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This was also the time when the profit-performance of the two doyen companies, First Leasing and 20th Century had been made public, which contained all the fascination for many more companies to join the industry.
In the meantime, International Finance Corporation announced its decision to open four leasing joint ventures in India.
To add to the leasing boom, the Finance Ministry announced strict measures for enlistment of investment companies on stock-exchanges, which made many investment companies to turn overnight into leasing companies.
Subsequent swings in the leasing cycle have always been associated with the capital market - whenever the capital markets were more permissive, leasing companies have flocked the market.
There has been appreciable entry of first generation entrepreneurs into leasing, and in retrospect it is possible to say that specialised leasing firms have done better than diversified industrial groups opening a leasing division.
The other side developed very fast - hire-purchase of commercial vehicles.
The dealers in commercial vehicles as well 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 until recently, most of automobile financing business was in hands of family-owned businesses.
Leasing and Hire-purchase: A vanishing distinction
Essentially, asset-based financing in India particularly by non-banking financial companies is split in two documentation modes - lease and hire-purchase.
These two are technically different instruments, but in essence, there is not much that differs between the two, except for the caption.
Besides, the motor vehicles laws gave the surest legal protection any law could give to a financier: the financier would not have to carry any of the operational risks of a motor vehicle, and yet, any transfer of the vehicle would not be possible without the financier's assent.
Leasing, essentially a US-innovation, entered the country significantly in the early 80s, and was propagated as an alternative to traditional modes of industrial finance.
Besides, the early motivation (which continues with a number of players even now) of leasing was capital allowances, more significantly the investment allowance, which was not available for transport vehicles.
Hence, the leasing form historically clung to industrial plant and machinery.
For several years, there was no lease of vehicles, because the Motor Vehicles law protection was not applicable to a lease, and there was no investment allowance on vehicles, and for reciprocal reasons, there was no hire-purchase of industrial machinery.
These companies are known, in regulator's jargon, as non-banking financial companies, or NBFCs for short.
The terms NBFCs includes several other financial concerns too, and all such companies are regulated by the Reserve Bank of India.
There were no entry barriers to leasing business till recently, but the January 1997 amendments to the RBI law now require any non-banking finance company to have a prior registration with the RBI, and the conditions of registration virtually amount to authorization by the RBI.
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 focussed cause
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.
Consumers: Retail funding for consumer durables was frowned-upon at one point of time, but recent bad experience with corporate financing has focussed attention towards consumer durables which incidentally, is all the all-time favorite of financiers World-over.
Most of the larger companies have expressed interest in consumer funding, with ticket size going as low as Rs. 5000.
Govt. deptts. and authorities : One of the latest entrants in leasing markets is the Govt. itself.
The Deptt. of Telecommunications of the Central Govt. took the lead by floating tenders for lease finance worth about Rs. 1000 crores.
In its reforms programme, 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.
Therefore, the principal sources of applicable law on lease and hire-purchase transactions are sections 148 to 171 of the Indian Contracts Act dealing with bailments, and a long series of Court rulings, principally on hire-purchase transactions, but of late, on lease transactions as well.
The goods must last for at least as long as the lease period.
Unless the lessor, or the lessee being under obligation to do so, replaces them and the goods so replaced become the subject matter of the lease, the contract of lease comes to an end as soon as the subject matter of the lease, viz., the leased goods, cease to exist.
the lessor may virtually escape all obligations relating to the goods - conditions of fitness, quality, usefulness for purpose, or any damages on account of defects in goods,
can be effectively avoided by a disclaimer clause in the agreement
backed by evidence that the lessor was not involved in selection of the goods
nor did he influence the lessee's decision as to the goods or the supplier.
Obligations regarding operation and use of the goods
While being the owner of the goods, the lessor may completely distance himself from obligations relating to the operation and use of the goods.
This issue is very comfortably settled in India though there is a raging controversy on this point in number of other markets.
The lessor is not in effective possession and is not the user of the goods.
The lessee cannot be taken to be the agent of the lessor.
[Sundaram Finance Ltd. v. D G Nanajappa and Others]
A bus given on hire-purchase collided with a tree and killed several people. Hire-purchase financier as owner was not responsible. The driver of the bus was not to be taken as agent and the financier a "master".
A truck given on hire-purchase was found carrying opium. The financier cannot be held responsible as the misuse of the vehicle could not have been with his consent and there was no possibility of the financier having control over the actual use by the hirer.
[Pradeep and Co. v. Collector of Customs AIR 1973 Cal 131.]
While the owner of the asset has been held not to be responsible for misuse, he still claims right to be notified before confiscation of his asset.
In order to qualify for depreciation, the lessor has to establish himself to be both the legal and beneficial owner of the asset.
As in a hire-purchase transaction, the lessor allows to the lessee the right to buy the asset at a nominal price, it can be seen that the lessor has parted with the whole of his beneficial interest in the asset.
The lessor will not be able to benefit from the asset during the lease period (as there is a committed right to use to the hirer), and beyond the lease period (as there is a right to buy the asset with the hirer).
Having thus permanently divested himself of his beneficial rights, the lessor becomes ineligible to claim depreciation.
As it is the beneficial ownership rights of the lessor that is crucial, the distinction between lease and hire-purchase goes beyond the mere existence of option to buy in the lease.
If, explicitly or implicitly, it is apparent that the lessor has agreed to a permanent beneficial enjoyment of the asset by the lessee, the lease may be treated as a hire-purchase or a plain financing transaction.
Sale and leaseback transactions came under a lot of flak during 1995-96, when transactions in junk funding were being labeled as sale and leasebacks at phenomenal values.
