ISSUE MANAGEMENT

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Learning Objectives
• This chapter will help the readers to:
• Understand the process to issue securities first time which is called IPO, i.e.,
Initial Public Offering or/and further issue which is known as Follow-on Public
Offers (FPOs)
• List the types of issues that are generally made by companies
• Discuss the activities that are carried on by merchant bankers in managing
pre-issue and post-issue of securities by their clients

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INTRODUCTION

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DEFINE BOOK BUILDING

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Methods and Guidelines for Book Building

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Reverse Book Building

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PRIVATE PLACEMENT

• Qualified Institutional Buyer

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VARIOUS FORMS OF SECURITIES’ ISSUE

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Buy-back of Shares

• Benefits of Buy-back of Shares

• Procedure for Buy-back of Shares

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OFFER DOCUMENT/PROSPECTUS

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ISSUE MANAGEMENT

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Application Supported by Blocked Amount
(ASBA)

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GUIDELINES FOR PUBLIC ISSUE

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GENERAL OBLIGATIONS OF ISSUER AND INTERMEDIARIES WITH
RESPECT TO MARKETING (ADVERTISEMENTS) OF PUBLIC
ISSUE AND RIGHT ISSUE
• Prohibition on Payment of Incentives
• Public Communications, Publicity Materials,
Advertisements and Research Reports
• Due Diligence
• Post-Issue Reports
• Post-Issue Advertisements

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 SUMMARY
• Book building is a process through which the price of IPOs (securities issued first time for public) is
derived which considers the demand in the market for a particular issue. Under the process of book
building, the investors send their bids at a price which is reasonable in the opinion of investor but it is
within a price range.
• According to the guidelines of the SEBI, an issuer company can follow the process of book building in
two ways. (i) 75% of Net Offer to the public through Book Building Process, and (ii) 100% of Net Offer
to the public through Book Building Process.
• The issuer company can sell its securities directly to some investors, generally these are institutional
investors, then it is called private placement.
• A preferential issue is an issue of specified securities by a listed issuer to any select person or group of
persons on a private placement basis and does not include an offer of specified securities made
through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock
purchase scheme or qualified institutions placement or an issue of sweat equity shares or depository
receipts issued in a country outside India or foreign securities.
• Public issue, right issue, private placement issue and bonus issue are the different forms of issues
made by a company.
• ..Broadly a company issues securities in the form of preference shares, equity shares or debentures.

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SUMMARY contd….
• A company can buy back its own shares under different circumstances and
the process of buying its own shares by the company is known as buy back
of shares. SEBI has given detailed guidelines and regulations in case a
company decides to buy back its shares.
• An offer document contains all necessary information related to the
securities, types of securities a company is going to issue, its promoters,
lead bankers, details about the financial parameters of the company,
related risk factors, and any other information necessary to be disclosed to
the investors.
• Section 2(36) of Companies Act, 1956 has defined the term prospectus. It
means any document described or issued as prospectus, notice, circular,
advertisement or other document inviting deposits from the public or
inviting offers from the public for the subscription, or the purchase of any
shares in or debentures of a body corporate.
• According to Section 2(1) of the Companies Act, 1956, “abridged
prospectus” means a memorandum containing such salient features of a
prospectus as may be prescribed; as per the revised format prescribed by
government, the abridged prospectus should give detail information as
given by a prospectus and it should be issued with share application form.

