LEASING

Presented By-
AHMED GULZAR
Roll No.- 17
MBA 4th Sem
LEASING
 The transfer of Property Act, defines a lease as a
transaction in which a party owning the asset
provides the asset for use over a certain period of
time to another for consideration of either in the
form of periodic rent or in the form of down
payment.
 In leasing, the lesser retains the ownership of the
asset while the leasee has possession and use of the
asset over a certain period of time.
 At the end of the leasing period, the asset reverts
back to the lessor unless there is a provision for the
renewal of the contract.
 Lessee is the receiver of the services or the assets
under the lease contract.
 Lessor is the owner of the asset.
ESSENTIAL ELEMENTS OF LEASING

 Parties to the contract-

 Essentially there are two parties to the contract
namely, the owner(lessor) and the user(lessee).
 The lessor as well as lessee may be individual, joint
stock companies, partnership, financial institutions.
 There may be lease broker, who act as a
intermediary in arranging the lease deal.
Assets-
 The asset under a lease contract includes-
 Automobiles
 Plant and Machinery
 Equipment
 Land and Building
 Factory
 A running business
 Aircraft, ships etc.
Ownership separated from user-
 During the lease tenure, ownership of the assets
vests with the lessor and its use is allowed to the
lessee.
 On the expiry of the tenure the assets reverts to the
lessor.
Terms of Lease-
 It is the period for which the agreement of lease
remains in operation.
 Every lease should have a definite period otherwise
it will be legally inoperative.
 The lease period may be sometimes spread stretch
over the entire life of the asset or a period shorter
than the useful life of the assets.
Lease Rental-
 The consideration which the lessee pays to the lessor
for the lease transaction is the lease rental.
 It is so structured as to compensate the lessor for the
:
• investment made in the asset ,
• the interest on investment ,
• repairs borne by the lessor ,and
• servicing charges over the lease period.
Mode of terminating lease-

 The lease is terminated at the end of the lease period and

various courses are possible , namely :
 lease is renewed on perpetual basis or for a definite
period
 the asset reverts to the lessor
 the asset reverts to the lessor and the lessor sells it to the
other party
 the lessor sells the asset to the lessee
 The parties may mutually agree to , and choose , any of
the aforesaid alternatives at the beginning of the lease
term.
STEPS IN LEASING TRANSECTION
CLASSIFICATION OF LEASING
1. FINANCE LEASE-
 Finance lease or capital lease is an a commercial
arrangement where:
 The lessee (customer or borrower) will select an asset
(equipment, vehicle, software);
 The lessor (finance company) will purchase that asset;
 The lessee will have use of that asset during the
lease;
 The lessee will pay a series of rentals or installments
for the use of that asset;
 The lessor will recover a large part or all of the cost of the
asset plus earn interest from the rentals paid by the lessee;
 The lessee has the option to acquire ownership of the asset
(e.g. paying the last rental, or bargain option purchase
price);
 The finance company is the legal owner of the asset during
duration of the lease.
 Types of assets included under such lease are :
 Ships
 Aircrafts
 Railway Wagons
 Land
 Building
 Heavy Machinery
 Diesel Generating Sets etc
OPERATING LEASE
 Operating lease is a contract wherein the owner,
called the Lessor, permits the user, called the Lessee,
to use of an asset for a particular period which is
shorter than the economic life of the asset without
any transfer of ownership rights. The Lessor gives
the right to the Lessee in return for regular
payments for an agreed period of time.
 Operating lease is generally given for :
 Computers
 Office equipments
 Automobiles
 Trucks
 Telephones etc
SALES AND LEASE BACK LEASING
 It is an indirect form of leasing .
 The owner of an equipment / asset sells it to a leasing
company (lessor) which leases it back to the owner
(lessee)
 Example:
 The sale and lease back of safe deposits vaults by
banks under which banks sell them in their custody to a
leasing company at a market price substantially higher
than the book value .
 The leasing company in turn offer these lockers on a
long – term basis to the bank .
 The bank sub- leases the lockers to its customer
LEVEREGED LEASE
 A lease agreement that is partially financed by the lessor
through a third-party financial institution. In a leveraged
lease, the lending company holds the title to the leased
asset, while the lessor creates the agreement with the
lessee and collects the payment. The payments are then
passed on to the lender.
 In a leveraged lease, if the lessee stops making payments
to the lessor, then the lessor stops making payments to the
financial institution (lender). This allows the lender to
repossess the property.
DOMESTIC LEASE
 When all the parties of the lease agreement reside
in the same country, it is called domestic lease.

INTERNATIONAL LEASE
 When all the parties of the lease agreement reside
in the different countries, it is called international
lease.
International lease of further of two types:
a) Import lease:
 When lessor and lessee reside in same country and

equipment supplier stays in different country, the

lease arrangement is called import lease.
b) Cross border lease:
 When the lessor and lessee are residing in two
different countries and no matter where the
equipment supplier stays, the lease is called cross
border lease.
ADVANTAGES OF LEASE
FINANCING:
a. To Lessor:
 Assured Regular Income
 Preservation of Ownership
 Benefit of Tax
 High Profitability
 High Potentiality of Growth
 Recovery of Investment
b. To Lessee:
 Use of Capital Goods

 Tax Benefits

 Cheaper

 Technical Assistance

 Inflation Friendly

 Ownership
DISADVANTAGES OF LEASE
FINANCING:
a. To Lessor:
 Unprofitable in Case of Inflation
 Double Taxation
 Greater Chance of Damage of Asset
b. To Lessee:
 Compulsion
 Ownership
 Understatement of Asset