Management of Financial Services

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Management of Financial Services:

Management of Financial Services Design and delivery of advice and financial products to individuals and business within the areas of banking and related institutions, personal financial planning, investment, real assets, insurance and so on. A wide variety of fund/assets-based and non-fund based/advisory services are provided mainly by the non-banking finance companies (NBFCs)

PowerPoint Presentation:

Direct: Financial Market Investment in stock by purchases Shares debenture’s Indirect: Financial Intermediaries Commercial banks, Mutual Fund Companies, Pension Fund, Companies, Insurance Companies, Institutional Investors ect.

Nature and Scope of Service provided:

Nature and Scope of Service provided Asset finance, Consumer finance, Investment and Loan Companies and Factoring and Forfaiting Organizations Housing Finance Companies Merchant and Banking Organizations, stock brocking Firms, Depositories, Credit rating agencies and Venture Capital Funds (SEBI)

Types of Financial Services:

Types of Financial Services Fee based & Fund Based Financial Service Fee based: Issue management Merchant Banker lead managers Activities/procedures Pre-issue and post-issue obligation other Requirement Corporate Restructuring Stock Broking, Depositories, custodial, services Credit Rating

PowerPoint Presentation:

Fund based: Leasing Factoring and Forfaiting Bill discounting Housing Finance Insurance service and products Venture capital financing

Regulatory work for financial services:

Regulatory work for financial services RBI Act Frame Work: NBI & FIs RBI NBFCs Acceptance Deposits Directions RBI NBFCs-D Prudential Norms Direction NBFCs Auditors Reports (RBI) Directions Asset Liability Management System Credit Information Companies Acts

RBI Act Frame Work: NBI & FIs :

RBI Act Frame Work: NBI & FIs NBI-Deposits: Amount received Form Banks, Development finance/State Financial Corporations or any other financial institution Ordinary course of business, by way of security deposit, dealership deposit, earnest money, advance against order for goods/ properties/ services Individual/firm/association related to money lending By way of subscription in respect of a chit Loans from Mutual funds

Financial Institutions:

Financial Institutions Financing by way of loans, advance, and so on, any activity except its own Acquisition of shares/ stock/ bonds/ debentures/securities Hire-purchase Any class of insurance, stock broking etc Chit funds Collection of money by way of subscription/sale of units or other instruments/ any other manner and their disbursement

Non-Banking Financial Company:

Non-Banking Financial Company Financial institution that is a company A non-banking intuition that is a company whose principal business is the receiving of deposits under any scheme/ arrangement/ in any other manner or lending in any manner Such other non-banking institution/ class of institution as the RBI may specify, with the prior approval of the Government and by notification in the official gazette.

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Registration and Net Owned fund (NOFs): Must obtained certificate, (NOFs) Rs.25 Lakh or such other amount not exceeding Rs.200 Lakh Maintenance of Assets Reserve fund Power of Regulation/prohibition

Leasing Concept:

Leasing Concept Leasing is a process by which a firm can obtain the use of a certain fixed asset for which it must make a series of contractual periodic tax-deductible payment (lease rentals) Lessee: possession and use of the asset on payment Lessor: (Financier) is the nominal owner of the asset as the possession and economic use of the equipment vests in the lessee

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Theoretical and Regulatory Framework of Leasing Theoretical/Conceptual Framework Regulatory Framework Concept Clasification Profile of Leasing in India Signification And Limitations Contract Act Other Acts/Laws: RBI Directions Motor Vehicle Act Lease Documentation And Agreement

Essential elements:

Essential elements Parties to the contracts: Lessor and lessee and Lease financier Merchant Banker, banks Asset Ownership Separated from User Term of loan Lease Rentals Modes of terminating lease

Classification :

Classification Finance lease and operating lease Sales and lease back and direct lease Single investor lease and leveraged lease Domestic lease and international lease Financial lease :is for terms that approach the economic life of the asset; the total payment Over the term of the lease are greater than the lessor’s initial cost of the leased asset Amortize the capital outlay of the lessor and leave some profit

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In such leases, the lessor is only a financier and is usually not interested in the assets. Also called as ‘ full payout leases’ Lessor enable recover his investment derive a profit in the lease Ships, Aircrafts, railway wagons, lands, buildings, heave machinery, diesel generatigs