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 SUMMARY contd….
• An offer document can be in the form of Prospectus, Abridged
Prospectus, Shelf Prospectus, Red Herring Prospectus, Letter of
Offer, Abridged Letter of Offer or a Placement Document.
• In order to make issue of securities in a more systematic way, to
take away shortfalls in securities issue and, to protect the interest
of the investors SEBI placed guidelines in the form of Disclosure
and Investors Protection (DIP), 2000 as basic rules for the new
issue activities. But this was replaced in 2009 by new guidelines
called Issue of Capital and Disclosure Requirement (ICDR)
Regulation, 2009. This regulation is in addition to the rules and
regulation given by the Companies Act. In addition to this, SEBI
has also issued one more regulation called Issue and Listing of
Debt Securities Regulation, 2008.
• Merchant banks facilitate the issuer companies to complete
various activities before the issue of securities and after the issue
of securities.
• An issuer may determine the price of specified securities in
consultation with the lead merchant banker or through the book
building process.
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 SUMMARY contd….
• The pre-issue obligations includes; lead merchant banker shall exercise due diligence, standard of due diligence shall
be such that the merchant banker shall satisfy himself about all the aspects of offering, authenticity and adequacy of
disclosure in the offer documents, liability of the merchant banker shall continue even after the completion of issue
process, lead merchant banker shall pay requisite fee in accordance with regulation 24A of the Securities and
Exchange Board of India (Merchant Bankers) Rules and Regulations, 1992 along with draft offer document filed with
the Board. In case of a fast track issue, the requisite fee shall be paid along with the copy of the red herring
prospectus, prospectus or letter of offer, as the case may be, filed under clause and lead merchant banker shall
ensure that facility of Applications Supported by Blocked Amount is provided in all books built public issues which
provide for not more than one payment option to the retail individual investors.
• Documents to be submitted along with the offer document by the lead manager are Memorandum of Understanding
(MOU), Due Diligence Certificate, various certificates to be submitted, Undertaking and List of Promoters’ Group and
other details.
• Appointment of intermediaries in pre-issue management includes appointment of merchant bankers, appointment of
associate managers, appointment of other intermediaries, underwriting, offer document to be made public, dispatch
of issue material, no complaints certificate, mandatory collection centres, authorized collection agents,
advertisement for rights post issues, appointment of compliance officer, abridged prospectus and agreements with
depositories.
• Post-issue obligations includes post-issue monitoring reports, redressal of investor grievances, co-ordination with
intermediaries, underwriters, bankers to an issue, post-issue advertisements, basis of allotment, proportionate
allotment procedure, reservation for retail individual investor and other responsibilities.
• There are further regulations related to the public and right issues etc.

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 CHAPTER 11
FACTORING AND FORFAITING

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Learning Objectives
This chapter will help the readers to:
- Understand factoring and its features
- Discuss mechanism of factoring
- Analyze how factoring is different from bills discounting
- Understand what a factor charges for its services
- Explain what one is looking for to discount the exporting bills
receivables

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INTRODUCTION AND MEANING OF FACTORING

Factoring can be defined as a specialized service provided by financial

institutions in which financial institutions buy (through an agreement)
receivables from the seller of services/goods and manage seller’s
receivables.
Here the specialized institution is called as ‘factor’.

“Factoring means an arrangement between a factor and his client which

includes at least two of the following services: Finance, maintenance of
accounts, collection of debts and protection against credit.”
by Unification of Private Law in Rome (1988)

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Features of Factoring

• Financial Service
• Helps in Risk Management
• Provides Liquidity to Business
• Factor is an Intermediary
• Other Services

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Parties Involved in Factoring

• Factor
• Seller
• Buyer

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Roles/Functions of Factoring

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Mechanism of Factoring

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Types of Factoring

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Cost Involved in Factoring Services

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Factoring and Bill Discounting

• Meaning
• Collection From Debtors
• Multiple Discounting
• With/ Without Recourse
• Total or Individual Basis of Discounting
• Effect on Balance Sheet
• Knowledge
• Stamp Duty

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 FORFAITING

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FORFAITING
Forfaiting is specifically meant for the facility of exporters. Like
factoring in case of forfeiting, the bills discounting facility is given for
export bills rather than domestic bills. For financing exports, one can go
for forfaiting which has the following features:
• It is discounting on export bills or receivables.
• This transaction must be evidenced by the promissory notes.
• For seller forfaiting is without recourse.
• It is for the 100% of the contract value.
• This source of finance can be used for medium to long term.

