100 marks project

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.

7

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.

10

http://www.businessdictionary.com/definition/hold.html

http://www.businessdictionary.com/definition/third-party.html

http://www.businessdictionary.com/definition/leveraged-lease.html

http://www.businessdictionary.com/definition/operating-lease.html

http://www.businessdictionary.com/definition/capital-lease.html

http://www.businessdictionary.com/definition/secured-party.html

http://www.businessdictionary.com/definition/secured-party.html

http://www.businessdictionary.com/definition/lender.html

http://www.businessdictionary.com/definition/property.html

http://www.businessdictionary.com/definition/asset.html

http://www.businessdictionary.com/definition/holder.html

http://www.businessdictionary.com/definition/title.html

http://www.businessdictionary.com/definition/owner.html

http://www.ehow.com/parties/

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.

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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.

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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

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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.

27

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.

67

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

68

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.

70

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

73

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

78

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.

89

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.

90

100 marks project

Documents

bank of calcutta

state bank of india

central bank of india

bank of upper india

general bank of india

imperial bank of india

bank of bengal

canara bank