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Operating Lease: is for a term shorter than the economic life of the asset generally the payment over the term of the lease is less than the lessor’s initial cost of the leased asset Lessor dose not transfer all the risks and rewards incidental to the ownership The cost of the asset in not fully amortized during the primary lease priod lessor provided services attached to the leased asset maintenance, repair and technical advice

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Operating Lease is also called service lease The rentals include cost for the ‘services’ provide The lessor does not depend on a single lessee for recover of his cost Computer, office equipment, automobiles, trucks, some other equipment, telephones

Sale and lease back and direct lease:

Sale and lease back and direct lease Sale and Lease Back: which bank sell them in their custody to a leasing company at a market price substantially higher than the book value. The leasing company in turn offers these lockers on a long-term basis to the bank. The bank sub-leases the lockers to its customers. Direct lease: the lessee, and the owner of the equipment are two different entities Bipartite:1) equipment supplier-cum-lessor 2) lessee and Tripartite: supplier, lessor and lessee

Single Investor Lease and Leveraged lease:

Single Investor Lease and Leveraged lease Single Investor: in the case of default in servicing the debt by the leasing company The lender is not entailed to payment from the lessee Leveraged Lease: Three parties 1. lessor (equity investor) 2. Lender and 3. lessee Lender (loan participant) Borrowing with full recourse to the lessee and without any recourse Mortgaged asset trustee who looks after the interest

Domestic lease and international lease:

Domestic lease and international lease Domestic lease : All parties to the agreement, equipment supplier, lessorand lessee, are domiciled in the same country International lease Import lease: lessor and lessee and domiciled , equipment supplier is located in different country Cross-Border: lessor and lessee are domiciled in different country :Risk factor 1. country risk: political, economic, tax and regulatory environment foreign countries concerned 2. currency risk: Payment to the supplier and lease rentals denominated in different country, variation in the exchange rate

Profile/Structure of Leasing in India:

Profile/Structure of Leasing in India Major Players: Six groups Independent Leasing companies Other Finance Companies Manufacturer-Lessors Financial Institutions In-house lessors Commercial Banks

SIGNIFICANCE/ADVANTAGES AND LIMITATIONS:

SIGNIFICANCE/ADVANTAGES AND LIMITATIONS Advantaged of Leasing: To the Lessee Financing of Capital Goods Additional source of Finance Less Costly Ownership Preserved Avoids Conditionality Flexibility in Structuring of Rentals Simplicity Tax Benefits

To the Lessor:

To the Lessor Full security Tax Benefit High profitability Trading on Equity High growth potential

Limitation of Leasing:

Limitation of Leasing Restrictions on Use of Equipment Limitations of Financial Lease Loss of Residual value Consequences of Default Understatement of lessee’s Asset Double sales-tax

Regulatory Framework:

Regulatory Framework Contract Act: General Provisions Contract Legal obligation lawful considerations Competent parties Free consent Not expressly Void Discharge of contracts

RBI NBFCS DIRECTIONS:

RBI NBFCS DIRECTIONS Motor vehicles Act Indian stamp act LEASE DOCUMENTATION AND AGREEMENT Purposes and Essential Requirements lease Approval Process Master lease and Supplemental Lease Agreements

PowerPoint Presentation:

Tripartite lease Agreement Guarantee Agreement Promissory Note Receipt of Goods Power of Attorney Collateral security/hypothecation Agreement

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Taxation Aspects of leasing Income Tax considerations Sales Tax

Income Tax Considerations:

Income Tax Considerations For lessor : Taxability of Lease Rentals, Deductibility of Expenses Depreciations Rent, rates, repairs and insurance of the leased asset where such expenditure is borne by the lessor Amortization of certain preliminary expenses, such as expenditure for preparation of project report, feasibility report, market survey and so on, legal charges for drafting/printing of memorandum of association and articles of association, registration expenses

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Public issue expenses other than on debentures and loans, subject to a maximum of 2.5 percent of the cost of the project/capital employed, allowable in 10 equal instalments Interest on borrowed capital Bad debts All expenses incurred in furtherance of trade/business Entertainment expenses subject to prescribed limits Travel expenses as per approved norms