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Parties Involved in a Forfaiting Agreement
• Seller/exporter
• Buyer/importer
• Seller’s bank
• Buyer’s bank
• Forfaiter

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Mechanism of Forfaiting

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Cost of Forfaiting
It includes three types of cost:
• commitment fee (by the exporter to forfaiter),
• discount fees (payable by the exporter to the forfaiter) and,
• documentation fees (cost of making promissory note, bills of
exchange, etc.).

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 Benefits of Forfaiting
• Reduction in the seller’s risk as it decreases country risk, political risk, and
commercial risk of importing country.
• It is without recourse agreement, so exporter is made free from all types of
risk associated with the export
• transactions and forfaiting has no impact on the borrowing capacity of the
exporter.
• Seller’s credit administration and credit collection is done by forfaiter so
forfaiting relieves the seller from all such
• hassles.
• By entering into a forfaiting agreement, seller need not make an
arrangement for export credit insurance.

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Difference in Forfaiting and Factoring
• Domestic and Foreign Bill Discounting
• Requirement of Banks Guarantee
• Amount of Financing
• With and Without Recourse
• Terms of Financing
• Continuity
• Charges
• Minimum Size of Transaction

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FACTORING IN India

• Kalyansundaram Committee

• RBI Guidelines

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Registration of Factors

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ORGANIZATIONS OFFERING FACTORING AND FORFAITING
SERVICES

• HSBC Corporate and Institutional Banking

• SBI Global Factors Ltd. (SBIGFL )
• IFCI Factors (A Subsidiary of IFCI)
• Canbank Factors Ltd.
• India Factoring and Finance Solutions Pvt. Ltd.
• Export Credit Guarantee Corporation of India Ltd.

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SUMMARY
• Bills receivables and debtors represent the credit sales of a business and it is an important strategy for a business to boost its sales
volume.
• For a small business, management of receivables can be done in a more efficient manner but it is not the same case for a large or
company size business. The receivable management is an extensively challenging task for a large sized business because of its
expansion of business activities is beyond the national and international boundaries.
• For large business firm/companies, receivable management is a very difficult (as it involves large cost) and they need services of
some specialized institutions who have expertise in the receivable management. This business is called factoring business.
• Factoring can be defined as a specialized service provided by financial institutions in which financial institutions buys (through an
agreement) receivables from the seller of services/goods and manages seller’s receivables. Here the specialized institution is called
as ‘factor’.
• A factor performs various roles. It includes, receivable collection, provision of finance, administration of sales ledge, risk protection
and other advisory services.
• There are various types of factoring. These are, (i) Recourse and non-recourse, (ii) advance and maturity factoring, (iii)
conventional/full factoring, (iv) domestic and export factoring, (v) limiting factoring, (vi) selected seller and selected buyer based
factoring, and (vii) disclosed and undisclosed factoring.
• A client can get various types of benefits by entering into an agreement with a factor. The client or the seller of goods can transfer
major responsibility of collection and management of sales to a factor and can focus on more strategic decisions of the business.

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SUMMARY
• Administrative charges and Discount charges are the two main components of cost
of factoring services.
• Financial evaluation of factoring involves cost-benefit evaluation of factoring.
• Factoring and bills discounting are different from each other. Factoring is a short
source of financing. In addition to providing short term finance, it provides many
other services too, viz., maintenance of sales ledger, credit collection, advisory
services etc. to the client. The bills discounting involves providing funds against the
bills receivables. It is a kind of loan and allied services are not provided by bank/
financing agency as these are available in factoring.
• Forfaiting is specifically meant for the facility of exporters. Like factoring in case of
forfeiting, the bills discounting facility is given for export bills rather than domestic
bills.
• Cost of forfaiting includes three types of cost: commitment fee (by the exporter to
forfaiter), discount fees (payable by the exporter to the forfaiter) and
documentation fees (cost of making promissory note, bills of exchange etc.)
• In India, factoring services have started recently and this initiative was taken by the
Reserve bank of India by appointing a committee on the factoring in January 1988
and report was submitted in 1989 in India.

