.

(Schoolfacilities.com, Orange, CA , 2006)
Briefly describes tax-exempt lease/purchase agreements as a means to finance
improvements in school facility energy consumption.

[Missouri School Facility Lease Purchase Policy] from

Missouri Revised Statutes, Chapter 166, Permanent Funds
and Trusts, Section 166.300
Aug 25, 2005
This provides definitions, describes how the Missouri school building revolving fund will
be created; eligibility for lease purchases for projects; ranking of projects; when a plan
may be waived; when repayment is required; failure to make annual payments; state to
take possession of buildings; and procedures.

Fiscally Responsible Leasing of School Buildings and

Facilities
(This text is part of the larger publication: The Six Habits of Fiscally Responsible Public
School Districts by the Mackinac Center for Public Policy. , Dec 2002)
This describes the leasing of school buildings, whereby districts sign contracts with
private developers or other entities that own land and/or multipurpose buildings that
could be used for schools. Optimally, such leases should be medium to long term, as
schools would not want to move very often, and the private property owner would want
to assure a return on the investment. In effect, this arrangement is a good example of a
public–private partnership.

LESSEE

38
 THE STEEL INDUSTRY IN INDIA

The steel industry in India is a fragmented one, resulting in players having very
little say in end prices. Hence, the key to success is keeping costs as low as possible
.The cost in a steel company is determined by factors such as technology,
manufacturing route, operational integration and operating efficiency as measured by
operating parameters.

The extent of forward integration is also critical in deciding the competitiveness of

steel companies’ .The realization of value added products are higher and more stable
than base grades resulting in better margin for integrated players.

With pressured operating profitability, players with economies of scale are likely to
benefit by lower cost burdens form lowered fixed cost per tones.

The sector is benefiting from rising income levels the cheaper consumer
finance .Moreover, it ,and go bumpers would benefit from more spending on road
development projects .Hot rolled flats are used in automobiles, as chassis, bumpers and
clutch cover .In general, steel constitutes 60% of weight of a car body. Cold rolled coils
and sheets are used to manufactures auto bodies (for commercial vehicles , cars
tractors, two and three wheelers(such as clutch assembly, bearings and horns). Coated
sheets are also used in the manufacturing of auto bodies.

Over the next five years, sales(domestic as well as exports) of passenger vehicles ,
man user segment of auto market for flats-are expected to grow at a compound rate of
14% to just under 2.5 million vehicle while the commercial vehicle market is projected to
grow at a lower 4-5% rate to just under 0.7 million. The two-wheeler market is expected

39
to have units sales of around 10 million by 2010 .As a result, this sector alone is
expected to generate substantial demand for flat steel products over the next 5 years.

Consumption of consumer durables has increased to higher consumer spending,

following the liberalization of the economy in 1991 and the arrival of many foreign
players in the domestic market. Prices of most consumer durables have become
competitive due to more competition among players. Competitive pricing , easy
availability of consumer finance and increased demand from the rural sector have
resulted in a significant increase in the penetration level of white goods and other
consumer durables. This has also led to robust demand conditions, with five-year
demand projections for various segments of the consumer durables marketplace
ranging between 5%- 20%. As this consumer durables sector is a major end use sector
for cold rolled flats with white goods (the outer panel of most white goods is made of
cold rolled or galvanized sheets) and furniture accounting for around 11% of total
consumption, demand in the flat steel segment is also likely to be driven by the
underlying growth in this sector.
Long products are used extensively in the construction sector, which consumes over 10
million tons of steel annually, and is projected to grow at around 20% for the next five
year period. This sector is benefiting form rising incomes and increased availability of
housing finance. There is also a surge in infrastructure and housing due to population
growth and urbanization and retail development such as shopping malls and
multiplexes.

Flat products are also used in the construction sector. Hot rolled steel coils and
sheets are used in structural materials and welded pipes. Cold rolled sheets and coils
are used in press formed components which in turn are used in construction for making
tanks and containers. Galvanized sheets are largely used in roofing , slide cladding ,
making water tanks and as fencing material.

