LEASE,HIRE PURCHASE,AMERICAN DEPOSITORY RECEIPT AND GLOBAL DEPOSITORY RECEIPT SPL REF., WIT FINANCIAL MANAGEMENT BY I M PANDEY

1. Lease, hire purchase, ADR & GDR
Ponmuthu s
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2. 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.PONMUTHU S2

3. Types of Leases
1. Operating Lease
2. Financial Lease
3. Sale-and-lease-back
PONMUTHU S3

4. 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 S4

5. 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.
PONMUTHU S5

6. 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.
PONMUTHU S6

7. 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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8. Commonly Used Lease Terminology
1. Leveraged Lease
2. Cross-border lease
3. Closed and open ended lease
4. Direct lease
5. Master lease
6. Percentage lease
7. Wet and dry lease
8. Net net net lease
9. Update lease
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9. Myths about Leasing
 Leasing Provides 100% Financing
 Leasing Provides Off-the-Balance-Sheet
Financing
 Leasing Improves Performance
 Leasing Avoids Control of Capital Spending
PONMUTHU S9

10. Advantages of Leasing
1. Convenience and Flexibility
2. Shifting of Risk of Obsolescence
3. Maintenance and Specialized Services
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11. Evaluating a Lease
 Equivalent Loan Method
 Net Advantage of a Lease Method
 IRR Approach
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12. 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.
PONMUTHU S12

13. 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.
PONMUTHU S13

14. 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
PONMUTHU S14

15. Difference between Leasing and Hire
Purchase Financing
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16. 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.
PONMUTHU S16

17. 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.
PONMUTHU S17

18. 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
PONMUTHU S18

19. 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 LawsPONMUTHU S19

20. 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
PONMUTHU S20

21. THANK YOU
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PONMUTHU S21