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 2
Lease Financing
ACCOUNTING/
REPORTING
FRAMEWORK AND
TAXATION OF
LEASING
FINANCIAL
EVALUATION OF
LEASING
INTRODUCTION
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Hire-Purchase
Finance and
Consumer Credit
Housing Finance
 7
Venture Capital Financing
 8
Banking Products
and Services
The SEBI has defined Venture Capital Fund in its
Regulation 1996 as ‘a fund established in the form of
a company or trust which raises money through loans,
donations, issue of securities or units as the case may
be and makes or proposes to make investments in
accordance with the regulations’.
 Meaning
➢Venture capital means funds made available for startup firms and small
businesses with exceptional growth potential.

➢Venture capital is money provided by professionals who alongside management

invest in young, rapidly growing companies that have the potential to develop
into significant economic contributors.
Venture Capitalists generally:

• Finance new and rapidly growing companies

• Purchase equity securities

• Assist in the development of new products or services

• Add value to the company through active participation.

Characteristics
• Long time horizon

• Lack of liquidity

• High risk

• Equity participation

• Participation in management
Advantages
• It injects long term equity finance which provides a solid
capital base for future growth.

• The venture capitalist is a business partner, sharing both the

risks and rewards. Venture capitalists are rewarded by business
success and the capital gain.

• The venture capitalist is able to provide practical advice and

assistance to the company based on past experience with
other companies which were in similar situations.
Advantages (Cont.)
▪ The venture capitalist also has a network of contacts in many areas that can add
value to the company.

▪ The venture capitalist may be capable of providing additional rounds of funding

should it be required to finance growth.

▪ Venture capitalists are experienced in the process of preparing a company for

an initial public offering (IPO) of its shares onto the stock exchanges or overseas
stock exchange such as NASDAQ.
They can also facilitate a trade sale.
Stages of financing
1. Seed Money:
Low level financing needed to prove a new idea.
2. Start-up:
Early stage firms that need funding for expenses associated with
marketing and product development.
3. First-Round:
Early sales and manufacturing funds.
4. Second-Round:
Working capital for early stage companies that are selling product, but not
yet turning a profit .
5. Third-Round:
Also called Mezzanine financing, this is expansion money for a newly
profitable company
6. Fourth-Round:
Also called bridge financing, it is intended to finance the "going
public" process
Risk in each stage
Financial Stage Period (Funds Risk Perception Activity to be
locked in years) financed
For supporting a
Seed Money 7-10 Extreme concept or idea or
R&D for product
development

Initializing
Start Up 5-9 Very High operations or
developing
prototypes
Start commercials
First Stage 3-7 High production and
marketing
Financial Stage Period (Funds Risk Perception Activity to be
locked in years) financed
Expand market and
Second Stage 3-5 Sufficiently high growing working
capital need

Market expansion,
acquisition &
Third Stage 1-3 Medium product
development for
profit making
company

Fourth Stage 1-3 Low Facilitating public

issue
 Organizational Structure of Venture
Capital Investment
General Partners
– Generate deal flow – Negotiate deals
– Screen opportunities – Monitor and advise
– Harvest investments

Effort and Annual Carried

1% of Management Interest 20-
capital Fee 2-3% 30% of Gain Investment
Capital and
Portfolio
Effort
Venture Capital Fund Companies
Financial –Value creation
99% of Investment Capital Appreciation Claims
Capital 70-80% of Gain

Limited Partners
– Pension plan – Corporations
– Endowments – Individuals
– Life insurance companies
The Venture Capital Investment Process
Development of Fund Concept

