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CHAPTER NO:- 1
Introduction to Banking Industry
Definition
Banking is "accepting, for the purpose of lending or investment of deposits of
money from the public, repayable on demand or otherwise and withdraw able by
cheques, draft, and order or otherwise."
Bank is defined as a person who carries on the business of banking. Banks also
perform certain activities which are ancillary to this business of accepting
deposits and lending. Since Banking involves dealing directly with money,
governments in most countries regulate this sector rather stringently.
Banking in India was defined under Section 5(A) as "any company which
transacts banking, business" and the purpose of banking business defined under
Section 5(B),"accepting deposits of money from public for the purpose of
lending or investing, repayable on demand through cheque/draft or otherwise".
In the process of doing the above-mentioned primary functions, they are also
permitted to do other types of business referred to as Utility Services for their
customers (Banking Regulation Act, 1949).
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History of Banks
Banking in India originated in the last decades of the 18th century.
The first banks were The General Bank of India which started in
1786, and the Bank of Hindustan, both of which are now defunct.
The oldest bank in existence in India is the State Bank of India,
which originated in the Bank of Calcutta in June 1806, which
almost immediately became the Bank of Bengal. This was one of
the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were
established under charters from the British East India Company.
For many years the Presidency banks acted as quasi-central banks,
as did their successors. The three banks merged in 1925 to form the
Imperial Bank of India, which, upon India's independence, became
the State Bank of India.
Indian merchants in Calcutta established the Union Bank in 1839,
but it failed in 1848 as a consequence of the economic crisis of
1848-49. The Allahabad Bank, established in 1865 and still
functioning today, is the oldest Joint Stock bank in India. It was not
the first though. That honor belongs to the Bank of Upper India,
which was established in 1863, and which survived until 1913,
when it failed, with some of its assets and liabilities being
transferred to the Alliance Bank of Simla.
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When the American Civil War stopped the supply of cotton to
Lancashire from the Confederate States, promoters opened banks to
finance trading in Indian cotton. With large exposure to speculative
ventures, most of the banks opened in India during that period
failed. The depositors lost money and lost interest in keeping
deposits with banks. Subsequently, banking in India remained the
exclusive domain of Europeans for next several decades until the
beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the
1860s. The Comptoire d'Escompte de Paris opened a branch in
Calcutta in 1860, and another in Bombay in 1862; branches in
Madras and Pondicherry, then a French colony, followed. HSBC
established itself in Bengal in 1869. Calcutta was the most active
trading port in India, mainly due to the trade of the British Empire,
and so became a banking center. The Bank of Bengal, which later
became the State Bank of India.
The first entirely Indian joint stock bank was the Oudh Commercial
Bank, established in 1881 in Faizabad. It failed in 1958. The next
was the Punjab National Bank, established in Lahore in 1895,
which has survived to the present and is now one of the largest
banks in India.
Around the turn of the 20th Century, the Indian economy was
passing through a relative period of stability. Around five decades
had elapsed since the Indian Mutiny, and the social, industrial and 3
other infrastructure had improved. Indians had established small
banks, most of which served particular ethnic and religious
communities.
The presidency banks dominated banking in India but there were
also some exchange banks and a number of Indian joint stock
banks. All these banks operated in different segments of the
economy. The exchange banks, mostly owned by Europeans,
concentrated on financing foreign trade. Indian joint stock banks
were generally undercapitalized and lacked the experience and
maturity to compete with the presidency and exchange banks.
The period between 1906 and 1911, saw the establishment of banks
inspired by the Swadeshi movement. The Swadeshi movement
inspired local businessmen and political figures to found banks of
and for the Indian community. A number of banks established then
have survived to the present such as Bank of India, Corporation
Bank, Indian Bank, Bank of Baroda, Canara Bank and Central
Bank of India.
The fervor of Swadeshi movement lead to establishing of many
private banks in Dakshina Kannada and Udupi district which were
unified earlier and known by the name South Canara ( South
Kanara ) district. Four nationalized banks started in this district and
also a leading private sector bank. Hence undivided Dakshina
Kannada district is known as "Cradle of Indian Banking".
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Pre-Independence
The banks in India were established by the British .The period
during the First World War (1914-1918) through the end of the
Second World War (1939-1945), and two years thereafter until the
independence of India were challenging for Indian banking. The
years of the First World War were turbulent, and it took its toll with
banks simply collapsing despite the Indian economy gaining
indirect boost due to war-related economic activities. At least 94
banks in India failed between 1913 and 1918
Post-independence
The partition of India in 1947 adversely impacted the economies of
Punjab and West Bengal, paralyzing banking activities for months.
India's independence marked the end of a regime of the Laissez-
faire for the Indian banking. The Government of India initiated
measures to play an active role in the economic life of the nation,
and the Industrial Policy Resolution adopted by the government in
1948 envisaged a mixed economy. This resulted into greater
involvement of the state in different segments of the economy
including banking and finance.
CHAPTER NO:- 2
INTRODUCTION OF LEASING
Leasing activity was initiated in India in year 1973. The first
leasing company of India named First Leasing Company Of India 5
Ltd was setup in that year by Farouk Irani with industrialist A C
Muthia. For several years this company remained only company in
the country until 20th Century Finance Corporation was setup – this
was around 1980. By 1981 the trickle started and Shetty Investment
and Finance, Jay Bharat Credit Investment, Motor and General
Finance and Sundaram Finance ect Joined the leasing game. The
last three names already involved with the hire purchase of
commercial Vehicles were looking of tax break and leasing seemed
to be the ideal choice.
The industry entered into the third stage in the growth phase in late
1982, when numerous financial institution and commercial banks
either started leasing or C plans to do so. ICICI was prominent
among financial institutions entered the industry in 1983 giving
boost to the concept of leasing. This was also the when the profit
performance of the two doyen companies. In the mean time
International Financial Corporation announced its decision to joint
the Forth leasing joint venture in India. To add to the lease boom,
the Finance Ministry announced stick measure for the
establishment of the investment companies on stock exchange
which made many investment companies to turn over light into the
leasing companies.
As per RBI record by 31st march 1986, there were 339 equipments
leasing companies in India whose assets leased totaled RS 2396
million. One can notice the surge in number from merely 2 in 1980 6
to 339 in 6 year. Subsequently swing in the leasing cycle have
always been associated with the capital market when ever the
capital market were more permissive leasing companies have
flocked the market. There has been appreciable only of first
generation entrepreneurs into leasing and in retrospect it is possible
to say that specialized leasing firm has done better than diversified
industrial group opening a leasing division.
Another significant phase in the development of Indian leasing was
the Dahotre Committees recommendation based on which RBI
formed guidelines on commercial banks funding to leasing
companies. The growth of leasing in India has distinctively been
assisted by funding form bans and financial institutions.
Banks themselves were allowed to offer facilities much later in
1994. However even to date commercial banking machinery has
not been able to gear up to make any remarkable difference to the
leasing scenario.
The post liberalization era has been witnessing the slow but sure
increase foreign investment into Indian leasing. Starting with G E
Capital entry, an increasing number of foreign owned financial firm
and banks are currently engaged or interested in leasing in India.
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CONCEPT OF LEASING
Lease financing denotes procurement of assets through lease. The
subject of leasing falls in the category of finance. Leasing has
grown as a big industry in the USA and UK and spread to other
countries during the present century. In India, the concept was
pioneered in 1973 when the First Leasing Company was set up in
Madras and the eighties have seen a rapid growth of this business.
Lease as a concept involves a contract whereby the ownership,
financing and risk taking of any equipment or asset are separated
and shared by two or more parties. Thus, the lessor may finance
and lessee may accept the risk through the use of it while a third
party may own it. Alternatively the lessor may finance and own it
while the lessee enjoys the use of it and bears the risk. There are
various combinations in which the above characteristics are shared
by the lessor and lessee.
MEANING OF LEASING
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 8
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.”
DEFINATION OF LEASING
Leasing is a process by which a firm can obtain the use of a certain
fixed assets for which it must pay a series of contractual, periodic,
tax deductible payments. The lessee is the receiver of the services
or the assets under the lease contract and the lessor is the owner of
the assets. The relationship between the tenant and the landlord is
called a tenancy, and can be for a fixed or an indefinite period of
time (called the term of the lease). The consideration for the lease is
called rent. Under normal circumstances, an owner of property is at
liberty to do what they want with their property, including destroys
it or hand over possession of the property to a tenant. However, if
the owner has surrendered possession to another (i.e. the tenant)
then any interference with the quiet enjoyment of the property by
the tenant in lawful possession is unlawful. Similar principles apply
to real property as well as to personal property, though the
terminology would be different. Similar principles apply to sub-
leasing, that is the leasing by a tenant in possession to a sub-tenant.