40
However, as compared with international norms, the construction industry in India is not
steel intensive .The steel to cement consumption ratio is 1.1 in developed countries as
compared with in India. There is substantial potential for an increased in the
consumption of steel in the construction industry, due to the low steel consumption ratio
and benefits of steel (long products). Such as superior quality and durability. Further
impetus has been provided by govt. due to its thrust on building roads networks.

Flat steel demand is likely to get a significant pull from the piping sector due to
and increased emphasis on gas, irrigation and supply projects. Currently, the country
has around 6,300 km of pipeline in place. It is estimated that the pipeline network will
more than double in the next 5-7 years and around 4,000-7,000 km of pipeline network
will be completed by 2010.

The robust performance of the Indian economy continued during the second quarter
(July-September) of 2006-07. According to the Central Statistical Organization (CSO),
real gross domestic products (GDP) growth accelerated to 9-2 per cent in the second
quarter from 8-9 per cent in the preceding quarter and 8.4 per cent a year ago. Strong
growth in industrial activity and services sector contributed to higher over all growth in
2006-07. With both the first and second quarters of 2006-07 recording higher growth
over the corresponding quarters of 2005-06, real GDP growth accelerated to 9.1% in
the first half of 2006-07 from 8.5% an year ago.

In line with the Five-Year Plan’s goals, as mentioned in the World Bank Group
Country Assistance Strategy, the Government has reiterated its commitment, as the
highest priority to the development and expansion of infrastructure. The govt. has also
committed itself to a massive expansion of social housing in towns and cities, in towns
and cities, in particular, to meet the needs of slum dwellers. Between 2001-02 and
2011-12, spanning the 10th and 11th five-year plan periods, the govt. Forecast outlays
on infrastructure (power, roads and brides, railways, ports, telecommunication ,airport
water and gas supply and urban development) are expected to be around US$300
billion. In addition, affordable housing and consumer finance is readily available from

41
local financial institutions and this is expected to increase the demand for housing.
Disbursements for housing finance form banking and housing finance institutions are in
the region of about US$1 billion annually and growing at a CAGR OF 30% .These
enormous housing/construction and infrastructure investment suggest that the demand
for steel products in the domestic market is expected to grow further.

The company is engaged in the steel business, which in context of Accounting

standard 17 issued by the Institute of Chartered Accountants of India is considered the
only business segment. The Overall operational performance of the company has been
much satisfactory during the year. The plants have operated optimally during the year
and there were no major break downs or shutdowns brief performance is given below:

Steel Authority of India Limited

Company Overview Steel Authority of India Limited (SAIL) is the leading steel-making
company in India. It is a fully integrated iron and steel maker, producing both basic and
special steels for domestic construction, engineering, power, railway, automotive and
defence industries and for sale in export markets. Ranked amongst the top ten public
sector companies in India in terms of turnover, SAIL manufactures and sells a broad
range of steel products, including hot and cold rolled sheets and coils, galvanised
sheets, electrical sheets, structurals, railway products, plates, bars and rods, stainless
steel and other alloy steels. SAIL produces iron and steel at five integrated plants and
three special steel plants, located principally in the eastern and central regions of India
and situated close to domestic sources of raw materials, including the Company's iron
ore, limestone and dolomite mines. The company has the distinction of being India’s
largest producer of iron ore and of having the country’s second largest mines network.
This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone,
and dolomite which are inputs for steel making.

42
Almost 88 per cent of its revenues come from saleable steel. Rest is contributed by
alloy and special steel plants and primary products viz. ingots, pig iron, scrap,
chemicals.

Lease Year-Wise

3000

2500

2000
year value(lak.)
VALUE(LAKS)

2005-
1500
06 1325
1000
2006-
07 2693
500 2007-
08 2707
0 cagr(%) 26.89
2005-06 2006-07 2007-08

Analysis
There has been a tremendous turnaround in the performance of the company .One of
the contributor to this has been the portion of fixed assets been financed through
leasing. This can be seen by the amt. being almost more than doubled in the past 3
years. The companies’ outlook seems strong enough to build upon this factor. Further
top add to the massive capex plan of the company of around 4000 crores being
financed in the nearby future having a realization in 3 years down the line may again
see the pumping in of financing opted through lease method.

