IntroductionIn addition to debt and equity financing,leasing has emerging s third importantsource of intermediate and long termfinancing of corporate enterprises duringthe last few decades.
Meaning of LeasingLease is a contractual arrangement in which a partyowing an asset/equipment (lessor) provides theassets for use to another/transfer the right touse the equipment to the user (lessee) over acertain period of time for the consideration ofreturn of periodic payment (rental) with or withouta further payment (premium).At the end of the period of contract theasset/equipment is reverts back to the lessorunless there is a provision for the renewal of thecontract.
Leasing is an arrangement that provides a firmwith used and control over assets without buyingand owing the same. It is a form of renting assets.Lease is a contract between the owner of theasset (lesser) and the user of the asset calledlessee, whereby the lesser gives the right to usethe asset to the lessee over an agreed period oftime for a consideration called the lease rental.The lease contract is regulated by the terms andconditions of the agreement.In long term lease contracts, the lessee isgenerally given an option to buy or renew the lease.
Elements of Lease Financing1. Parties to the contact,2. Asset3. Ownership separate from the users4. Term of lease5. Lease rentals
Modes of Terminating Lease1. The lessor sells the asset to the lessee.2. The asset give back to the lessor.3. The lease renewed on a perpetual basisfor a specific period.
1. Operating or Service LeaseIn this lease the lessor does not transfer all the risks andrewards incidental to the ownership of the asset and thecost of the asset is not fully amortized during the primarylease period.The lessor provides services attached to the leased assets,such as maintenance, repair and technical advice.For this reason, operating lease is also called ‘service lease’.Operating lease is generally used for computers, officeequipments, automobiles, trucks, some other equipments,telephones, and so on.
Characteristics of Operating Lease1. It is short term lease.2. The lease is usually cancelable at short-noticeby the lessee.3. The lessor is generally for maintenance,insurance and taxes of the asset.4. The lessee has the option of renewing thelease after the expiry of lease period.
2.Financial LeaseA lease is classified as financial lease if it ensuresthe lessor for amortization of the entire cost ofinvestment plus the expected return on capitaloutlay during the term of the lease.Such a lease is usually for a longer period of timeand non-cancelable.As a source of funds, the financial lease is analternative similar to debt-financing.Most of the lease in India are financial leas thatare commonly used for leasing land, building,machinery and fixed equipment.
Characteristics of Financial Lease1. The PV of the total lease rentals payable duringthe period of the lease exceeds or is equal tothe whole of the fair value of the leased assets.2. Financial is for long period of time.3. It is usually non-cancelable by the lessee priorto its expiration date.4. The lessee is generally responsible for themaintenance, insurance and service of the asset.
3. Sale and Lease back and Direct LeaseUnder the sale and lease back lease, a firm may sellan asset which it already owns to another partyand lease it back from the buyer.The lessee receives immediate cash for his assetsand repays the lease rentals over the stipulatedperiod.In Direct lease, the lessee and the owner of theequipment are two different entities.
4. Single investor lease and leverage leaseIn Single investor lease, only two parties to the leasetransaction, the lessor and the lessee. The leasing company(lessor) funds the entire investment by an appropriate mixof debt-equity funds.The debt raised by the leasing company to finance the assetare without resources to the lessee. In the case of defaultin servicing the debt by the leasing company the lender isnot entitled to payment from the lessee.
Leveraged lease- in it , there are three partiesinvolved- lessor (leasing company), lessee (user ofthe equipment), and financer.Leasing company contribute through the way ofequity capital, financial institution, and banksfinance by way of term loans towards thepurchase of an asset to be leased.
5. Domestic Lease and International LeaseDomestic Lease- A lease is said to be adomestic lease if all parties t the transactionare domiciled in the same country.International Lease- If the parties involvedin the leasing transaction are located in twodifferent nations, the transaction is knownas international lease transaction.
EVOLUTION OF LEASINGLeasing activity was initiated in India in 1973.The first leasing company of India was set up inthat year by Farouk Irani, with industrialist ACMuthia for several years, and the company ‘FirstLeasing Company of India Ltd’.
Meaning / DefinitionHire purchase is hiring an asset for a period oftime and at the end of the period, purchasingthe same. This is time sharing of the asset.The person hiring the asset acquires itspossession and the right to use it .As a legal device it is being used for financingof capital goods such as industrial finance,financing of consumer goods and for sellingconsumer good on hire purchase.