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The right to sub-lease can be expressly prohibited by the main
lease.
CHAPTER NO:- 3 Parties Of Lease
Lessors
According to Business Dictionary.com, the lessor is the one who
grants another party exclusive use or possession of his property for
a specific time period and under specific conditions, in return for
periodic payments.
Lessor means Owner or the title holder of the
leased asset or property. The lessor is also the lender and secured
party in case of capital leases and operating leases. In case
of leveraged leases, however, a third party (the lender) and not the
lessor holds the title. Lessor is the legal term applied to the owner
of the property being leased.
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1. Specialized leasing companies:
There are about 400-odd large companies which have an
organizational focus on leasing, and hence, are known as leasing
companies. Till recently, most of them were diversified financial
houses, offering several fund-based and non-fund based financial
services. However, recent SEBI rules on bifurcation of fund-based
and non-fund based activities have resulted into hiving-off of
merchant banking divisions of these entities. Most of these
companies also offer hire-purchase activities, and some of them
might have a consumer finance division as well.
2. Banks and bank-subsidiaries:
Till 1991, there were some ten bank subsidiaries active in leasing
and over-active in stock investing. The latter variety was ravaged in
the aftermath of the 1992 securities scam. In Feb.1994, the RBI
allowed banks to directly enter leasing. So long, only bank
subsidiaries were allowed to engage in leasing operations, which
was regarded by the RBI as a nonbanking activity. However, the
1994 Notification saw an essential thread of similarity between
financial leasing and traditional lending. Though State Bank of
India, Canara Bank etc has set up leasing activity, it is not currently
at a scale to make any difference on the leasing scenario. This is
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different from the rest of the World, where banks are front-runners
in leasing markets.
3. Specialized Financial institutions:
There is a wide variety of financial institutions at the Central as
well as the State level in India. Apart from the apex financial
institutions, viz., the Industrial Development Bank of India, the
Industrial Finance Corporation of India, and the ICICI, there are
several financing agencies devoted to specific causes, such as sick-
industries, tourism, agriculture, small industries, housing, shipping,
railways, roads, power, etc. In most States too, there are multiple
financing agencies for generic or focused cause.
4. One-off lessors:
Some of the companies engaged in some other business which
gives them huge taxable profits, have resorted to one-off leasing on
a casual basis to defer their taxes. These people are interested only
in leasing of high-depreciation items, preferably those entitled to
100% depreciation.
5. Manufacturer lessors:
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This part of the Lessor-industry is in highly under-grown form in
India, for simple reasons. Vendor leasing is a product of
competition in the product market. As competition forces the
manufacturer to add value to his sales, he finds the best way to sell
the product is to sell it without the buyer having to pay for it
instantly. Product markets so far for most durables were
oligopolistic, and good products used to sell even otherwise at a
premium. With the economy decisively moving towards market
orientation, competition has become inevitable, and competition
brings in its wake sales-aid tools. Hence, the potential for vendor
leasing is truly great. Presently, vendors of automobiles, consumer
durables, etc. have alliances or joint ventures with leasing
companies to offer lease finance against their products. However,
there is no devoted vendor leasing of the type popular in most of
the advanced markets, where a specific leasing company or leasing
program takes exclusive charge of a vendor's products.
Lessees
Lessee is the legal term for the party who will use or possess the
property being leased. The lessee is obligated to make periodic
payments of rent or lease charges and adhere to other conditions as
spelled out in the lease agreement. A lessee who can't make lease
payments or violates other lease conditions forfeits further use or
possession of the leased property.
a. Corporate customers with very high credit ratings: 13
These essentially look at leasing to leverage against assets which
are otherwise not bankable, or for pure junk financing.
b. Public sector undertakings:
This market has witnessed a very rate of growth in the past. With
budgetary grants to the PSUs coming to a virtual halt, there is an
increasing number of both centrally as well as State-owned entities
which have resorted to lease financing. Their requirements are
usually massive.
c. Mid-market companies:
The mid-market companies, that is, companies with reasonably
good creditworthiness but with lower public profile have resorted to
lease financing basically as an alternative to bank/institutional
financing, which to them is time consuming and tedious.
d. Consumers:
Retail funding for consumer durables was frowned-upon at one
point of time, but recent bad experience with corporate financing
has focused attention towards consumer durables which
incidentally, is all the all-time favorite of financiers World-over.
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Most of the larger companies have expressed interest in consumer
funding, with ticket size going as low as Rs. 5000.
e. Car customers:
Car leasing World-over is a very big market, and the same is true
for India. So long, most car leases were plain-vanilla financial
leases but one now finds few instances of value-added car lease
services also being offered.
f. Commercial vehicles:
Commercial vehicles customers have always relied upon funding
by hire-purchase companies. The customer profile ranges from
large fleet owners to individual trucker
g. Earth-moving machinery customers:
These customers have also traditionally relied upon lease
financing. Their requirements are generally large - each excavator
costs more than Rs. 25 lacks. The income-stream is based on
contracts they have - at times, the income generation may be
sporadic, or the need might itself be temporary. In fact, operating
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leases would have been ideal in this market, but they are yet to be
launched to any serious degree.
h. Govt. depts. and authorities:
One of the latest entrants in leasing markets is the Govt. itself. The
Depts. of Telecommunications of the Central Govt. took the lead by
floating tenders for lease finance worth about Rs. 1000 corers. In its
reforms programmer, India has limits to the extent to which it can
resort to deficit financing, and leasing is easily going to appeal to
the Govt., if not for cost reasons, at least for the fact that it will not
feature in national accounts as a commercial financing. As a spin-
off, it might even help reducing the reported deficit, as the Govt.
resorts to what is loved World-over as a tool of off-balance sheet
financing.
CHAPTER NO:- 4
TYPES OF LEASE
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Lease agreements are basically of two types. They are (a) Wet lease
(b) Damp lease (c) Dry Lease is consist of financial lease and
operating lease. The other variations in lease agreements are Sale
and lease back, Leveraged leasing, direct leasing Balloon lease and
Cross border lease.
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LEASE AND IT’S TYPE’S
FINANCIAL LEASE
OPERATING LEASE
DAMP LEASE
DRY LEASEWET LEASE
WET LEASE
In airplane industry, also referred to as ACML lease (Aircraft and
Maintenance & insurance). The lessor provides the aircraft, crews
including their salaries and allowance, all maintenance for the
aircraft and insurance. Insurance usually includes hull and third
party liability. The lessor charges for the block hour and depending
on the aircraft type sets a minimum guaranteed block hours.
The lessee has to provide all fuel, landing/handling/parking/storage
fees, crew hotel accommodation (HOTAC) including meals and
transportation as well as visa fees, import duties where applicable
as well as local taxes. Furthermore the lessee has to provide
passenger/luggage and cargo insurance.
The period can go form one month to usually one to two years.
Everything less than on month can be considered as ad-hoc charter.
DAMP LEASE
Damp lease is similar to wet leasing, however usually without cabin
crew. The lease will provide the cabin crew. Damp lease is
uncommon.
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DRY LEASE
Aircraft is leased with out insurance, crew maintenance etc. Usually
dry lease is utilized by leasing companies and banks. This is the
most commonly used lease for equipment in the industry.
Dry lease is of two types, financial lease and operating lease
equipment. Operating lease is really meant for rental use of
equipment. In some countries, lessor is permitted to buy the asset at
the end of the tenor of contract of lease. In India, however it is not
permitted, then financial leas would be almost same as hire-
purchase.
FINANCIAL LEASE
Long-term, non-cancellable 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
19
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.
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.20
Special Types of Lease
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. The sale and
lease back transaction can be expressed with the help of the
following figure.
SALE TRANSACTION
SALE VALUE
21
SELLER BUYER
LEASE TRANSACTION
LEASE RENTALS
Structure of a Sale and Leaseback Deal
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 market
price) and to adjust difference in the lease rentals. Thus the effect of
profit/loss on sale of assets can be deferred.
Cross Border Lease
Lessor and lessee are I different countries. This is cross border
lease common in aircraft, ships and such big ticket movable assets.
Now-a-days this concept is becoming popular earlier it was
introduced in 1970 in USA.
22
LESSEE LESSOR
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 then 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.