PowerPoint Presentation:

For Lessee: Allow ability of Lease Rentals Deductibility of incidental Expenses Tax Planning Flexible Restructuring of lease Rentals Transfer of investment-related Unabsorbed Tax Shield

Sales Tax Aspects:

Sales Tax Aspects Purchase of equipment Lease Rentals Sale of Asset

Hire-Purchase:

Hire-Purchase Hire-purchase finance Legal Framework Sales of Goods Act Hire- Purchase Agreement Taxation Income Tax Sale Tax Interest Tax

The Act contains provisions for regulating:

The Act contains provisions for regulating The format/contents of the hire-purchase agreement Warrants and the conditions underlying the hire-purchase agreement Ceiling on hire-purchase charges Rights and obligations of the hire and the owner

PowerPoint Presentation:

Governed provisions of the Indian Contract Act Sales of Goods Act

Sales of Goods Act:

Sales of Goods Act Is a contract whereby the seller transfers/ agrees to transfer the property in the goods to the buyer for a price Contact of sales of goods Sales VS Bailment Sales VS Mortgage, pledge and Hypothecation Sale VS Hire-purchase Goods Destruction of goods Before Making of Contract

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Destruction of goods After the Agreement to Sell But Before Sale Document of Title to Goods Price Earnest money or Security Deposit Time Stipulations for Payment of Price Condition Warranties Doctrine of Caveat Emptor (Let the Buyer Beware)

PowerPoint Presentation:

Transfer of Property in Goods Performance of Contract Delivery of goods Right of an Unpaid Seller

Hire- Purchase Agreement:

Hire- Purchase Agreement Nature of Agreement Location Inspection Hire-Charges Repairs Alteration Termination Risk

PowerPoint Presentation:

Registration and Fees Indemnity clause Stamp Duty Schedule of equipment forming subject-matter of agreement Schedule of hire charges

Taxation Aspects:

Taxation Aspects Income Tax Assessment of Hire-purchaser (hirer) Tax shield on deprecation calculated cash purchase price Tax shield on consideration for hire (total charge for credit) consideration for hire: that is finance charge Finance charge deducted each year, No Method hirer choose one of the alternatives 1. level/equal distribution 2. sum-of-year digits method 3. rate of return method

PowerPoint Presentation:

Assessment of Owner (hire-vendor) Normal deduction (except deprecation are allowed while computing the taxable income Tax Planning in Hire-purchase: tax planning device in two ways: Net income (finance income less interest on borrowings by the hire-vendor) Hire-purchase as bridge between the lessor and the lessee

Sales-Tax Aspects :

Sales-Tax Aspects Hire-purchase as Sale- Demand to be sale liable to sale tax, no refund of sales tax on the unpaid installment Delivery VS Transfer of Property Taxable Event: only delivered taxable Taxable quantum: sale tax is related to the sale price States Entitled to impose Tax Rate of tax: rates undergo a change during the currency

PowerPoint Presentation:

Interest-Tax: the hire-purchase finance companies, total amount of interest earned less bad debts in the previous year @2 percent

Financial Evaluation from the point of view of Hirer (hire-purchaser):

Financial Evaluation from the point of view of Hirer (hire-purchaser) Hire-purchases exactly the opposite of that given to financing Lessor is entitled to claim depreciation and other deduction associated with the ownership of the equipment Lessee enjoys full deduction of lease rentals Hirer is entitled to claim depreciation and deduction for the finance charge (interest)

Decision-criterion:

Decision-criterion If the cost of hire-purchase is less than the cost of leasing, the hirer (purchases)should prefer the hire-purchase alternative Down payment Plus service charges Plus present value of hire purchase payments discounted by cost of debt ( Kd ) Minus present value of depreciation tax shield by cost of capital ( Kc ) Minus present value of net salvage value discounted by cost of capital ( Kc )

Cost of Leasing:

Cost of Leasing Lease management fee Plus present value of lease payment discounted by (Kd) Less present value of tax shield on lease payment and lease management fee discounted by (Kc) Plus present value of interest tax shield on hire purchase discounted by (Kc)

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