The Income-tax law was amended to insert a specific provision about sale and leasebacks, which now restricts the amount with reference to which depreciation can be claimed in a sale and leaseback transaction, to the written down value in the hands of the seller-lessee.
That is, the actual cost of the asset to the lessor will be ignored, and instead, depreciation will be allowed on the seller's depreciated value.
Because the expenses involved in documenting a leveraged lease can be substantial, transactions involving less than $2 million worth of equipment can be economically difficult to structure as a leveraged lease.
If, however, documentation fees (such as counsel fees) can be kept within reason, smaller equipment amounts can be financed in this manner.
In many cases a prospective lessor or underwriter has an in-house legal staff with the ability to originate and negotiate the required documents.
Far more common than problems about the term and rent provisions are problems regarding the lessee's late payment of rent.
Generally, this is not a usury problem in most states — penalty rent is not considered to be "interest" for usury purposes under most state laws.
However, several types of problems can arise if the late charges are not consistently applied. If the lessee is going to be given grace for any reason, a written letter to the lessee should explain that the lessor reserves the right to reinstitute the penalty later on.
The hell or high water clause is important to establish that the lessee must pay the full amount of rent whether or not the equipment functions and has no right of offset. If this clause is explained to the lessee, it should be pointed out that the lessee does not, in this clause alone, give up its right to sue the lessor if it feels that the lessor has breached any terms of the lease, including representations regarding the equipment.
One of the provisions which addresses directly the lessor's anticipated residual value realization is the return provision of the lease.
These provisions include provisions addressing the condition in which the equipment must be on the date of return, the allocation of the costs of redelivery and what additional charges the lessee may be required to pay.
If the lessee desires to exercise a renewal or purchase option, check to ensure that no default exists, that no liabilities are outstanding and that the lessee has complied with all notice and other requirements.
In addition, a provision describing how fair market value should be in your lease form.
Be sure you are comfortable with its workings and the potential cost in dollars and time.
Contact potential appraisers in advance and be sure that they are familiar not only with the type of equipment but the concept of a fair market value determination for equipment lease purposes.
Ownership Buying Leasing You own the vehicle and get to keep it as long as you want it. You don't own the vehicle. You get to use it but must return it at the end of the lease unless you decide to buy it.
Up-front costs Buying Leasing They include the cash price or a down payment, taxes, registration and other fees. They typically include the first month's payment, a refundable security deposit, a down payment, taxes, registration and other fees.
Monthly payments Buying Leasing Loan payments are usually higher than lease payments because you're paying off the entire purchase price of the vehicle, plus interest and other finance charges, taxes, and fees. Lease payments are almost always lower than loan payments because you're paying only for the vehicle's depreciation during the lease term, plus interest charges (called rent charges), taxes, and fees.
Early termination Buying Leasing You can sell or trade in your vehicle at any time. If necessary, money from the sale can be used to pay off any loan balance. If you end the lease early, early-termination charges can be almost as costly as sticking with the contract.
Vehicle return Buying Leasing You'll have to deal with selling or trading in your car when you decide you want a different one. You can return the vehicle at lease-end, pay any end-of-lease costs, and walk away.
Future value Buying Leasing The vehicle will depreciate but its cash value is yours to use as you like. On the plus side, its future value doesn't affect you financially. On the negative side, you don't have any equity in the vehicle.
Mileage Buying Leasing You're free to drive as many miles as you want. (But higher mileage lowers the vehicle's trade-in or resale value.) Most leases limit the number of miles you may drive, often 12,000 to 15,000 per year. (You can negotiate a higher mileage limit.) You'll have to pay charges for exceeding your limits.
Excessive wear and tear Buying Leasing You don't have to worry about wear and tear, but it could lower the vehicle's trade-in or resale value. Most leases hold you responsible. You'll have to pay extra charges for exceeding what is considered normal wear and tear.
End of term Buying Leasing At the end of the loan term (typically four to five years), you have no further payments and you have built equity to help pay for your next vehicle. At the end of the lease (typically two to four years), you'll have to finance the purchase of the car or lease or buy another.
Customizing Buying Leasing The vehicle is yours to modify or customize as you like. Because the lessor wants the vehicle returned in sellable condition, any modifications or custom parts you add will need to be removed before you return the car. If there is any residual damage, you'll have to pay to have it fixed.
Financing the purchase through a loan may make more sense if the company needs to use the equipment longer than just few years.
Cash purchase could be the preferred option, on the other hand, if the equipment is needed for longer period of time and the interest rate of the lease or loan significantly exceeds company's cost of capital.
The principle of value additivity states that the present value (lease amount) is equal to the present value of the monthly payments (an annuity) plus the present value of the residual value (a lump sum).
Therefore, we have the following formula as our starting point:
Cross-border leasing has been widely used in some European countries, to arbitrage the difference in the tax laws of different jurisdictions, usually between a European country and the United States.
Typically, this rests on the fact that, for tax purposes, some jurisdictions assign ownership and the attendant depreciation allowances to the entity that has legal title to an asset, while others (like the U.S.) assign it to the entity that has the most indicia of tax ownership (legal title being only one of several factors taken into account).
A very prominent bank would purchase aircraft and lease them to the airlines.
Because the bank was able to claim depreciation deductions for the aircraft,
the bank was able to offer lease rates significantly lower than the interest payments that airlines would otherwise pay on an aircraft purchase loan (and most commercial aircraft flying today are operated under a lease).
As part of the market planning process, you must learn about your competitors and how to position yourself in relation to them.
Describe your strengths and what you want to emphasize.
Once you identify both direct and indirect competition (for example, the Internet as indirect competition), you can determine how and why your services are special and benefit users in a particular way.