Secure Commitments Generate Deal Flow

from Investors

Year 0
Closing of Fund
First Capital Call

2-3 years Screen Evaluate and Negotiate Additional Invest

Business Conduct Due Deals and Capital Funds
Plans Diligence Staging Calls

Value Creation and Monitoring

4-5 years
– Board service – Assist with external relationships
– Performance evaluation and review – Help arrange additional financing
– Recruitment management

2-3 years Harvesting Investment Distributing Proceeds

or more – IPO – LBO – Cash – Other
– Acquisition – Liquidation – Public Shares

7-10 years plus extensions

VC investment process
Deal origination

Screening

Due diligence (Evaluation)

Deal structuring

Post investment activity

Exit plan
Methods of Venture Financing
The financing pattern of the deal is the most important element.
Following are the various methods of venture financing:
• Equity
• Conditional loan
• Income note
• Participating debentures
• Quasi equity
Exit route
• Initial public offer(IPOs)
• Trade sale
• Promoter buy back
• Acquisition by another company
 How does the Venture Capital work?
▪ Venture capital firms typically source the majority of their funding from large
investment institutions.

▪ Investment institutions expect very high ROI

▪ VC’s invest in companies with high potential where they are able to exit through
either an IPO or a merger/acquisition.

▪ Their primary ROI comes from capital gains although they also receive some
return through dividend.
 Critical factors for the success of venture
capital

➢ The regulatory, tax and legal environment should play an enabling role as
internationally venture funds have evolved in an atmosphere of structural flexibility,
fiscal neutrality and operational adaptability.
➢ Resource raising, investment, management and exit should be as simple and flexible as
needed and driven by global trends.
➢ Venture capital should become an institutionalized industry that protects investors and
investee firms, operating in an environment suitable for raising the large amounts of
risk capital needed and for spurring innovation through start-up firms in a wide range of
high growth areas.
➢In view of increasing global integration and mobility of capital it is important that Indian
venture capital funds as well as venture finance enterprises are able to have global
exposure and investment opportunities

➢Infrastructure in the form of incubators and R&D need to be promoted using government
support and private management as has successfully been done by countries such as the
US, Israel and Taiwan. This is necessary for faster conversion of R&D and technological
innovation into commercial products.
Leasing, Hire Purchase,
Consumer Finance
Definition
• Lease is a contract whereby the owner of the asset(lesser) grants to
another party(lessee), the exclusive right to use the asset usually for
an agreed period of time in written for the payment of rent.
CONCEPT OF LEASING
• Lease finance 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 first leasing company
was set up in Madras and the eighties have seen a rapid growth of
business.
• Lease as a concept involves a contract whereby ownership, financing and
risk taking of any equipment or asset are separated and shared by two or
more parties. • Thus, the lesser may finance and lessee may accept risk
through the use of it while a third party may own it. • Alternatively, the
lesser may finance and own it while the lessee enjoys the use of it and
bears the risk
FEATURES OF LEASING
• 2 Parties
• Selection of an asset
• Purchase of an asset
• Use of the asset
• Rentals and installments payment
• Recovering the cost of an asset.
• Option of acquiring ownership of the asset.
• A lease is a contractual agreement in which:
• A party owing an asset i.e. lesser
• Provides an asset for use to another party i.e. lessee
• For an agreed period of time i.e. lease period
• For a consideration i.e. lease rentals
LEASE FINANCING
• Lease financing is one of the important sources of medium-and long-
term financing where the owner of an asset gives another person, the
right to use that asset against periodical payments. The owner of the
asset is known as lessor and the user is called lessee.
• The periodical payment made by the lessee to the lessor is known as
lease rental. Under lease financing, lessee is given the right to use the
asset but the ownership lies with the lessor and at the end of the
lease contract, the asset is returned to the lessor or an option is given
to the lessee either to purchase the asset or to renew the lease
agreement.
• Marketing of leasing is done by financing manykinds of assets to
consumers as well as business which includes:
• Plant andmachinery
• Businesscars
• Commercialvehicles
• Agriculturalequipments
• Hotelequipments
• Medical and dentalequipments.
• Computers including softwarepackages.
• Office equipmentsetc.
TYPES OF LEASE
• FINANCIAL LEASE
• Finance lease, also known as Full Payout Lease, is a type of lease wherein the lessor
transfers substantially all the risks and rewards related to the asset to the lessee.
Generally, the ownership is transferred to the lessee at the end of the economic life
of the asset. The lease term is spread over the major part of the asset life. Here, a
lessor is only a financier. An example of a finance lease is big industrial equipment.
• OPERATING LEASE
• In an operating lease, risk and rewards are not transferred completely to the lessee.
The term of a lease is very small compared to the finance lease. The lessor depends
on many different lessees for recovering his cost. Ownership along with its risks and
rewards lies with the lessor. Here, a lessor is not only acting as a financier but he also
provides additional services required in the course of using the asset or equipment.
An example of an operating lease is music system leased on rent with the respective
technicians.
SALE AND LEASE BACK-DIRECT LEASE
• In the arrangement of sale and leaseback, the lessee sells his asset or
equipment to the lessor (financier) with an advanced agreement of leasing
back to the lessee for a fixed lease rental per period. It is exercised by the
entrepreneur when he wants to free his money, invested in the equipment
or asset.