Sells Asset Leases 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
23
Manufacturer
Lender
Lessee Lessor
remains with the manufacturer itself. The major types of direct
lessor include manufacturers, finance companies, independent lease
companies, special purpose leasing companies etc
BALLOON LEASE
A type of lease which has zero residual value at the en of lease
period is called as Balloon Lease. It is also kind of lease where the
lease rentals are low at the beginning high during the mid year and
low during the end of the lease contracts.
SUB-LEASE
A transaction in which leased property is released by the original
lessee to third party, and the lease agreement between the two
original parties remain in effect.
24
Difference between Financial lease and Operating Lease
POINTS Financial lease Operating
Lease
Concept Lessee requires
asset for asset’s
workable life. He
does not want to
buy it and bring it
on balance sheet.
Lessee requires asset for relatively short period.
Lessee For complete life
of asset, there is
only one lessee.
There could be
many lessees
in the life of
asset
Maintenance Expenses borne
by lessee
Expenses
borne by
lessor.
Cancellation Usually non-
cancelable
contracts.
Cancelable
contracts.
Obsolescence Lessee assumes
risk of
obsolescence.
Lessor
assumes risk
of
25
obsolescence.
Term Long term Short term
Asset Aircraft, ship,
heavy equipment.
Computer,
office
equipment,
auto, trucks.
Theme Financing idea
for asset
True ‘rental’
concept.
Period
Usually two parts
of the lease
period, primary
lease period and
secondary lease
period.
No such
different
periods.
COMPARATION BETWEEN WET, DRY AND DUMP LEASE
POINT WET LEASE DRY LEASE DUMP
LEASE
MEANIN
G
Wet lease means
along with the
lease property the
accessories
associated with it
Only lease
property is
provided to
lessee.
It is similar to
leasing but
usually
without cabin
crew, property 26
is provided by the
leaser to lessee.
is provided to
lessee.
TYPES NO TYPES NO TYPES It is divided
into two
types(1)
Financial lease
(2) Operating
lease
FEATURES
Formality of a lease
A tenancy for years greater than 1 year must be in writing in order
to satisfy the Statute of Frauds.
Term of a lease
The term of the lease may be fixed, periodic or of indefinite
duration.
If it is for a specified period of time, the term ends automatically
when the period expires, and no notice needs to be given, in the
absence of legal requirements.
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The term's duration may be conditional, in which case it lasts until
some specified event occurs, such as the death of a specified
individual.
A periodic tenancy is one which is renewed automatically, usually
on a monthly or weekly basis.
A tenancy at will lasts only as long as the parties wish it to, and be
terminated without penalty by either party.
It is common for a lease to be extended on a "holding over" basis,
which normally converts the tenancy to a periodic tenancy on a
month by month basis.
Rent
Rent is a requirement of leases in common law jurisdiction, but not
in civil law jurisdiction.
There is no requirement for the rent to be a commercial amount.
"Pepper corn" rent or rent of some nominal amount is adequate for
this requirement.
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Leasing of real property
There are different types of ownership for land but, in common law
states, the most common form is the fee simple absolute, where the
legal term fee has the old meaning of real property, i.e. real estate.
An owner of the fee simple holds all the rights and privileges to that
property and, subject to the laws, codes, rules and regulations of the
local law, can sell or by contract or grant, permit another to have
possession and control of the property through a lease or tenancy
agreement. For this purpose, the owner is called the lessor or
landlord, and the other person is called the lessee or tenant, and the
rights to possess and control the land are exchanged for some
payment (called consideration in legal English), usually a monthly
rent. The acceptance of rent by the landowner from a tenant creates
(or extends) most of the rights of tenancy even without a written
lease (or beyond the time limit of an expiring lease). Although
leases can be oral agreements that are periodic, i.e. extended
indefinitely and automatically, written leases should always define
the period of time covered by the lease. In the 1930s, the British
government introduced infinite leases, only to remove the power to
create these in the early 1990s. A lease may be:
a fixed-term agreement, in other words one of these two:29
for a specified period of time (the "term"), and end when the term
expires;
conditional, i.e. last until some specified event occurs, such as the
death of a specified individual; or
A periodic agreement, in other words renewed automatically
usually on a monthly or weekly basis at will, i.e. last only as long as
the parties wish it to, and be terminated without penalty by either
party.
Because ownership is retained by the lessor, he or she always has
the better right to enforce all the contractual terms and conditions
affecting the use of the land. Normally, the contract will be express
(i.e. set out in full and, hopefully, plain language), but where a
contract is silent or ambiguous, terms can be implied by a court
where this would make commercial sense of the transaction
between the parties. One important right that may or may not be
allowed the lessee is the ability to create a sublease or to assign the
lease, i.e. to transfer control to a third party. Hence, the builder of
an office block may create a lease of the whole in favors of a
management company that then finds tenants for the individual
units and gives them control.
30
Under common law, a lease should have three essential
characteristics:
1. A definite term (whether fixed or periodic)
2. at a rent
3. Confer exclusive possession.
Leasing of tangible personal property
An owner can allow another the use of a vehicle (such as vehicle
leasing of a car, a truck or an airliner) or a computer either for a
fixed period of time or at will. This can be a simple leasing
transaction, or it can be a transaction intended to allow the user the
right to buy the item at some future time.
In a simple lease (rental) of a car, P pays O a rental for the use of
the car during the agreed period which may be a few days (e.g. for
a holiday trip) or longer where it is more economic to pay for use
rather than pay for the ownership of an asset of depreciating value.
Normally, only P will be allowed to use the vehicle and, in such a
case, P has possession and control. But, P could be an employer
who allows C the use of the car to visit clients, and thereby gives C
control.
In a lease with the possibility of purchase, O could allow P to lease
the car for a specified period of time. If all the rental payments are 31
made in full, P will then be allowed to buy the car at the contractual
purchase option price. In a consumer lease subject to the federal
Consumer Leasing Act and the Truth in Lending Act, the purchase
option price can not be a "bargain" purchase, that is, it cannot be
less than the originally estimated fair market value. A "bargain"
purchase creates an installment sale, to which the Truth in Lending
Act (TILA) applies including the standardized disclosures, most
importantly the Annual Percentage Rate (APR). Typically, the
vehicle dealer or other personal property seller offers the leasing
terms and contract of a third party finance company. Hence, O
leases the vehicle to P, and upon execution of the contract
simultaneously sells ownership of the car to F and assigns the lease
contract to F. It is standard for the contractual terms to prohibit P
from parting with possession or control of the car to another (if P
does part with possession, this can be a theft of the car from F).
Real leases
Whether it is better to lease or buy land will be determined by each
state's legal and economic systems. In those countries where
acquiring title is complicated, the state imposes high taxes on
owners, transaction costs are high, and finance is difficult to obtain,
leasing will be the norm. But, freely available credit at low interest
rates with minimal tax disadvantages and low transaction costs will
encourage land ownership. Whatever the system, most adult
consumers have, at some point in their lives, been party to a real 32
estate lease which can be as short as a week, as long as 999 years,
or perpetual (only a few states permit ownership to be alienated
indefinitely).
For commercial property, whether there is a depreciation allowance
depends on the local state taxation system. If a lease is created for a
term of, say, ten years, the monthly or quarterly rent is a fixed cost
during the term. The term of years may have an asset value for
balance sheet purposes and, as the term expires, that value
depreciates. However, the apportionment of relief as between
business expense and depreciating asset is for each state to make
(all that is certain are that the lessee cannot have a double
allowance).
Private property rental
Rental, tenancy, and lease agreements are formal and informal
contracts between an identified landlord and tenant giving rights to
33
both parties, e.g. the tenant's right to occupy the accommodation for
an agreed term and the landlord’s right to receive an agreed rent. If
one of these elements is missing, only a tenancy at will or bare
license comes into being. In some legal systems, this has
unfortunate consequences. When a formal tenancy is created, the
law usually implies obligations for the lessor, e.g. that the property
meets certain minimum standards of habitability. With a bare
license, some states do not imply any significant lessee protections
A tenancy agreement can be made up of:
Express terms. These include what is in the written agreement (if there is one), in the rent book, and/or what was agreed orally (if there is clear evidence of what was said).
Implied terms. These are the standard terms established by custom and practice or theMinimum rights and duties formally implied by law.
34
ADVATAGES OF LEASING
Leasing is often considered as an alternative to purchase of
equipment, vehicle ECT. Thus it is choice between buy and lease.
Buying an asset can be fully funded by equity or it can be with a
support of loan so to be precise, managers weigh the option of
buying asses with loan or to get it on lease. Advantages and
disadvantage of lease over buying are discussed here.