43
 20 2005-06 2006-07 2007-08
18 Lease/T.Asse 7.393973 14.6494 17.335
16 Int./lease 3.376116 4.678 6.442
14
LEASE/T ASSET

12
10
8
6
4
2
0
2005-06 2006-07 2007-08

4
INT/LEASE

0
2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8

TATA STEEL

Company Overview: Tata Steel is the largest private sector steel producing company
in India. It manufactures steel through the blast furnace or basic oxygen furnace route.
Its other businesses are grouped organizationally under the following divisions:
Bearings, Ferro Alloys and Minerals, Rings and Agrico, Tata Agrico, Tata Growth Shop,
Tubes and Wires. Tata Steel ventured into steel retail with India's first organised steel
retail store in Kolkata in 2005, christened `Steeljunction'. Tata Steel acquired Europe's
second largest steel producer, Corus in April 2007 for USD 13.8 billion. This acquisition
makes Tata Steel the world's fifth largest steel producer. With the acquisition of Corus,
the global steel capacity of Tata Steel, including Natsteel and Millennium Steel will

44
increase to 28 million tonnes. Through investments in Corus, Millennium Steel
(renamed Tata Steel Thailand) and NatSteel Asia, Singapore, Tata Steel has created a
manufacturing and marketing network in Europe, South East Asia and the Pacific-rim
countries. Corus, which manufactured 18.3 MT of steel in 2006, has operations in the
UK, the Netherlands, Germany, France, Norway and Belgium. Tata Steel (Thailand) is
the largest producer of long steel products in Thailand, with a manufacturing capacity of
1.7 MT. NatSteel Asia produces about 2 MT of steel products annually across its
regional operations in seven countries. Tata Steel is one of the few steel companies in
the world that is Economic Value Added (EVA) positive.

India is the seventh largest steel producer in the world and among the fastest
growing steel producers globally. India is one of the best countries to produce steel at a
competitive cost by virtue of availability of key raw materials viz. iron-ore, coal (to some
extent) and skilled labour. Steel consumption in India is likely to increase at a rapid pace
in the future due to large investments planned in infrastructure development, increased
urbanisation and growth in key steel consuming sectors viz. automotive, construction,
capital goods and other manufacturing sectors.After successful completion of the 1
million tonne steel expansion in Jamshedpur, the Company is currently expanding its
crude steel making capacity from 5 million tonnes to 6.8 million tonnes which will be
commissioned by June 2008.
The current expansion will enhance the Company’s capacity to produce billets
and slabs by 1.5 million tonnes and 0.3 million tonnes respectively which will be rolled
intofinished products in various finishing mills within the fold of the Company. The
project cost is estimated at Rs. 4,550 crores. To leverage the potential of Jamshedpur
further, the Company is planning to expand its crude steel production capacity from 6.8
million tonnes to 9.7 million tonnes by 2010. This expansion is likely to be cost
competitive (both in terms of capital cost and operating cost) since the Company is
planning to upgrade the capacity of its existing blast furnaces and other facilities. Aspart
of this expansion, the Company will install a new Thin Slab Caster Rolling (TSCR)
facility in Jamshedpur, which will increase Flat Products capacity by 2.9 million tonnes.
The project cost is estimated at around Rs. 9,100 crores.

45
Year-Wise Lease

8000

7000
year value(lak.)
6000
2005-06 3362
5000
VALUE(LACS)

4000 2006-07 5906

3000
2007-08 7057
2000

1000 cagr(%) 28.04

0
2005-06 2006-07 2007-08

Analysis
The Company is planning to set up a 6 million tonne integrated steel project at
Kalinganagar in the state of Orissa. This project will be executed in two phases of 3
million tonnes each, with the first phase to be commissioned by 2010. The Company
has placed orders for major equipments viz. Blast Furnace and Steel Melting Shop and
is in the process of completing land acquisition and rehabilitation of families residing on
the land. The Company has made an application for fresh The Company is planning to
set up a 6 million tonne integrated steel project at Kalinganagar in the state of Orissa.
This projectwill be executed in two phases of 3 million tonnes each, with the first phase
to be commissioned by 2010.