To be valid HP, agreements must be in writing andsigned by both the parties. They must clearly layOut the following information in written form:-• A clear description of the goods• The cash price for the goods• The deposit of Amount• The monthly installments• The right of the hire to terminate the contractwhen he feels like doing so with a valid reason.• The HP price (the total sum that must be paid tohire and then purchase the goods)
Parties Involved in Hire purchaseThere are two parties involved in a hire purchasecontract, namely the intending seller and theintending buyer or hirer.Now a days hire purchase contract involves threeparties, namely –The Seller,The Financier,The Hirer.
1. SellerThe seller is the (hiree) who agrees to partwith the possession of the goods to thebuyer (hirer) for a consideration which willbe spread over a specific period of time.
2. BuyerThe purchaser or the buyer is also known ashirer who purchases the goods on hirepurchase from the seller agreeing to paythe value of the goods in regularinstallments spread over a specific periodof time.
3. FinancerIn most of the hire purchase contracts there are only twoparties; the seller and the buyer but in certain rare casesthere may be a third party, the hire purchase financer,who pays the price of the goods to the seller on behalf ofthe buyer and then collects the dues along with interestfrom the buyer of the goods.A dealer now normally arranges a hire purchase agreementthrough a finance company with the customer.It is therefore, a tripartite deal.
The finance (hire purchase) company purchases theequipment from the supplier and gives it on hire.The hirer is required to make a down payment of 20-25% ofthe cost and pay the balance amount along with the interestin EMI, in advance or arrears over a time span of 36-48months. Alternately, the hirer has to deposit an equal amount as afixed deposit with the finance company which provides theentire finance on hire purchase terms, repayable withinterest in EMIs over 36-48 months.Deposit and the accumulated interest is returned to thehirer upon payment of the last installment.
OwnershipHire Purchase - The ownership of the equipmentpasses to the hirer on payment of the lastinstallment. The lessor company is the owner andThe lessee is entitled only to the use of the leasedequipment.
Hire Purchase - Depreciation The hirer is entitleddepreciation shield on the assets hired by him.Hire Purchase - To the Depreciation on the asset ischarged in the books of the lessor. Tax BenefitsHirer is
Meaning / DefinitionHire purchase is hiring an asset for a periodof time and at the end of the period, purchasingthe same. This is time sharing of the asset.The person hiring the asset acquires itspossession and the right to use it .As a legal device it is being used for financing ofcapital goods such as industrial finance,financing of consumer goods and for sellingconsumer good on hire purchase.
Parties involve in hire purchasing• Lessor• Lessee• Financer (third party)
• The hirer will be allowed to enjoy quietpossession of the goods, i.e. no-one willinterfere with the hirers possession during theterm of this contract.• The owner will be able to pass title to, orownership of, the goods when the contractrequires it.• That the goods are of merchantable quality andfit for their purpose, save that exclusionclauses may, to a greater or lesser extent, limitthe Finance Companys liability.
The Hirer usually has the following rights:-• To buy the goods at any time by givingnotice to the owner and paying the balanceof the HP price less a rebate.• To return the goods to the owner — this issubject to the payment of a penalty toreflect the owners loss of profit.
• Where the owner wrongfully repossessesthe goods, either to recover the goods plusdamages for loss of quiet possession or todamages representing the value of thegoods lost.• Basically hirer have following rights- 1.Rights of protection 2. Rights of notice 3.Rights of repossession 4. Rights ofStatement 5. Rights of excess amount
The Hirer usually has the following obligations:• To pay the hire installments• To take reasonable care of the goods (ifthe hirer damages the goods by usingthem in a non-standard way, he or shemust continue to pay the installments and,if appropriate, compensate the owner forany loss in asset value)
• To inform the owner where the goodswill be kept.• A hirer can sell the products if an onlyif he has purchased the goods finally.
The owners rights• The owner usually has the right toterminate the agreement where the hirerdefaults in paying the installments orbreaches any of the other terms in theagreement. This entitles the owner:• To forfeit the deposit• To retain the installments already paid andrecover the balance due
• To repossess the goods (which may haveto be by application to a Court dependingon the nature of the goods and thepercentage of the total price paid)• To claim damages for any loss suffered.