1. Capital Advantages:
a) Initial Cash Outlay:
A reduced initial cash outlay is a primary advantage of leasing. In
case of limited capital recourses, funds can be used for purposes
other than buying equipments. As for purchase loans, lender
frequently require down payment of up to 25% or more and hence
capital is locked to this purpose.
b) Easier Credit Terms:
Getting loan for purchase of asset is normally more time consuming
than getting it on lease. Credit terms require security collateral and
detailed appraisal. Leasing is relatively easy to get. This is mainly
35
because, in case of lease, ownership of the asset is with the Lessor.
This asset itself is a security for him.
c) Balance Sheet Appearance:
Leasing may improve such financial indicators as debt to equity
and earring to fixed asset ration. The actual benefit of the improved
indicators may e negligible, since careful lender will likely equate
the lease commitment with long term debt obligations.
d) Avoidance Of Financial Restrictions:
An equipments lease rarely includes ant provisions that restrict
lesses’s future financial operations. In contracts, a loan agreement
includes restriction on acquiring additional equipment or borrowing
addition funds without the lender’s permission.
2. Financial Advantages :
(a) Tax Saving:
Lease or rental payments are considered as an operation coast
which is fully deductible and thus it result I tax saving of course
one needs to weigh the corresponding disadvantage of being denied
any depreciation deductions with respect to the leased property.
36
(b) Easy For Budgeting:
As a lease agreement is almost always a fixed contract, it is
relatively easy to budget and forecast budget much more easily than
an irregularly occurring lump sum; allowing the lessee to keep a
much better control over current and future cash flow
3. Operational Advantages:
(a)Flexibility In Addressing Obsolescence:
Leasing may enable the lessee to better keep pace with improving
technology for computer communication devices and other
equipments that is subject to rapid technological improvement, it is
easer to invest in updated equipment if existing equipment
substitution provision.
(b)Flexibility In Addressing Need & Suitability:
If he lessee is not sure whether a particular item of
equipment is really needed then, leasing an item on short term basis
will give the opportunity to evaluate the items utility to the business
37
without committing to a substantial investment. Short term leases
may be used as a way to test and compare different brands and
models.
(c) Maintenance Support:
Under some leases, the lessor may agree to responsible for
maintaining and repairing the leased equipment. Although the cost
of this service will provision at lease avoids the problem of having
to find qualified repairperson and of being burdened with
unplanned repair.
Disadvantages of leasing
(a)Higher overall cost
The biggest disadvantage of leasing is that the costs over the life of
the asset are generally going to be higher than if the asset was
purchased. Lease rental payment compensate the lessor not only for
acquisition and financing costs, but also for the lessor’s retained
38
risk of continuing ownership. Lessee must also pay for the
insurance continuing ownership.
(b)No ownership interest:
Lease payments do not establish any equity in the leased
equipments or premises. At the end of the lease, the lessee won’t
have a tangible asset in the balance sheet. This can be especially
painful if lessee has grossly underestimated what the equipment or
premises would be worth at end of the lease.
(c) Lost tax benefits:
A potential of leasing is losing the tax benefits of deprecation may
be insignificant, however if the “lost” benefit are offset by
deduction of rental payment or if revenues income is less or tax
liability is les any ways because of other factors of taxation.
RIGHTS AND OBLIGATION OF LEASEE
39
Rights
The lessor is obliged to within reasonable intervals (can be as much
as 10 -15 years), undertake painting and common repair of the
room or apartment. As a tenant who moves into an apartment have
the right to fully functioning room or apartment that meets the
minimum requirement that are lain out under “what’s include “if
the apartment does not meet these minimum requirement of the
person who lease rent out is negligent in the upkeep of the
accommodation or building with in your right to bring this to the
lessor attention.
Lessee are allowed to make change to the apartment that do not
include structural change (walls and floors must never be
compromised). For example he can paint the wall .however all the
changes must be done professionally. If the walls are painted ,but
the work is adjusted to be of an un professional be required to
return the apartment to the original condition as it was when you
moved in or pay for such work to be done when you move out.
40
Obligation
As a tenant lessee is responsible for the condition of the apartment
during the time that he is renting it. This means that he is expected
to be carefully not to damage the apartment or any equipment that
comes along with it. Lessee is also expected to keep the room or
apartment clean. This responsibility also extends to other area that
is connected to the room or apartment such or basement storage
space and as on.
If lessee as it tenant because any damage to the apartment during
the time of renting it, you are responsible for covering the repair or
replacement coast. This cost also include damage that is caused by
other have invented to home.
If damage occur in the apartment required to report it to the lesser
immediately if he neglects to report the damage and this negligence
cause additional damage to occur he is also responsible for any cost
and that are incurred due to this additional damage.
He must always pay rent. Even if he feels that the room or
apartment does not meet the standard or that the lesser is negligent.
Lessees do not have the right to stop paying rent.
41
Lessee is obliged to provide the lesser access to apartment so that
the lesser can perform necessary repair or renovation and also
obligated to show the apartment to new prospective tenant once
lessee have notified the lessor that you are terminating the contract.
RIGHTS AND OBLIGATION OF LESSOR
While enjoying all the rights of ownership the lesser may virtually
escape all obligations relating to the goods condition of fitness,
quality usefulness for purpose or any damage on account of defect
in good, can be effective that the lesser was not involved in
selection of the good nor did he influence the lesser decision as to
the gods or the supplier.
While being the owner of the goods the lesser may completely
distance him from obligation relating to the operation and use of the
goods. This issue is very comfortable settled in India through there
is a raging controversy on this point in number of other market. The
lesser is not in effective possession and is not the user of the goods.
The lesser cannot be taken to be the agent of the lesser see the
following existences.
A truck on the hire purchase was found carrying option. The
financer cannot be held responsible as the misuse of vehicle could 42
not have been with his consent and could not have been with his
consent and there was no possibility of the financier having control
over the actual use by the hirer.
While the owner of the asset has been held not to be responsible for
misuse he still claim right to be notified before confiscation of his
asset.
CHAPTER NO:- 5
CONTENTS OF LEASING
Following points are included in a typical agreement.
Details of Lessor and Lessee.
Descriptions of asset to be leased, delivery and possession are
clearly defined.
Lease rent amount periodically and advance payment or arrears of
payment.
Retention money security deposits.
43
Use allowed including list of prohibited activities.
Provision for premature termination defaults.
Lease renewals related clause.
Maintenance responsibilities clearly defined including regular over
halving.
Insurance requirement and responsibility allocation.
Causes for dispute resolution and arbitration.
Commercial leasehold
Generally speaking in the modern legal framework, commercial
real property leases fall into one of just a few categories: Office,
Retail, Warehouse, Ground, and a catch-all hybrid often referred to
as "Mixed Use". Each has certain typical characteristics, although
Ground leases may differ somewhat, taking on some characteristics
of Retail leasing when associated with a retail project, like a
44
shopping center; and although Mixed Use projects can vary greatly
depending upon the various inclusions and the size of the overall
project, among other things. It is widely appreciated by those who
specialize in commercial leasing, including the business side and
the legal side, that, other than hybrids such as Mixed Use project
leasing, Retail leasing can have the most complexity.
Mixed Use projects often have elements of most or all of the other
categories, not infrequently including a hotel, office building,
ground floor retail with residential condominium above and a
parking garage. The interplay of all these different components
with each other and the underlying property documents which
describe, define, and control their interactions, operation and
management, as well as the division of costs for the operation of the
site, are typically very complex.
Retail leasing often requires the parties to address issues typically
not addressed at all in other types of commercial leasing which
have no retail component. These additional challenges include such
topics as exclusives and restrictive covenants, radius restrictions on
near-by self-competition, co-tenancy, no-build areas and visibility
corridors, parking ratio assurances, signage concerns (including
pylons, monuments, and criteria), CAM and CAM caps and
controls (including the "cumulative" and "non-cumulative"
concepts), continuous operating covenants, and much more.
45
Advantages of commercial leasing
For businesses, leasing property may have significant financial
benefits:
Leasing is less capital-intensive than purchasing, so if a business
has constraints on its capital, it can grow more rapidly by leasing
property than it could by purchasing the property outright.
Capital assets may fluctuate in value. Leasing shifts risks to the
lessor, but if the property market has shown steady growth over
time, a business that depends on leased property is sacrificing
capital gains.
Because of investments which are done with leasing, new
businesses are formed. Furthermore, unemployment in that country
is decreased.
Leasing may provide more flexibility to a business which expects
to grow or move in the relatively short term, because a lessee is not
usually obliged to renew a lease at the end of its term.
In some cases a lease may be the only practical option; such as for a
small business that wishes to locate in a large office building within
tight locational parameters.