46
 60

50

40
2005-06 2006-07 2007-08
LEASE/T ASSET

Lease/T.Asset 27.39027 40.40501 48.556

30
Int./lease 1.531747 2.5897 4.331
20

10

0
2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8

5
4 .5
4
3 .5
3
INT/LEASE

2 .5
2
1 .5
1
0 .5
0
2005-06 2006-07 2007-08

47
 JINDAL STEEL &POWER Ltd.

Company Overview: Jindal Steel & Power Limited (JSPL), part of the US $ 8 billion
Jindal Organisation, has business interests in steel production, steel products, power
generation, mining, sponge iron, Ferro chrome and heavy machinery. An enterprising
spirit and ability to discern long-range trends have been the driving forces behind
JSPL’s remarkable growth. Along the way, JSPL has consistently tapped new
opportunities by increasing production capacity, diversifying investments, and
leveraging the core capabilities to advance into new businesses. And that has prepared
the company for growth today and tomorrow. Excelling the level of steel making, JSPL
has exceeded the production capacity of 2.90 MTPA with its plant at Raigarh,
Chhattisgarh. Upgrading its existing facility at Raigarh and by commissioning of
additional facilities in Jharkhand and Orissa, JSPL is encompassing the future
production capacity of steel that will rise by 12 MTPA in coming years. JSPL’s sinter
plant, blast furnaces (1681m and 351m), coke oven, state-of-theart Steel Melting Shop
with electric arc furnace, ladle refining, vacuum degassing and continuous casting bears
testimony to its promise of providing its customers with international quality steel. JSPL
has a 340 MW power generation facility In Raigarh based on waste heat recovery from
rotary kilns, washery rejects and coal fines to meet the
captive requirements as well as supply to the State Electricity Boards of Chhattisgarh.
JSPL have expansion plans of expanding the power generation facility to 600 MW.

48
Year-Wise

3000

2500

2000 value
VALUE(LAKS)

year (lak.)
1500
2005-06 1106
1000 2006-07 1485
2007-08 2599
500
cagr(%) 32.95
0
2005-06 2006-07 2007-08

The company’s robust growth has seen an increase the leasehold items from FY 05-07.
The captive capacity and underutilization which was hampering the companies future
plan has been taken care by its approach of reducing its capex and straying more stress
on utilising its operating costs. An extent of it has been achieved by utilising more of
leasing agreements as compared to what it was doing on HP basis.

41

40

39
LEASE/T ASSET

38
2005-06 2006-07 2007-08
37 Lease/T.Asset 36.50767 37.556 40.48608
Int./lease 2.170655 2.2045 2.34084
36

35

34
2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7- 0 8

49
 2.4

2 .35

2.3

2 .25
INT/LEASE

2.2

2 .15

2.1

2 .05
20 05 - 06 20 06 - 07 2 00 7- 08

JINDAL STAINLESS

Company Overview: Jindal Stainless is a ISO: 9001 & ISO: 14001 company is the
flagship company of the Jindal Organization. The company today, has come a long way
from a single factory establishment, started in 1970. As the numero uno it has taken on
the task of making stainless steel a part of everybody's life by taking a 360 degrees
approach from production of raw materials to supply of architecture and lifestyle related
products. Jindal Stainless Limited manufactures Continuous Cast Slabs & Blooms, Hot
Rolled Stainless Steel coils, Hot Rolled Annealed Pickled coils, Hot Rolled Annealed
Pickled Plates, cold Rolled Stainless Steel coils, Chequered plates, Blade Steel,
Customized products for crucial applications like nuclear applications and applications
in turbines. The application of product range of the company is in infrastructure and
industries. Besides Indian Railways, bus bodies, showrooms and building complexes in
the country, Jindal Stainless is also providing its stainless steel for car exhaust systems
and auto gas cylinders, Jindal Stainless has developed ferritic grade stainless steel
which is being supplied to the Indian Mint and also mints in the global market.

50
Architecture, building and construction, Automotive, Railway and Transport sector and
Designer-wares are major users of stainless steel.

