2. Introduction
In addition to debt and equity financing,
leasing has emerging s third important
source of intermediate and long term
financing of corporate enterprises during
the last few decades.
3. Meaning of Leasing
Lease is a contractual arrangement in which a party
owing an asset/equipment (lessor) provides the
assets for use to another/transfer the right to
use the equipment to the user (lessee) over a
certain period of time for the consideration of
return of periodic payment (rental) with or without
a further payment (premium).
At the end of the period of contract the
asset/equipment is reverts back to the lessor
unless there is a provision for the renewal of the
contract.
4. Leasing is an arrangement that provides a firm
with used and control over assets without buying
and owing the same. It is a form of renting assets.
Lease is a contract between the owner of the
asset (lesser) and the user of the asset called
lessee, whereby the lesser gives the right to use
the asset to the lessee over an agreed period of
time for a consideration called the lease rental.
The lease contract is regulated by the terms and
conditions of the agreement.
In long term lease contracts, the lessee is
generally given an option to buy or renew the lease.
5. Elements of Lease Financing
1. Parties to the contact,
2. Asset
3. Ownership separate from the users
4. Term of lease
5. Lease rentals
6. Modes of Terminating Lease
1. The lessor sells the asset to the lessee.
2. The asset give back to the lessor.
3. The lease renewed on a perpetual basis
for a specific period.
8. 1. Operating or Service Lease
In this lease the lessor does not transfer all the risks and
rewards incidental to the ownership of the asset and the
cost of the asset is not fully amortized during the primary
lease 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, office
equipments, automobiles, trucks, some other equipments,
telephones, and so on.
9. Characteristics of Operating Lease
1. It is short term lease.
2. The lease is usually cancelable at short-notice
by the lessee.
3. The lessor is generally for maintenance,
insurance and taxes of the asset.
4. The lessee has the option of renewing the
lease after the expiry of lease period.
10. 2.Financial Lease
A lease is classified as financial lease if it ensures
the lessor for amortization of the entire cost of
investment plus the expected return on capital
outlay during the term of the lease.
Such a lease is usually for a longer period of time
and non-cancelable.
As a source of funds, the financial lease is an
alternative similar to debt-financing.
Most of the lease in India are financial leas that
are commonly used for leasing land, building,
machinery and fixed equipment.
11. Characteristics of Financial Lease
1. The PV of the total lease rentals payable during
the period of the lease exceeds or is equal to
the 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 prior
to its expiration date.
4. The lessee is generally responsible for the
maintenance, insurance and service of the asset.
12. 3. Sale and Lease back and Direct Lease
Under the sale and lease back lease, a firm may sell
an asset which it already owns to another party
and lease it back from the buyer.
The lessee receives immediate cash for his assets
and repays the lease rentals over the stipulated
period.
In Direct lease, the lessee and the owner of the
equipment are two different entities.
13. 4. Single investor lease and leverage lease
In Single investor lease, only two parties to the lease
transaction, the lessor and the lessee. The leasing company
(lessor) funds the entire investment by an appropriate mix
of debt-equity funds.
The debt raised by the leasing company to finance the asset
are without resources to the lessee. In the case of default
in servicing the debt by the leasing company the lender is
not entitled to payment from the lessee.
14. Leveraged lease- in it , there are three parties
involved- lessor (leasing company), lessee (user of
the equipment), and financer.
Leasing company contribute through the way of
equity capital, financial institution, and banks
finance by way of term loans towards the
purchase of an asset to be leased.
15. 5. Domestic Lease and International Lease
Domestic Lease- A lease is said to be a
domestic lease if all parties t the transaction
are domiciled in the same country.
International Lease- If the parties involved
in the leasing transaction are located in two
different nations, the transaction is known
as international lease transaction.
16. EVOLUTION OF LEASING
Leasing activity was initiated in India in 1973.
The first leasing company of India was set up in
that year by Farouk Irani, with industrialist AC
Muthia for several years, and the company ‘First
Leasing Company of India Ltd’.
17. Meaning / Definition
Hire purchase is hiring an asset for a period of
time and at the end of the period, purchasing
the same. This is time sharing of the asset.
The person hiring the asset acquires its
possession and the right to use it .
As a legal device it is being used for financing
of capital goods such as industrial finance,
financing of consumer goods and for selling
consumer good on hire purchase.