• A direct lease is a simple lease where the asset is either owned by the
lessor or he acquires it. In the former case, the lessor and equipment
suppliers are one and the same person and this case is called ‘bipartite
lease’. In a bipartite lease, there are two parties. Whereas, in the latter
case, there are three different parties viz. equipment supplier, lessor, and
lessee. And it is called a tripartite lease. Here, equipment supplier and
lessor are two different parties.
SINGLE INVESTOR LEASE-LEVERAGED LEASE

• Single investor lease, there are two parties –lessor and lessee. The lessor
arranges the money to finance the asset or equipment by way of equity or
debt. The lender is entitled to recover money from the lessor only and not
from the lessee in case of default by a lessor. Lessee is entitled to pay the
lease rentals only to the lessor.

• Leveraged lease, on the other hand, has three parties –lessor, lessee, and
the financier or lender. Equity is arranged by the lessor and debt is financed
by the lender or financier. Here, there is a direct connection of the lender
with the lessee and in a case of default by the lessor. The lender is also
entitled to receive money from the lessee. Such transactions are generally
routed through a trustee.
DOMESTIC AND INTERNATIONAL LEASE-SUB
LEASE
• When all the parties to the lease agreement reside in the same country, it is called
domestic lease.
• The International lease is of two types –Import Lease and Cross-Border Lease. When
lessor and lessee reside in the same country and equipment supplier stays in a different
country, the lease arrangement is called import lease. When the lessor and lessee are
residing in two different countries and no matter where the equipment supplier stays,
the lease is called cross-border lease.
• SUB LEASE
• As sub lease is a rental agreement where the original lessee(tenant) rents out the
premises to another person called the sub-tenant or sub-lessee. The new tenant gets few
rights as the sub-lessee. The original tenant (lessee) can only give those rights to the new
tenant (sub-lessee) which he has got from the original landlord (lessor). He cannot pass
on more rights of use on the property. The flow of rent is from the sub-lessee to the
lessee and the lessor/owner. The risk of rent is always mainly borne by the lessee. In case
the sub-lessee is unable to make full or timely payment to the original lessee, the lessor
is still entitled to his timely rents and the risk is borne by the lessee.
 Advantages of Lease Financing
• At present leasing activity shows an increasing trend. Leasing appears to be a cost-effective alternative for using an asset.
• To Lessor:
• Assured Regular Income:
• Lessor gets lease rental by leasing an asset during the period of lease which is an assured and regular income.
• Preservation of Ownership:
• In case of finance lease, the lessor transfers all the risk and rewards incidental to ownership to the lessee without the transfer of ownership of asset
hence the ownership lies with the lessor.
• Benefit of Tax:
• As ownership lies with the lessor, tax benefit is enjoyed by the lessor by way of depreciation in respect of leased asset.
• High Profitability:
• The business of leasing is highly profitable since the rate of return based on lease rental, is much higher than the interest payable on financing the asset.
• To Lessee:
• Use of Capital Goods:
• A business will not have to spend a lot of money for acquiring an asset but it can use an asset by paying small monthly or yearly rentals.
• Tax Benefits:
• A company is able to enjoy the tax advantage on lease payments as lease payments can be deducted as a business expense.
• Cheaper:
• Leasing is a source of financing which is cheaper than almost all other sources of financing.
• Technical Assistance:
• Lessee gets some sort of technical support from the lessor in respect of leased asset.
• •Inflation Friendly:
• Leasing is inflation friendly, the lessee has to pay fixed amount of rentals each year even if the cost of the asset goes up.
• Ownership:
• After the expiry of primary period, lessor offers the lessee to purchase the assets—by paying a very small sum of money.
Disadvantages of Lease Financing
• To Lessor:
• Unprofitable in Case of Inflation:
• Lessor gets fixed amount of lease rental every year and they cannot increase this even if
the cost of asset goes up.
• Double Taxation:
• Sales tax may be charged twice:
• First at the time of purchase of asset and second at the time of leasing the asset.
• Greater Chance of Damage of Asset:
• As ownership is not transferred, the lessee uses the asset carelessly and there is a great
chance that asset cannot be useable after the expiry of primary period of lease.
Disadvantages of Lease Financing
• To Lessee:
• Compulsion:
• Finance lease is non-cancellable and even if a company does not want to use the asset,
lessee is required to pay the lease rentals.
• Ownership:
• The lessee will not become the owner of the asset at the end of lease agreement unless
he decides to purchase it.
• Costly:
• Lease financing is more costly than other sources of financing because lessee has to pay
lease rental as well as expenses incidental to the ownership of the asset.
• Understatement of Asset:
• As lessee is not the owner of the asset, such an asset cannot be shown in the balance
sheet which leads to understatement of lessee’s asset.
Meaning of Hire-Purchase

• Hire purchase is governed by the Hire Purchase Act,1972.It is a special system of credit
purchase and sale. In this buyer pays the price in installments i.e. monthly ,quarterly or
yearly etc. and also some amount of interest.
• Goods are delivered to the buyer at the time of hire purchase agreement but buyer will
become the owner of goods only on the payment of the last installment. Such
installments are to be treated as hire of these goods until a certain fixed amount has
been paid ,when these goods become the property of the hire.
• Either the buyer or the seller has a right to terminate the agreement at any time before
the property so passes. Every agreement shall be in writing and signed by all the parties
thereto.
• In the case of default, in the payment by the buyer, the seller has got a right to repossess
the goods, as ownership lies with the seller, till the payment of last installment.
• The buyer cannot pledge, sell or mortgage the assets as he is not the owner of the assets
till the last payment is made.
FEATURES OF HIREPURCHASE

• Credit purchase
• Instalment payment
• Possession at time of agreement
• Ownership till last instalment
• Right to use goods as a bailer
• Termination of the agreement
• Ownership of goods after all installments payment.
Hire Purchase Company
INSTALLMENT CREDITsystem
• Installment credit, also called Installment Plan, or Hire Purchase Plan
in business, credit that is granted on condition of its repayment at
regular intervals, or instalments, over a specified period of time until
paid infull.
• Thegoodsareadvancedtothepurchaseraftermakinginitialfractionalpay
mentcalledadownpayment.
ADVANTAGES AND DISAVANTAGES OFHIRE
PURCHASE
• Spread the cost of finance.
• Interest free credit.
• Higher acceptance rates.
• Sales
• Debt solutions