46
Depreciation of capital assets has different tax and financial
reporting treatment from ordinary business expenses. Lease
payments are considered expenses, which can be set off against
revenue when calculating taxable profit at the end of the relevant
tax accounting period.
Disadvantages of commercial leasing
For businesses, leasing property may have significant drawbacks:
A net lease may shift some or all of the maintenance costs onto the
tenant.
If circumstances dictate that a business must change its operations
significantly, it may be expensive or otherwise difficult to terminate
a lease before the end of the term. If the business is successful,
lessors may demand higher rental payments when leases come up
for renewal. If the value of the business is tied to the use of that
particular property, the lessor has a significant advantage over the
lessee in negotiations.
47
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.
48
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.
Laws applicable to Pro-tenant laws in India often inhibit rental
market
Even with the application of the Lease and License Agreement system, it
is still difficult for a landlord to protect his property from unwanted
overstaying tenants. Even if contracts are enforceable in courts, the actual
enforcement takes years or decades to accomplish.
Rents: Can landlord and tenant freely agree rents in India?
There are two types of tenancy agreements in India, Lease Agreements which
are covered by rent control laws and Lease and License Agreement which are
not.
A Lease (or Rental) Agreement is covered by restrictive rent control laws. The
amount of rent that can be charged is based on a formula devised by the local
executive, legislative or judicial government, as the case maybe. For Delhi, the
maximum annual rent is 10% of the cost of construction and the market price of
49
the land, but the cost of construction and the price of land are both based on
historical values and not the current market valuation. So the older your
property, the smaller the rent you can charge. Rents can only be increased by a
fraction of the actual cost the landlord has incurred in improving the property.
The Lease Agreement transfers the right of ownership to the tenant for an
indefinite period of time, which can be problematic because it encourages the
tenant to claim the right to permanent occupation. In numerous cases, tenants
have refused to relocate. When brought to court, these cases can take 10 to 20
years to resolve.
Most landlords prefer a Lease and License Agreement. This agreement only
grants the tenant a license to occupy the property for a period of 11 months, with
an option for periodic renewal. Because the rent control laws (which are largely
in favor of tenants) only apply for lease agreements of at least 12 months,
establishing an 11-month agreement serves as a pre-emptive measure.To avoid
complications, since landlord prefer these agreements, we will only discuss
Leave and License agreements for the rest of the article.
Deposits
Prior to occupancy, tenants usually pay a security deposit of three months’ rent.
This is usually refundable at the end of the contract, if no other liabilities have
been left unsettled. Deposits are expected to be returned within a month after the
end of the tenancy, or as stated in the contract. Until the deposit is returned,
contracts commonly stipulate that interest must be charged on the deposit,
computed at a daily rate. Advance payments for six months up and full payment
for 11 months are popular.
50
Indian Leasing Industry
1. Manufacturers:
Manufacturers have to sell their equipment consumer products.
These companies offer leasing or financing companies. These
companies offer leasing or hire purchases option or even credit
facilities. Automobile and construction equipments sector have
such visible tie-ups.
2. Specialized leasing companies:
By regulation these companies are called as NBFCs. i.e. Non
Banking Finance Companies. These are typically funding based
NBFCs, unlike merchants banking NBFCs which are in fee based
business. There are around 350 dedicated leasing and hire
purchases companies in India. RBI registration is required to
become a leasing company.
3. Banks:
In 1994, RBI allowed banks to undertake leasing activity directly.
Though some banks (around 8) have leasing activity including SBI,
the scale of Operations is small as compared to the size of the
industry.
4. One-off lessors :
Some of the companies engaged in some other business which gives them
huge taxable profits, have resorted to one-off leasing on a casual basis to
51
defer their taxes. These people are interested only in leasing of high-
depreciation items, preferably those entitled to 100% depreciation. The
major items eligible for 100% depreciation are gas cylinders, certain
energy-saving devices, pollution control devices etc. Severe scrutiny by
revenue officials into lease transactions at the time of assessment has
dampened the enthusiasm in this line of leasing activity, however it
carries on. Mostly such lease transactions are syndicated, at times even
funded, by active players in leasing markets.
Leasing Internationally
52
The practice of leasing is well established in most countries of the
world. However the benefits (in particular the tax benefits) to the
lessee and lessor will vary widely depending on national accounting
standards and tax regulations. These largely divide into countries
observing:
Legal Form: the lessor’s legal ownership of the property.
Or
Substance: the lessee legal right to use the property.
National accounting standards vary in the tests that decide if the
lease is a:
Capital or Finance Lease, which is considered a financing
transaction – as the lessor has less of the risks of ownership, such as
the value of the equipment in future years.
Operating Lease, whose term is short compared to the useful life of
the asset, where the lessee does not have to show the lease on their
balance sheet.
Pros and cons of leasing by the way of example
Buying a vehicle is a fairly straightforward process. You borrow
money from a lending institution, pay the dealership for the car, and
53
then make monthly payments on the loan until it's paid off. As you
pay off the loan, you gain equity in the vehicle until it's eventually
all yours. You can keep the vehicle as long as you like and you can
do whatever you want to it, from giving it a custom paint job to
entering it in a demolition derby. The only penalty for modification
or abuse, perhaps, is a lower resale value when you're done with it.
On the surface, leasing appears even simpler. You pay the leasing
company a monthly payment that's lower than when buying. Then,
after enjoying the most trouble-free two or three years of the
vehicle's life, you simply bring it back to the dealership and lease
another new one, or walk away. No muss, no fuss, right? Gone are
your worries about haggling over the trade-in value or how to sell
your old car. With a lease, that new-car smell need never leave your
nostrils. Moreover:
There's often no down payment required when leasing, or only a
low one.
You can drive a higher-priced, better-equipped vehicle than you
might otherwise be able to afford to buy.
You're always driving a late-model vehicle that's usually covered
by the manufacturer's warranty. These benefits are very inviting for
many people. Still, there are a number of compromises and
54
disadvantages to leasing, which means that it's not right for
everyone.
Once you're in the leasing habit, monthly payments go on forever.
You have a limited number of miles in your contract and will have
to pay extra if you go over.
You must maintain the vehicle in good condition. If you don't,
you'll have to pay penalties for excess wear and tear when you turn
it in.
If you need to get out of a lease before it expires, you may be stuck
with thousands of dollars in early-termination fees and penalties--
all due at once.
Leasing is rarely a better financial arrangement than buying. The
financial advantage of buying increases the longer you keep the
vehicle after the loan is paid off.
At the end of the lease, you have no equity in the vehicle to put
toward a new car.
55
You can't customize your vehicle in any permanent way.
CHAPTER NO:- 6
INTRODUCTION OF HIRE PURCHASE
Hire purchase (frequently abbreviation to HP) is the legal term
contract developed in the United Kingdom, and now in India,
Australia and New Zealand. In the republic of Ireland, HIRE
PURCHASE most commonly refer to employment with the
comparable system being called closed end leasing. In case where a
buyer cannot afford to pay the asked price for an item of property
as lump sum but can afford to pay a percentage as a deposit, a hire
purchase contract allows the buyer to hire the goods foe a monthly
rent. When a sum equal to the original full price plus interested has
been paid in equal installments; the buyer may then exercise an
option to buy the goods at a predetermine price (usually a nominal
56
sum) or return the goods to the owner. In Canada and the United
States a hire purchase is termed an installment plan.
Hire purchase differs from mortgage and similar from lien secured
credit in that the so called buyer who has the use of the goods is not
the legal owner during the term of the hire purchase contract. If the
buyers default in paying the installment the owner may reposes the
goods, a vender protection not available with unsecured consumer
credit system. Hire purchase is frequently advantageous to
consumers because is spread the cost of expensive items over an
extended time period. Business can Sumer may find the different
balance sheet and taxation treatment of hire purchase goods
beneficial even consumer have collateral or other form of credit
readily available.
The British concept of hire purchase has, however been there in
India for more than 6 decades. The first hire purchase company is
believed to be commercial credit corporation successor to auto
supply company. While this company was based in Madras, motor
and general finance and installments Supply Company were setup
in north India. These companies were setup in the 1920’s and
1930’s. Development of hire purchase took two forms consumer
durable and automobiles.
Consumer durable hire purchase was promoted by the dealer in the
respective equipment. Thus singer Sewing Machine Company or 57
Murphy radio dealers would provide installments facilities on hire
purchase basis to the customer of their products.
The other side developed very fast hire purchase of commercial
vehicle. The dealers in commercial vehicles as well s\as pure
financing companies sprang up. The value of the asset being good
and repossession being easy this branch of financing activity
flourished fast, although unity recently must of automobile
financing business was in hands of family owned businesses.