Year- Wise Approach

450

400

350

300
year value(lak.)
VALUE(LAKS)

2005-06 125
250
2006-07 300
200 2007-08 395
150 cagr(%) 46.74
100

50

0
2005-06 2006-07 2007-08

Analysis
With more focus on providing “value-added” steel products, the company has increased
its units as compared to increasing its production vis-à-vis capacity. For this extensive
contracts for land lease in particular has been entered so that future cost of production
can be increased substantially. Although the initial margins for the company will be
lower but as compared to its future generation plan, these contractual payments are
sure to encash on the realizing front to push up its top line

51
 0.1
0.09
0.08
0.07
LEASE/T ASSET

0.06
0.05
2005-06 2006-07 2007-08
0.04
Lease/T.Asset 0.052448 0.085752 0.088154
0.03
Int./lease 1.098472 1.572973 1.994
0.02
0.01
0
2005-06 2006-07 2007-08

2.5

2
INT/LEASE

1.5

0.5

0
2005-06 2006-07 2007-08

52
 ISPAT INDUSRIES LIMITED

Company Overview:

Ispat Industries Limited (IIL) is one of the leading integrated steel makers and the
largest private sector producer of hot rolled coils in India. Set up as Nippon Denro Ispat
Limited in 1985 by founding Chairman Mr M L Mittal, IIL has steadily grown into a Rs
7,000-crore company, assuming its position as flagship of the reputed Ispat Group. A
corporate powerhouse with operations in iron, steel, mining, energy and infrastructure,
the Group today figures among the top 20 business houses in the country. With
investments of over US $2 billion, IIL is the seventh largest Indian private sector
company in terms of fixed assets

Year –Wise lease

53
 900

800

700
600 year value(lak.)
VALUE(LAKS)

500 2005-06 56
400
2006-07 66
2007-08 770
300
cagr(%) 139.57
200

100

0
2005-06 2006-07 2007-08

Analysis

The corporate plan being chalked out can be popularly owed to the feasibility that
leasing contracts are providing as an advantageous in building up high scale capital
intensive units.3 major plans being drafted have led to en substantial increase in the
companies opting for leasing contracts. Finally, the export pressure being crapped in
through government policies can turn out as a calculated risk which the ompany has
taken to meet its utilisation plans.

54
 10
9
8
7
LEASE/T ASSET

6 2005-06 2006-07 2007-08

5 Lease/T.Asset 0.452964 0.578491 8.892482
4 Int./lease 8.007765 8.37935 10.443
3
2
1
0
2005-06 2006-07 2007-08

12

10

8
INT/LEASE

0
2 0 05 -0 6 20 06 -07 2 00 7-08

Lease Finance Pattern Of Leasing Company’s(LESSOR)

CHOLAMANDALAM
(Amounts in lacs)

55
 Lease

800

700

600
2005 7.43
500 2006 83.23
400
2007 190.9
2008 683.58
300

200

100

0
2005 2006 2007 2008

Analysis
The up lift of the lease industry is incorporated by the rise in the lease graph above
showing the bar height are getting taller and taller from 2004 to 2007 it has shown
handsome growth in the business of cholamandalam financials. Cholamandalam
finance had taken the advantage of its dominant market share, which support them to
create the demand as per their convenient. Other Big fishes are also the trend setter of
Lease market. It will be going to reach a remarkable height in the Indian loan and
advances sector. Earlier Cholamandalam was into Hire purchase more but the current
scenario of the market side is pretending bowed towards leasing system as the demand
from the corporate side is increasing.
Development in the Real Estate, Mall culture and Retail outlays in India
increases the avenues for this sector to grow which will play complementary and
supplementary both.

M & M FINANCIAL
(Amount in Lacs)

56
 lease

2500

2000 2005 1569.63

2006 1239.67
1500 2007 1627.01
2008 2271.36
1000

500

0
2005 2006 2007 2008

Analysis
Mahindara & Mahindra financials, a Lease and Hire Purchase company which show a
gentle growth in the last four years which is the refraction of the adoption of lease
business by the corporate rather then hire purchase due to n numbers of factors
Booming in the manufacturing industries and other industries where high amount are
blocked with Fixed Assets i.e. capital intensive industries. In case of small retailers hire
purchase is applicable but when it comes into big wholesalers even they prefer Lease
only. The booming economy with PO’ mania will push the leasing to leave its footprints
in the history of landmarks.

