• Leasing is distinguished from most other
forms of finance by the fact that the
financier (the lessor) is the legal owner of
the leased asset.
• The asset user (the lessee) obtains the
right to use the asset in return for periodic
payments (lease rentals) to the lessor.
Concept of Leasing
• Leasing, as a financing concept, is an
agreement between two parties, the
leasing company or lessor and the user or
• The rentals are predetermined and
payable at fixed intervals of time,
according to the mutual convenience of
both the parties.
• However, the lessor remains the owner of
the equipment over the primary period. 3
Concept of Leasing
• Leasing is an important source of finance
for the lessee. Leasing Co. finance for:-
– Modernization of business
– Balancing equipment
– Cars and other vehicles and durables
– Assets which aren’t being financed by
Origin & Development of
• Since WW II, the use of leasing has
been greatly expanded and is constantly
used for new products and new
• Henry Scholfeld set up US Leasing
Corporation with a capital of $20,000 in
• The concept of financial leasing was
pioneered in India during 1973, First
company was set up by Chidambaram 34
Legal Aspects Of Leasing
• The delivery of goods by one person to
• For some purpose,
• When the purpose is accomplished, be
returned or otherwise disposed of
according to the directions of the person
• The person delivering the goods is called
the ‘bailor’ and
• The person to whom they are delivered is 6
Obligation For The Lesser And
• The lesser has the duty to deliverthe
asset to the lessee,
• The lessee has the obligation to pay the
lease rentals as specified in the lease
Contents Of Lease Agreement
• Description of the lessor, the lessee, and
• Amount, time, and place of lease rental
• Time and place of equipment delivery.
• Lessee’s responsibility for taking delivery
and possession of the leased equipment.
• Lessee’s responsibility for maintenance,
repairs, registration, etc. 8
Contents Of Lease Agreement
• Lessee’s right to enjoy the benefits of
the warranties provided by the
• Insurance to be taken by the lessee on
behalf of the lesser.
• Variation in lease rentals.
• Option of lease renewal for the lease
• Return of equipment on expiry of the
lease period. 9
• A financial Lease is also known as Capital
lease, Long-term lease, Net lease & Close
• Under a financial lease, the rate of lease
would be fixed based on the kind of lease,
the period of lease, periodicity of rent
payment, & the rate of depreciation &
other tax benefits available.
• The high cost of equipments such as
office equipment, diesel generators, 13
Framework of finance lease
• Lessee selects the equipment from the
manufacturer or distributor and negotiates the
terms of warranties, maintenance etc.
Delivery, installation, the price and terms of
• The lessor purchases the equipment either
directly from the vendor or from the lessee
following the delivery.
• Lessor retains ownership of equipment while
the lessee enjoys the use.
• The lease is for non-cancelable period, lessor
• An operating lease is also known as service
lease, short-term lease or true lease.
• The lease is for a limited period may be in a
month, six months, a year or few years.
• Normally, the lease rentals will be higher as
compared to other leases on account of
short period of primary lease.
Framework Of Operating Lease
• Unlike in the case of financing lease, in an
operating lease, the lessor leases same
asset to different lessees successively
after the expiration of each contract.
• A single contract does not result in
recovery of the capital cost in full.
• This lease is usually for the period that is
significantly shorter than the economic life
of the equipment.
• This lease is subject to cancellation by
• The lessor also relies on the residual
value of the equipment to partly recover
• In an operating lease, the lessor leases
the equipment to many lessees over the
equipments economic life.
• Operating lease, are usually confined to
equipments having an established used or
have an active second market
• A leverage lease is used for financing those
assets which require huge capital outlay.
• Asset has economic life of 10 years or more.
• The Lessor acquires the assets as per the
terms of the lease agreement but finances only
a part of the total investment, say 20%-50%
Cross Border Lease
• A vendor leasing is one where the retail
vendors tie up with the lease finance
companies which give financing option to
the customers of the vendors to purchase
• This type of lease is popular in auto
–Dry and Wet Leasing
• Wet lease
– Aircraft with complete crew,
maintenance and Insurance
– Lessee acts like air travel agent
– Rent is paid by hours operated
– Period of lease I from 1 to 24 Months
• Dry Lease
– Aircraft without crew, maintenance etc
– Typically used by Banks and Leasing
– Leasing period is more than 24 months
Problems of Leasing
• Unhealthy Competition
• Stamp Duty
• Delayed payments
• Bad debts
• Higher Fixed Cost per month
• Reduce return to Equity Shareholder
• Complex processing and Documentation
Advantages of Leasing
• Alternative use of funds
A leasing arrangement provides a firm
with the use and control over asset without
incurring huge capital expenditure.