This act may be called as hire purchase act 1972. It extends to the
whole of India except that the state of Jammu & Kashmir. It shall
come fore as such date as the central government may, be
notification in the official gazette appoint.
1. The owner delivers possession of goods thereof to a person on
condition that such person pays the agreed amount in periodic
installments.
2. The property in the goods is to pass to such person on the payment
of the last of such installments, and
3. Such person has a right to terminate the agreement at any time
before the property so passes”.
58
Concept and Meaning
Hire purchase is a type of installment credit under which the hire
purchase called the hirer agrees to take the goods on hire at a stated
rental which is inclusive of there repayment of principal as well as
interest with an option of purchase.
Under this transaction the hire purchase acquires the property
immediately on signing the hire purchase agreement but the
ownership and title of some is transfer only when the last
installment is paid.
DEFINATION
(a) “Contract of guarantee” in relation to only hire purchase
agreement means a contract by a person (in this act referred to
as the surely) guarantees the performance of all or any of the
hires obligation under the hire purchase agreement.
(b)Hire means the sum payable periodically by the hirer under a
hire purchase agreement.
59
(c) Hire purchase agreement “ means an agreement under which
goods are let on hire and under which the hirer has an option to
purchase them in accordance with the term of the agreement and
includes an agreement under which (i) possession of goods
is delivered by the owner therefore to a person on condition that
such person pays the agreed amount in periodical installments
and (ii) the property in the goods is to pass to such person on the
payment of the last of such installments, and(iii) such person has
aright to terminate the agreement at any time before the property
so passes.
(d)Hire purchase price means the total sum payable by the hirer
under a hire purchase agreement in order to complete the
purchase of car the acquisition of property in the goods to which
the agreement relating and include any sum so payable by the
hirer under hire purchase agreement by way of deposit other
initial payment or credited or to be credited to hire under such
agreement on account of any such deposit or payment, whether
that sum is to be a or has been paid to the owner or to any other
person or is to be or has been discharge by payment or money or
by transfer or delivery of goods or by any other means but does
not include any sum payable as a penalty or as compensation or
damage for a breach of the agreement.
60
(e) Hirer means the person who obtains or has obtained possession
of goods from an owner under a hire purchase agreement and
includes a person whom the hirer rights or liabilities under the
agreement have passed by assignment or by operation of law.
(f) “Owner “means the person who lets or has let delivers or has
delivered possession of goods to a hirer under a hire purchase
agreement and includes a person to whom property in the goods
or any of the owner rights or by operation of law
CHAPTER NO:- 7
FORM & CONTENTS OF HIRE PURCHASE
1. Hire purchase to be in writing and signed by parties there
to:
a) Every hire purchase agreement shall be (a) in writing (b) sign by
all the parties there to.
61
b) A hire purchase shall be void of in respect there of any of the
requirement specified in sub-section (1) has not been complied
with.
c) Where there is a contract of guarantee the hire purchase
agreement shall be signed by the surely also and if the hire
purchase agreement is not so signed the hire purchase agreement
shall be variable of the owner.
2. Content of hire purchase agreement
A) Every hire purchase agreement shall state :
1. The hire purchase price of the goods to which the agreement
relates.
2. The cash price of the goods, that is to say the price at which
the goods may be purchased by the hirer for cash.
3. The date o which the agreement shall be deemed to have
commenced.
4. The number of installment by which the hire purchase price
is to be paid, the amount of each of those installments and
the date or the mode of determining the date, upon which it is 62
payable and the person to whom the place where it is
payable and.
5. The goods to which the agreement relates in a manner
sufficient identity them.
B) Where any part of the hire purchase price is, or is to be paid
otherwise than in cash or by cheque, the hire purchase
agreement shall contain a description of the part of the hire
purchase price.
C) Where any of the requirement specified in sub section(1) or
sub section(92) has not been complied with the hirer may
institute an suit getting the hire purchase agreement
rescinded and the court may, if it is satisfied that the failure
to comply with any such requirement has prejudiced . the
hirer rescind the agreement on such term as it think just or
pass such other order as it think it in the circumstances of the
case.
3. Two or more agreement when treated as a single hire
purchase agreement:
63
Where by virtue of two or more agreement in writing none of
which by itself constitutes a hire purchase agreement, there is a
bailment of goods and the bailee has an option to purchase the
goods and requirement of section 3 and section4 are satisfied in
relation to such agreement the agreement shall be treaded for the
purpose of this act as a single hire purchase agreement made of
the time when the lend of the agreement was made.
RIGHTS AND OBLIGATION OF HIRER
1. Right to hirer to purchase at any time with rebate:
a. The hirer may , at any time during the continuance of the hire
purchase and after giving the owner not less than 14 days
notice in writing of his intension so to do complete the
purchase of the goods by paying or tendering to the owner of
the hire purchase price or the balance section(2).
The rebate for the purpose of sub section (1) shall be equal to
two-third of an amount which bear to the hire purchase the
same proportion an the balance of the hire purchase price not
yet due bears to the hire purchase price.
The provision of this section shall have effect not with
standing anything to the contract contained in the hire
purchase agreement, but where the term of the agreement 64
entitled to hirer to a rebate higher then that allowed by this
section the hirer shall be entitled to the rebate provided by
the agreement.
2. Right to hirer to terminate agreement at any time:
The hirer may at any time before payment under the hirer
purchase agreement fall due, and after giving the owner not less
than 14 days
Notice in writing of his intension so to do and re-delivering or
tendering the good to the owner terminated the hire purchase
agreement by payment or tender to the owner of the amount
which have accrued due towards the hire purchase price and not
been paid by him including the sum if any which he is liable to
pay under sun section (2).
Where the hirer terminates the agreement under sub section (1)
and the agreement provide for the payment of a sum name on
account of such termination the liability of the hirer to pay that
sum should be subject to the following condition, namely.
Where the sub total of the amount paid and the amount due in
respect of the hire purchase price immediately before the
termination exceeds on be one half of the hire purchase price,
the hirer shall be liable to pay difference between the said sum 65
total and the said one half, or the sum named in the agreement
which ever is less nothing is sub section (2) shall relieve the
hirer from any liability for any hire which might have accorded
due before the termination.
Any provision in any agreement, where by the right conferred
on a hirer by this section to terminate the hire purchase
agreement by him under this section shall be void.
3. Right to hirer to appropriate payment in respect of two or
more agreement:
A hirer who is liable to make agreement I respect of two or more
hire purchase agreement to the same owner hall. With out
signing any agreement to the contrary be entitled on making any
payment in respect of the agreement to appropriate the sum so
paid by him in or towards the satisfaction of the sum due under
any two or more of the agreement In such proportion as be
thinks fit and it be fail to make any such appropriation as a fore
said the sum so paid be virtue his section stand appropriated
towards the satisfaction of the sums due under the respective
hire purchase agreement in the order in which the agreement
were entered into.
4. Assignment & transmission of hirer’s right or interest under
hire purchase agreement:66
A. The hirer may assign his right, title and interest under the hire
purchase agreement with the consent of the owner or if this
comment is unreasonable with held without his consent.
Expect as otherwise provided in this section no payment or other
consideration shall be required by an owner for this consent to
an assignment under sub section (1) and where requires any
such payment or other than consideration to his consent that
consent shall be deemed unreasonably with held.
Where on a request being made by a hirer in this be half to
owner fails or refines to give his consent to an assignment under
sub section (1) the hirer may apply to the court for an order
declaring that the consent of the owner to the assignment has
been un reasonability with held and where such an order is made
the consent shall be deemed to be un reasonable with held.
Explanation: - in this sub section” court means a court with
would have jurisdiction to entertain a suit for the relit claimed in
the application.
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5. As a condition of granting such consent the owner may stipulate
that all defaults under the hire purchase agreement shall be
made good and may required the hirer and the assignee to
execute and deliver to the owner an assignment agreement in a
form approved by the owner, where by without affecting the
continuing personal liability of the hirer In such respect the
assignee agrees with the owner to be personally liable to pay the
installment of hire remaining un paid and to perform and
absence all other stipulation and condition of the hire purchase
agreement and condition of the hire purchase agreement during
the residue of the term therefore and where by the assignee
indemnifies the hirer in respect of such liabilities.
6. The right title & interest of a hirer under a hire purchase
agreement shall be capable of passing by operation of law to the
legal representative from sub section shall believer the legal
representative from compliance with the provision of the hire
purchase agreement.