18. To be valid HP, agreements must be in writing and
signed by both the parties. They must clearly lay
Out 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 contract
when he feels like doing so with a valid reason.
• The HP price (the total sum that must be paid to
hire and then purchase the goods)
19. Parties Involved in Hire purchase
There are two parties involved in a hire purchase
contract, namely the intending seller and the
intending buyer or hirer.
Now a days hire purchase contract involves three
parties, namely –
The Seller,
The Financier,
The Hirer.
20. 1. Seller
The seller is the (hiree) who agrees to part
with the possession of the goods to the
buyer (hirer) for a consideration which will
be spread over a specific period of time.
21. 2. Buyer
The purchaser or the buyer is also known as
hirer who purchases the goods on hire
purchase from the seller agreeing to pay
the value of the goods in regular
installments spread over a specific period
of time.
22. 3. Financer
In most of the hire purchase contracts there are only two
parties; the seller and the buyer but in certain rare cases
there may be a third party, the hire purchase financer,
who pays the price of the goods to the seller on behalf of
the buyer and then collects the dues along with interest
from the buyer of the goods.
A dealer now normally arranges a hire purchase agreement
through a finance company with the customer.
It is therefore, a tripartite deal.
23. The finance (hire purchase) company purchases the
equipment from the supplier and gives it on hire.
The hirer is required to make a down payment of 20-25% of
the cost and pay the balance amount along with the interest
in EMI, in advance or arrears over a time span of 36-48
months.
Alternately, the hirer has to deposit an equal amount as a
fixed deposit with the finance company which provides the
entire finance on hire purchase terms, repayable with
interest in EMIs over 36-48 months.
Deposit and the accumulated interest is returned to the
hirer upon payment of the last installment.
24. Ownership
Hire Purchase - The ownership of the equipment
passes to the hirer on payment of the last
installment. The lessor company is the owner and
The lessee is entitled only to the use of the leased
equipment.
25. Hire Purchase - Depreciation The hirer is entitled
depreciation shield on the assets hired by him.
Hire Purchase - To the Depreciation on the asset is
charged in the books of the lessor. Tax Benefits
Hirer is
27. Meaning / Definition
Hire purchase is hiring an asset for a period
of time and at the end of the period, purchasing
the same. This is time sharing of the asset.
The person hiring the asset acquires its
possession and the right to use it .
As a legal device it is being used for financing of
capital goods such as industrial finance,
financing of consumer goods and for selling
consumer good on hire purchase.
28. Parties involve in hire purchasing
• Lessor
• Lessee
• Financer (third party)
30. • The hirer will be allowed to enjoy quiet
possession of the goods, i.e. no-one will
interfere with the hirer's possession during the
term of this contract.
• The owner will be able to pass title to, or
ownership of, the goods when the contract
requires it.
• That the goods are of merchantable quality and
fit for their purpose, save that exclusion
clauses may, to a greater or lesser extent, limit
the Finance Company's liability.
31. The Hirer usually has the following rights:-
• To buy the goods at any time by giving
notice to the owner and paying the balance
of the HP price less a rebate.
• To return the goods to the owner — this is
subject to the payment of a penalty to
reflect the owner's loss of profit.
32. • Where the owner wrongfully repossesses
the goods, either to recover the goods plus
damages for loss of quiet possession or to
damages representing the value of the
goods lost.
• Basically hirer have following rights- 1.
Rights of protection 2. Rights of notice 3.
Rights of repossession 4. Rights of
Statement 5. Rights of excess amount
33. The Hirer usually has the following obligations:
• To pay the hire installments
• To take reasonable care of the goods (if
the hirer damages the goods by using
them in a non-standard way, he or she
must continue to pay the installments and,
if appropriate, compensate the owner for
any loss in asset value)
34. • To inform the owner where the goods
will be kept.
• A hirer can sell the products if an only
if he has purchased the goods finally.
35. The owner's rights
• The owner usually has the right to
terminate the agreement where the hirer
defaults in paying the installments or
breaches any of the other terms in the
agreement. This entitles the owner:
• To forfeit the deposit
• To retain the installments already paid and
recover the balance due
36. • To repossess the goods (which may have
to be by application to a Court depending
on the nature of the goods and the
percentage of the total price paid)
• To claim damages for any loss suffered.