SREI INFRASTRUCTURE
(Amount in Lacs)

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 Lease

200

180

160

140

120

100

80 2005 89.88
60 2006 134.54
40 2007 127.41
20 2008 187.7
0

Analysis 2005 2006 2007 2008

Being the major contributor in the infrastructure industry, the company has leased the
maximum amount of land to the companies in its business. With the infrastructure
industry growing at a rate of 12-14% the potential in the lease business is highly
immense. The steady business in this practice of contract is a indicator that lease forms
a integral part for a infrastructure developers owing to the rapid growth in the economy
with the fundamentals looking strong there is no doubt that the increase in the leasing
contracts will move below the current level of realization.

SUNDARAM FINANCE
(Amount in Lacs)

58
 Lease

2500

2000

1500
2005 1109.37
2006 1159.55
1000 2007 2058.34
2008 2330.04
500

0
2005 2006 2007 2008

Analysis
The company has been one of the dominant players in this industry. The company
provides lease majority being for the equipments required and termed as capital
intensive. There has been a constant growth being observed in its business being
executed. The factor which needs to be considered is the amount of business which the
company has been able to generate through office equipments being leased. The
business doubling in 4 years gives the taste which is being formed by the corporates.

CONSOLIDATED LEASING PATTERN OF LEASING

COMPANIES
(Amount in Lacs)

59
ANALYSIS

The above graphs are showing clearly that the trend of financing corporate through
leasing method is increasing Year on Year basis at industry level and individual
company level both.

Consolidated movement towards leasing of steel industry

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Year Amount
2005-06 5974
2006-07 10450
2007-08 13528

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 India is a growing economy with large pool of FDI’s. India is already a leading
service render and also in the commanding que in manufacturing sector, after china in
Asian market. Expansion of manufacturing sector needs huge investments in acquiring
fixed assets meant for long-term. Here, comes the role of some financial innovations
like Leasing and Hire purchase.

Leasing is a contract between the owner of an asset (the lessor) and its user
(lessee) for the right to use the assets during a specified period in return for a mutually
agreed periodic payments (the lease rentals).Steel industry requires huge amount of
money to acquire fixed assets (Machinery, Equipments, lands, etc.) to run, even start
the business, So, leasing emerged as a buoyant remedies to rid these sort of barrier
which pulls back the industry in general. Specially, if a steel co. requires a special
machine for a project. In such case, it would be more cost effective to lease the
machine for the duration of project instead of purchasing it. Leasing is also tax-efficient,
as it is deduction of depreciation from its taxable income. Off lately, it is being observed
that the corporate sector prefers lease than Hire Purchase, specially, in manufacturing
sector. There, are several examples in the market like – Tata steel, Bhushan steel, Oil
Refineries, Hardware industries, Aviation industry and many more.

In Retail sector, still higher purchase is popular, where, it comes to purchase of

small items such as Household and small office environment but, when it comes into
corporate taste, Lease is preferred as for large income segment steel industry- a capital
intensive industry players, prefer to play in economies of scale due to pressured
operating profitability. The uphand industries are growing as, per capita income is also
increasing.

Bhushan steel, the company has got three plants running successfully at
Sahibabad, Khopoli and Dhenkanal. The setting up of all these plants involved high
capital, where Bhushan steel opted to go for leasing system, when it came to acquisition
of land, heavy machinery and equipments. Now, the company is expanding the need for
land, building, machinery and even raw material procurement is increasing. Such, steps

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will increase in near future also. Thus, the affect, of leasing and its tax implication has
been a major cause for maintaining such rapid growth.

The growing popularity being seen in the major steel companies increasing their asset
financing by entering into more of leasing contracts highlights the cost advantage which
the company is benefiting from. The open market where the features, flexibility & net
value or cost advantage derives the value of the contract being entered into is the key
for successfully not only increasing but also maintaining an healthy income for the
business. “Leasing “, no doubt is the next buzz for successfully keeping down the cost
of financing the assets.