7. The provision of this section shall apply not with standing any
thing to there contract contained in the hire purchase agreement
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NSIC AND HIRE PURCHASE
Small scale firms can acquire industrial machinery, office
equipment, vehicles, etc. without making full payment through hire
purchase. With the help of assets acquired through hire purchase
they can produce and sell. From the earning payments can easily be
made in installments. Ultimately the ownership of assets can be
acquired. Now several agencies like National Small Industries
Corporation (NSIC) provide machinery and equipment to small
scale units on hire purchase basis and on lease basis. NSIC follows
the following Hire Purchase procedure and Hire Purchase Scheme
for financing plant and machinery to small scale units.
Hire Purchase
69
Now several Finance companies provide machinery and
equipments to small
unit on hire purchase
basis and on lease basis.
In such cases, where
hire purchase is funded
by NBFC engaged in
such business,
schematic
representation is as
followed:
"Finance of Plant &
Machinery to small
scale industrial units/enterprises on installment terms."
TERMS OF HIRE PURCHASE
Every hire purchase agreement shall state:
1. The hire purchase price of the goods to which the agreement
relates.
2. The cash price of the goods that have to say the price at which
the goods may be purchase by hire for cash.
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3. The date on which the agreement shall be deemed to have
commenced.
4. The number of installment by which the hire purchase price is to
be paid the amount of each of those installment and the date or
made of determine the date upon which it is payable and the
person to whom and the place where it is payable.
5. The goods to which the agreement relates in a manner sufficient
to identify them.
6. The purpose for which the goods / asset will be by the hirer.
Hirer is not supposed to use if for substantially different
purpose.
7. No sublease the undertaking that the hirer shall not give the said
be used by any other person without the prior written consent of
the seller and shall not hypothecate or pledge the seller and shall
not person to secure payment of any money.
FACTORS RELATED TO HIRE PURCHASE AGREEMENT
1) Discharge of price otherwise than by payment of money.
71
Where an owner has agreed that any part of the hire purchase price
may be discharge other wise than y the payment of money and such
discharge shall for the purpose section 10, section 11, section 17,
section 20 and section 23, be deemed to be a payment of the part of
the hire purchase price.
2) Insolvency of hirer
Where during the continuance of the hire purchase agreement the
hirer is adjusted insolvent under any law with respect to insolvency
for the time being in force, the Official Receiver or where the hirer
is a company than in the event of the company being wound up the
liquidator. shall have in respect of the goods which are in the
possession of the hirer under the agreement the some right&
obligations as the hirer had in relation there of.
The Official Receiver or the liquidator as the case may be the
permission of the insolvency court or which the winding up
proceeding are pending assign the right of the hirer under the
agreement to any other person and the assignee shall have the right
and he subject to all the obligation of the hirer under the agreement.
3) Successive hire purchase agreement between same parity
72
Where goods have been let under hire purchase agreement and at
any time thereafter the owner makers a sub sequent hire purchase
agreement with the hirer whether relating exclusively to other
goods or to the other goods together with the goods to which the
first agreement relative any such subsequently hire purchase
agreement shall not have effect in so far as it affect prejudicial any
might which the hire would have held by virtue of section 20 under
the first agreement if such subsequent hire purchase agreement had
not been made.
4) Evidence of adverse detention is suit or application to recover
possession of goods.
Where in a suit or application by an owner of goods which have
been let under hire purchase agreement to enforce a right to recover
possession of the goods from the hirer the owner proves that before
the commencement of the suit or application and after the right to
recover passion of the goods accrued the owner made q request I
writing to the hirer to surrender the goods shall for the purpose of
the owner claim to recover possession there of.
5) Hirer refusal to surrender goods not to be conversion in certain
cases
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If during the subsistence of any restriction to which the
enforcement by an owner of right to recover possession of goods
from a hirer is subject by virtue of goods to the owner the hirer
shall not be only of such refusal be liable to the owner for
conversion of goods.
6) Service of notice
Any notice required or authorized to be served on or given to an
owner or a hirer under this act may be so served by delivering it to
him personally or by sending it buy post to him this last known
place of residence or business.
CHAPTER NO:- 8
ADVANTAGE OF HIRE PURCHASE
1. CONSTRAINT OF CAPITAL RESOURCES RESOLVED
Prospective user is confident of successful commercial or any kind of
utilization of asset but he may not be willing or capable of funding,
capital coast of asset this concern of funding in address by there
arrangement in a better manner as compare to term loans.
2. CORE BUSINESS SEPERATION
74
User business is related to use of asset. Vendors or lesser business is of
financing. Both of them get to do what they intend to focused on.
3. RISK ALLOCATION
Asset risk is appropriately borne by user and vendors in fact it is risk
optimization concept for both.
4. INDUSTRY GROWTH
Because of there merit more over come forward to start a business. This
triggers growth in user industry asset industry and also in leasing industry.
Risk stripping in deal is a tool for growth.
WARRANTES & CONDITIONS, LIMITATION HIRE PURCHASE
CHARGES
1. Warranties & condition to be implied in hire purchase agreement
Not with standing anything contained in any contract in every hire
purchase agreement there shall be an implied warranty (a) that the hirer
shall have and enjoy quiets possession of goods and (b) that the goods
75
shall be free from any charge or encumbrance in favor of any 3rd party at
the time when the property is to pass.
Not with standing anything contained in any contract in every hire
purchase agreement there shall be (a) an implied condition on the part of
the owner that be has a right to sell the goods at the time when the
property is to pass.(b) an implied condition that the goods shall be of
merchantable quality but not such condition shall be implied by virtues of
this clause. As regard deficit reasonable have been aware at the time when
the agreement was made, if the goods are second hard goods and the
agreement contain a statements to the effect,
Where the hirer, whether expressly or by implication has made known to
any other person by whom those negotiations were conducted there shall
be an implied condition that the goods shall be reasonable fit for such
purpose.
Where the goods are let under hire purchase agreement by reference to a
simple there shall be (a) an implied condition on the part of the owner that
the bulk will correspond with the sample in quality and (b) an implied
condition on the part of the owner that the hirer will have a reasonable
opportunity of company the bulk with the sample.
Where the goods one let under a hire purchase agreement by description
there shall be an implied condition that the goods will corresponds with
the description and if the goods are let under by description it shall not be 76
sufficient that the bulk of the goods corresponds with the sample it the
goods do not also correspond with the description.
An owner shall be entitled to rely on any provision in a hire purchase
agreement excluding or modifying the condition the agreement was made
the provision was brought to the notice of the hirer and it self made clear
to hirer.
Nothing in this section shall prejudice the operation of any other rule of
law where by any condition or warranty is to be implied in any hire
purchase agreement.
LIMITATION OF HIRE CHARGER
A) “Cash price installation “in relation to hire purchase installment means
an amount which bear to the real amount of hire purchase price.
B) Deposit means any sum payable by the hirer under the hire purchase
agreement by way of deposit or other initial payment or credited or to
be credited to him under the agreement on account of any such deposit
or payment whether money or by the other means.
C) “Net cast price” in relation to goods comprised hi hire purchase. A
means the cash price of such goods as required to be specified in the
77
hire purchase under clause (b) of sun section (1) of section 4 less any
deposit as defined in the clause (b).
D) “ Net hire purchase charges in relation to hire purchase agreement for
any good means the different between the net hire purchase and there
of such goods.
COMPARITIVE STUDY OF LEASING & HIRE PURCHASE
BASIS LEASING HIRE PURCHASE
MEANING Lease on the other hand
is an agreement of using
an asset for certain
period and paying rent
on it at a pre described.
Rate of interest. It is a
temporary acquiring of
an asset just to use it.
Generally Pvt. schools
are building on lease
land. Interest on lease is
fully exempt from tax.
Hire purchase is type of
installment credit under
which the hire purchaser
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.
Option to user No option is provided to Option is provided to
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the lessee (user) to
purchase the goods.
the hirer (user).
Nature of expenditure Lease rentals paid by
the lessee are entirely
revenue expenditure of
the lessee.
Only interest element
included in the hire
purchase installments is
revenue expenditure by
nature.
Ownership The lesser is the owner
of lessee is entitled to
use of the leased asset
only in case of lease
financing. The
ownership is never
transferred to user
(lessee).
In the contract the
ownership of asset is
passed on to the user, in
case of HP finance. On
payment of last
installment
Components Lease rentals comprise
of
2 elements (1) finance
charge and (2) capital
recovery.
HP installments
comprise of 3 elements
(1) normal trading profit
(2) finance charge and
(3) recovery of cost of 79
goods/assets.