• Fasterand cheapercredit
Acquisition of assets under leasing
agreement is cheaper and faster than any
other source of finance. 23
Leasing arrangements may be tailored to the
lessee’s needs more easily than ordinary
financing. The lessee can utilize more funds for
working capital needs.
• Facilitates Additional Borrowings
Leasing may increase long-term ability to
• No restrictive covenants
The restrictive covenants which are usually
imposed under debenture or loan agreement are
absolutely absent in a lease agreement.
• Hundred percent financing
Lease financing enables a firm to acquire the
use of an asset without having to make a down
payment. So, hundred per cent financing is
assured to the lessee.
• Boomto small firm
It is a boom to small firms and technocrats who
are able to make promoters contribution as
Disadvantages of Leasing
• Lease is not a suitable mode of project
• Certain tax benefits/incentives such as
subsidy may not be available on leased
• The value of real assets such as land and
building may increase during lease period.
In such a case, the lessee loses the
advantage of a potential capital gain.
• The cost of financing is generally higher
• A manufacturer who wants to discontinue a
particular line of business will not in a
position to terminate the contract except by
paying heavy penalties.
• If the lessee is not able to pay rentals
regularly, the lessor would suffer a loss
particularly when the asset is a sophisticated
one and less liquid.
• Hire Purchase is the legal term for a contract,
in which persons usually agree to pay for
goods in parts or a percentage at a time.
• When a sun equal to the original full price
plus interest has been paid, the buyer may
then exercise an option to buy the goods or
return the goods to the owner.
• The hire purchaser acquires the goods
immediately on signing the hire purchase
agreement but the ownership of the same is 28
Hire Purchase Act, 1972
• HP transactions are governed by the Hire Purchase Act
• The HP Act sets out the forms and contents of HP
agreements, the legal rights, duties, obligations of hirers
• The HP Act is administered by the Ministry of Domestic
Trade and Consumer Affairs.
• Hire purchase should be distinguished from installment
sale wherein property passes to the purchaser with the
payment of the first installment.
Development of hire purchase
• In India, Hire purchase finance started
only after WW I.
• With the increase in economic activity,
many Non-Banking financing companies
entered the scene in the fifties and sixties.
Hire Purchase Agreement
HP agreements must be in writing and signed by both
They must clearly lay out the following information:
• A clear description of the goods
• The cash price for the goods
• The HP price
• The monthly installments
• Rights to parties 31
Features Of Hire Purchase
• Possession of goods
• Each installment is treated as hire
• Default in the payment
• Terminate the agreement
Advantages Of Hire Purchase
• Spread the cost of finance
• Interest-free credit
• Higher acceptance rates
• Debt solutions
Disadvantages Of Hire Purchase
• Personal debt
• Final payment
• Bad credit
• Creditor harassment
• Repossession rights
BETWEEN LEASING &BETWEEN LEASING &
HIRE PUECHASEHIRE PUECHASE
• In lease, ownership
lies with the lessor.
The lessee has the
right to use the
equipment and does
not have an option to
• Leasing is a method of
• In hire purchase, the hirer
has the option to
purchase. The hirer
becomes the owner of the
immediately after the last
installment is paid.
• Hire Purchase is a
method of financing both
business assets and
consumer articles. 36
METHOD OF FINANCING
• In Leasing, depreciation
and investment allowance
cannot be claimed by the
• The entire lease rental is
tax deductible expense.
• In Hire Purchase
investment allowance can
be claimed by the Hirer.
• Only the interest
components of the Hire
Purchase installment are
• The lessee, not being the
owner of the assets and
does not enjoy the
salvage value of the
• In Leasing the Lessee is
not required to make any
• The hirer, in purchase
being the owner of assets
and enjoy the salvage
value of the assets.
• In Hire Purchase, the
Hirer is required to
deposit 20% (or any other
amount a per agreement)
of the cost.
• In Leasing, the Lessee
take the asset on a rent
• Lease financing is
financing. It does not
required any immediate
• In Hire Purchase the
asset is purchased by the
• In Hire Purchase, a
margin equal to 20-25%
of the cost of the assets
to be paid the Hirer. 39
EXTENT OF FINANCE
• In Leasing, the
maintenance of leased
asset is the responsibility
of the Lessee.
• The leased assets are
shown by way of footnote
• In Hire Purchase, the cost
of maintenance of hired
assets is to be borne by
the Hirer himself.
• The assets on hire
purchase is shown in the
balance sheet of the Hire.