PONMUTHU S1

Lease, hire purchase, ADR & GDR

Ponmuthu s

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Lease Defined Lease is a contract under which a lessor,

the owner of the assets, gives right to use the asset to a lessee, the user of the assets, for an agreed period of time for a consideration called the lease rentals.

In up-fronted leases, more rentals are charged in the initial years and less in the later years of the contract. The opposite happens in back ended leases.

Primary lease provides for the recovery of the cost of the assets and profit through lease rentals during a period of about 4 or 5 years. It may be followed by a perpetual, secondary lease on nominal lease rentals.

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Types of Leases

1. Operating Lease2. Financial Lease3. Sale-and-lease-back

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Operating Lease Short-term, cancelable lease agreements

are called operating lease. Tourist renting a car, lease contracts for

computers, office equipment's and hotel rooms.

The Lessor is generally responsible for maintenance and insurance.

Risk of obsolescence remains with the lessor.

PONMUTHU S5

Financial Lease Long-term, non-cancelable lease contracts

are known as financial lease. Examples are plant, machinery, land,

building, ships and aircrafts. Repay the cost of the asset over the terms

of the lease–Capital or Full pay-out leases.

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Sale and Lease Back Sometimes, a user may sell an (existing)

asset owned by him to the lessor (leasing company) and lease it back from him. Such sale and lease back arrangements may provide substantial tax benefits.

In April 1989, Shipping Credit and Investment Corporation of India purchased Great Eastern Shipping Company bulk carrier, Jag Lata, for Rs 12.5 Cr and then leased it back to GESC on a 5 years lease, the rentals being Rs 28.13 Lakh per month. The ships WDV was Rs 2.5 Cr.

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Cash Flow Consequences of a Financial Lease Avoidance of the purchase price Loss of depreciation tax shield After–tax payments of lease rentals

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Commonly Used Lease Terminology1. Leveraged Lease2. Cross-border lease3. Closed and open ended lease4. Direct lease5. Master lease6. Percentage lease7. Wet and dry lease8. Net net net lease9. Update lease

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Myths about Leasing Leasing Provides 100% Financing Leasing Provides Off-the-Balance-Sheet

Financing Leasing Improves Performance Leasing Avoids Control of Capital Spending

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Advantages of Leasing

1. Convenience and Flexibility2. Shifting of Risk of Obsolescence3. Maintenance and Specialized Services

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Evaluating a Lease Equivalent Loan Method Net Advantage of a Lease Method IRR Approach

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Lease Benefits to Lessor and Lessee A lease can benefit both when their tax

rate differs. In fact in a lease, the lessee sells his

depreciation tax shield to the lessor. In the absence of taxes it is hard to believe

that leasing would be advantageous if the capital markets are reasonably well functioning.

Gain of both is loss to the government in form of taxes.

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Leasing Benefits Come from… Both, lessor and lessee, gain at

government’s expense because of the difference in their tax rates.

The government gains from the tax on lease rentals while it loses on depreciation and interest tax shields.

The implicit principal payments in a lease rental are shielded by depreciation, while interest deductions provide for implicit return on the lessee’s capital.

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Hire Purchase–Conditions The owner of the asset (the Hirer or the

manufacturer) gives the possession of the asset to the Hirer with an understanding that the Hirer will pay agreed installments over a specified period of time.

The ownership of the asset will transfer to the hirer on the payment of all installments.

The Hirer will have the option of terminating the agreement any time before the transfer of ownership of assets. ( Cancellable Lease)

Hire purchase financing

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Difference between Leasing and Hire Purchase Financing

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Installment Sale Installment Sale is a credit sale and the

legal ownership of the asset passes immediately to the buyer as soon as the agreement is made between the buyer and the seller.

Except for the timing of the transfer of ownership, installment sale and hire purchase are similar in nature.

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Evaluation of Hire Purchase Financing The hiree charges interest at a flat rate,

and he requires the hirer to pay equal installments at each period.

The sum-of-years-digit (SYD) method is the most commonly used methods for calculating interest over a period of time.

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American Depositary Receipt (ADR) Raising funds from American Markets NRI & foreign nationals can invest Normally traded like stocks in US stock

exchange Company has to deposit their shares in the

American bank Eg  JPMorgan Chase, Bank of America, Citi

bank, The Bank of New York Mellon They issue the ADR & where American

people can buy & sell them freely in normal DP account

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ADR Cont.., Indian companies to adopt US Accounting

Norms which is also called as GAAP(Generally accepted accounting principles)

Maintain accounting practices as per American Financial Year (Which starts in January and ends in December of any particular year),

Also follow variety of stringent standards as per American norms Indian company would have to follow two different set of rules simultaneously,

One to comply with the laws of Indian Companies Act,

And the other to comply with the American Laws

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Global Depositary Receipt (GDR) Same like ADR But raising fund from global market Indian companies prefer to get GDR due to

its global use for getting foreign investment for own business projects

GDR is negotiable instrument all over the world

(A) Bajaj Auto (B) Hindalco (C) ITC ( D) L&T (E) Ranbaxy Laboratories (F) SBI

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THANK YOU

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