Deprecation The deprecation on the
asset is charged in the
books of the lesser in
case of leasing.
The hirer is entitled to
deprecation on the asset
hired by him.
Maintenance In case of finance lease
only. The maintenance
of leased asset is the
responsibility of the
lessee. It is the lesser
who has to ear the
maintenance cost in an
operating lease.
The cost of maintenance
of hired asset is to be
bearded by the hire
himself.
CHAPTER NO:- 9 CASE STUDY
CASE STUDY RELATED TO LEASING
80
A CASE OF CROSS BRODER LEASE BETWEEN KOREAN AIR AND
IT’S SUBSIDIRAY.
Korean Air Lines Company Ltd, established in 1969 under the law of
Republic of Korea, has been serving as a national flag carries of Korea for
39 yrs in Air Transportation of passenger and cargo. A s of the end of
January 2007 it provide air transportation services to 109 international and
domestic cities around the world with more than 17000 employees
working in its work force since the inception Korean Air has grown to the
15th largest international; passenger carrier and the 1st largest
international; cargo carrier in the world based on IATA statistics. As of
January 2007, Korean Air operates 122 aircraft in its fleet of which 22 are
cargo aircraft. The company has been financing market through both
domestic and international finance market since 1997 when the Asian
currency arises started it has heavily relied on international finance market
particularly with export credit supported structure such as EXIM bank
support and European export credit Agency support due to lack of
domestic financing sources. A couple of operation lease contract have
been made by the company air on effort to diversify its Aircraft Financing
during the period.
In June 1997, Korean Air established a wholly owned financing
subsidiary named Korean Air Lease and Finance Company limited
(KALF) at international financing services center in Dublin at the time
Irish government was eager to induce foreign capital investment. Also it
appears that the Korean Ministry of economy encouraged companies to 81
utilize the operation lease structure in efforts to reduce national trading
deficit as it did not have to finance lease had to be recorded as national
debt.
From Korean Air’s prospective taking aircraft through the operating lease
provided the following benefits.
Reduction debt related of the company which were critical to raise
more debts due to prevailing regulations imposed by government
authorities.
Benefits on with holding taxes based on double tax treaty between
Korea and Ireland for Korean Air and favorable cooperate tax rate
offered by the Irish government for the subsidiary to be established
in Ireland.
Avoiding foreign currency truncation gains/losses by off-balance
sheet treatment at the lease transition.
KALF was established by Korean Air in June 1997 and Registered as one
of IFSC companies in Ireland with approval by the Irish ministry of
finance In order to facilitates Korean Air crafts lease financing. It is
different form an SPCV in a scene that it has own office and employees as
a going concern while SPC is typically set up for a specific transaction
and liquidated after the expiry of the transaction. Although KALF Started
with the lease transition in connected with Korean Air it intended to
expand its business with 3rd parities as on independent leasing company, it
opened an office in Dublin and hired 3 or an employee in order to perform
its leasing business and administrative works.82
After establishment KALF has been rapidly expanding its business
volume thanks to increase at lease truncation with Korean Air every year
as at the end of 2005 it had a total of 58 aircraft in its fleet and the total
assets amounted 517 million USD in 2003 arose mainly form lease
income from Korean Air.
KALF annual financials
2000 2001 2002 2003 2004 2005
Asset 2,7333.3 3550.6 4159.5 4447.8 4327.5 4128.7
Liability 2672.3 3499.9 4136.7 4542.2 443.5 4221.9
S.Equity 61.0 56.2 30.4 -94.2 -103.0 -93.2
Revenues 453.5 487.1 513.3 516.8 585.4 577.4
Expanses 2333.3 306.6 345.9 308.5 345.1 346.0
Op.profit 220.2 180.5 167.4 208.2 211.3 231.4
Net Income 32.2 -4.9 -25.1 3.5 -8.6 9.8
Accumulated
Income
60.0 55.2 29.4 -95.4 -104.3 -94.2
AIRDRAFT LESASING DIAGRAM
83AIR CRAFT
MANUFACTURER
Aircraft sale
Leasing company
or SPC
Lease payment Right to use
Airline Company
DIAGRAM OF LEASE CRITERIA
YES
NO
YES84
LESSOR
LESSEE
Is there a transfer of
ownership?
Is there a bargain
purchase option?
Capital lease
NO
YES
NO
YES
NO
CONCLUSION
We have received the case of the leases between Korean Air and KALF
and its issues related to lease classification. My intension is not to
challenge the interpretation made the Korean Financial supervision
commission but to facilitate lease classification issue through case review.
The case of Koran Air and KALF is similar to synthetic lease in a since
that Korean Air and lenders structure the lease involving KALF in an 85
Is PV of payments >/ 90% of fair
value?
Is lease term>/ 75% economic life?
Operating lease
effort to achieve off balance sheet treatments. In 2003 the Korean
Financial Supervision commission interpret the lease capital based on
their view that Korean airways taking the risk and reward of the lease by
way of a guarantee and ownership of the share of KALF. As a result
significant accounting changes were made. By Korean Air through lease
re classification of 32 aircraft from operation lease to capital lease. KALF
however retained the existing accounting treatment for the 32 air crafts
based on option by its auditor and the IRISH accounting rules.
I admit that my analysis is not sufficient enough to support or justify
off=balance sheet treatment of case Korean Air and KALF. I d\believe
mere integrate study including financial analysis and tax effect is
required. I will leave it for further study in the future.
CASE STUDY RELATED TO HIRE PURCHASE
VEHICAL FINANCE THROUGH HIRE PURCHASE
86
ABSTRACT
In resent time the Non-Banking Financial Company (NBFC’s) has
emerged as substantial contributors to the Indian economic growth. In
India economy today, the financial intermediately is being conducted by a
wider range of financial institutions. They are showing spectacular
performing both in terms of sourcing of funds and development of funds
in various areas. This paper seeks to analyze the various sources of funds
obtained for vehicle finance by financial institution.
The banking and non-banking financial institution plays an expanded role
as to accelerate the growth of financial market and to provide a wider
choice to the investors. The hire purchase finance adopts the automobile
sectors as a high way to his road transport. One estimate put about 25 to
30 percent of all civilian commercial vehicle sales was having been
financial by hire purchase companies.
The companies are providing the corporate sector with alternative sources
of funds and to some extend have helped to reduce the pleasure on the
development of financial institution which are also facing a resource
crouch. If very successful company should have adequate recourses at its
disposal and the RBI has also issued various direction for the regulation
of the deposit being raised by such companies.
87
VEHICALE FINANCE THROUGH HIRE PURCHASE
To begin with there are basically three way of funding asset.
1) HYPOTHECATION
2) LEAING
3) HIRE PURCHASE
The similarity is that all have equally monthly installments. In
Hypothecation the title (ownership) according to the sale of goods act
goes to the purchaser, the asset is hypothecated to the financial company.
The lien is cancelled at the end of the contract.
In leasing the financial company is the lessor and the user is lessee. The
title of the product cannot be sold or transferred to the lessee at the end of
the contract.
The hire purchase the vehicle is sold to the finance company which is
turn, hires it to the user. After the end of the contract the product is sold to
the user after collecting option money.
From this study of vehicle finance through Hire purchase it is very clear
that Hire purchase is one of the best option of vehicle financing for self
employed and salaried people in order to fulfill their needs and to avoid
income tax problems.
88
It is also clear that the number of documents and guarantors authority is
very strict in Hypothecation unlike Hire purchase. This is because the risk
for the financiers is very high in Hypothecation since the vehicle will be
in the name of the borrower whereas in Hire purchase the risk involved is
comparatively less.
Conclusion
During 1980’s many financial services came into existence like hire purchase,
leasing venture capital ECT. This service gave an excellent growth in changing
the business scenario. Now a day manufacturers, NBFC’s and banks are mostly
indulged in leasing business and hire purchase business.
Leasing is like rented asset where ownership is not with the user. Where as in
case of hire purchase after the payment of last installment the buyer become the
owner of that asset. Leasing attracts lease tax and hire purchase attracts regular
sale tax. Prospective use can buy these assets for cash or on credit and use it for
life of the asset. It 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 monthly rent.
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Normally a deposit is requested i.e. 10% while haring any asset. Funding Periods are normally between 3-7 year. Rather than pay for the asset outright using cash, it can often make sense for businesses to look for ways of spreading the cost of acquiring an asset, to coincide with the timing of the revenue generated by the business. The most common sources of medium term finance for investment in capital assets are Hire Purchase and Leasing. Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. Hire purchase and leasing services provides helping hands to the consumers.
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