RESEARCH FINDINGS

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There has been a major consideration for the tax advantage and the time period for
which the leasing or hire purchase is being considered. Further, the formalities and the
mode of payment to settle the contract for its renewal as well as for the final expiration
of the contract. To add to it one needs a major outlook towards the future increase in
costs and the input cost of the various assets for which the contract is seeked for. IT
industry to Real Estate industry, the integral affect on the financial structure and the cost
of financing these assets is a major concern in such kind of inflationary scenario.

There are other considerations which have also come to highlight. Once an
agreement is being entered into for a particular asset it can’t be simultaneously being
financed by entering into the contract of another nature. These implications are some
loopholes in the practice of the leasing or the hire purchase being entered into.
Submission of documents, in discrepancies in the filing of documents, authentication of
genuine information and above all the practice for successfully abiding these contracts
needs to give more stress.

The failure to meet the lease payment may be the single most factor that the
company worry about, but in comparison to the tax shelter and the settlement of dues is
what making it preferable medium to exercise. On the other hand, hire purchase is
loosing its popularity as it drastically affects the bottom line of the company in its initial
phases. Even from the perspective of share holders this implied Effect on their earning
in the initial stages of assts being financed its single most deterrent factor. Thus, to
conclude leasing in its tax implication, lessor time and formalities consuming is the
preferred choice for corporate to choose from, in the prevailing economic scenario

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 Recommendations

The shift in increasing number of leasing contracts being used for financing
leasing assets, is a clear indication of it becoming a preferred mean to finance an
asset. Hire Purchase on the other hand is more confined to small scale business
as well for service industry to be particular. Although leasing is catching up but
what still remains the dark side of the picture, is the realization of incurring long
term benefit from leasing. One of the major boosters for such an increase has
been the cost of assets been increased dramatically and second is the time
constraint to effectively reduces the tax liability.

Corporate specifically in the capital intensive industries can gain by entering

into leasing contracts as compared to hire purchase contract. Since the
expenditure on the lease contract is treated as a business expense while the same
for hire purchase account as a capital expenditure, the realization of the cost
cannot be realized throughout the period of contract in the case of hire purchase.
This not only makes the bottom- line look negative but also makes the financing a
determinant factor in increasing the overall cost of capital higher. In order to have
the tax shelter till the asset is being financed, is another important benefit being
provided by exercising lease financing.

Undoubtedly, lease financing is catching up but now is the time for the companies
providing such financial solutions as well as for takers in the industry to realize its
true worth. Major steel companies like Tata steel, SAIL, JSPL, Jindal stainless &
ispat industries whose products form the backward integral part of cement industry,
automotive industry & real estate industry can look out steel industry as an
example which has successfully adopted this method for cutting down its input cost
dramatically. Further the companies in the business of lease & hire-purchase can
segment their target clientele and bring more tax friendly; less formalized and
better secured flexible contract solutions to capture on the market sentiments.

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 Finally, more efforts need to be put in to make the corporate aware of the
advantages of entering into a leasing contract highlighting its tax shelter structure & also
the liquidity which it provides which is further benefited by reduction in the overall cost of
capital. The trend being followed by means of analyzing the leasing segment growth of
the companies in this very business along with steel as an example of success for
capital intensive industry can undoubtedly bring about more transparency & efficiency in
the assets are being financed.

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 BIBLIOGRAPHY

• Religare Enterprises Limited

• India Infoliine

• Money Control

• http://www.belkcollege.uncc.edu/resources/pdfs/Development%20of
%20public%20Schools%208-14-2006.pdf

• http://www.ncleg.net/gascripts/BillLookUp/BillLookUp.pl?
Session=2005&BillID=s2009

• http://www.dgs.state.va.us/PPEA/tabid/62/Default.aspx

• http://www.schoolfacilities.com/_coreModules/content/contentDisplay.aspx?
contentID= 2677

• http://www.moga.mo.gov/statutes/C100-199/1660000300.HTM

• http://www.lisc.org/content/publications/detail/811/

• http://www.mackinac.org/article.aspx?ID=4911

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