• Personal debt
• Final payment
• Bad credit
• Credit or enhancement.
• Repossession rights.
Leasing Vs Hire Purchase
Leasing Vs Hire Purchase
Leasing Vs Hire Purchase
Hire Purchase: Advantages and Disadvantages
(Summary)
• If you need to buy something for either yourself or your business but
you don’t have the immediate funds to hand, then it is worth
considering hire purchase advantages and disadvantages. A hire
purchase scheme can be a great way of getting your hands on it
quickly while spreading the cost over an agreed period.
• This method of asset finance results in a monthly repayment and
transfer of ownership to you once the term ends and all funds have
been repaid. There are some significant hire purchase advantages and
disadvantages though. Throughout this post, we will run through the
most notable.
Advantages of hire purchase
• Rather than one big lump sum, you can spread the purchase cost of high ticket
items. These include items such as cars, where you can pay over a period of 3 to 5
years typically.
• As the hire purchaser, you’ll own the asset after paying the last instalment which
can make it a favourable alternative to a lease.
• You’ll have immediate use of the item once the agreement with the vendor has
been signed off, rather than wait until you have saved enough.
• Hire purchase is a simple way of financing and typically relatively easy to obtain.
• The interest rate on hire purchases is fixed for the duration of the agreement.
This is regardless of any changes the Bank of England make to the base rate.
• When considering hire purchase advantages and disadvantages, one of the
bonuses, is that usually choose from a fixed term and deposit amount which
reflects your circumstances and budget.
Disadvantages of hire purchase
• Hire purchase contracts are usually fixed, therefore if you find yourself in financial difficulty during
that period, you may lose the asset and damage your credit rating.
• You’ll pay more for whatever it is you’re financing through hire purchase.
• You won’t own the asset until you have made the final hire purchase payment. Therefore the
vendor has the right to seize it should you fall foul of their terms.
• Because you won’t own the asset, it won’t be protected if you’re made bankrupt. This is
because it is technically still owned by the vendor during the agreement.
• The duration of most hire purchase schemes can be quite long – anywhere between 3 to 5 years.
If it’s for a car, that can make a lot of sense, but for other purchases you’ll need to consider if
there really is a benefit in spreading the cost for that length of time.
• Hire purchase agreements aren’t free. As with all forms of financing, you’ll pay a fee for spreading
the cost. Many hire purchase schemes can prove quite costly in that regard.
• Mind the gap! If you are buying an asset – such as a car – and it is stolen/ destroyed before it is
fully paid for, the insurance may not cover the replacement value. This means you could face a
shortfall. “Gap insurance” can be arranged to cover this situation – but will add to your costs.
Banking Services
 Depending inflow and outflow of
CASA => Savings (chalu – working
materials = banks release the funds
capital and retail – limit on
(all payments received by the
deposit/withdrawal, convenience –
borrower will be credited to Cash
low int – demand, cheques allowed,
credit account and all payments
Recurring – saving of retail guys
made have to be debited to cash
(liquidity => pre-clo, loan against, =>
credit account (c) Overdraft – (1) a
to achieve a financial goal, deferred
single time debit allowed on a
exp (staggering) – int is higher than
current account to accommodate a
Savings => longer term, Current –
cheque payment by a good
for corporates or business =>
customer (2) an over draft limit
unlimited entry and exit =>
given by a Bank to an extremely
convenience => no int to be paid
good customer against no collateral
(sweeping), FD = > for a fixed term
=> Cash Credit and ODs have limits
=> liquidity (single premium
specifically by the Bank => renewed
concept) => to achieve a financial
after every 11 months.
goal => loan as collateral
Credit card => (limit allowed for
Loans : (a) (objectives for
encouraging spending)
borrowers) (b) chalu khata for
Investment products => cross
business operations – Cash credit
selling (third party products)
(against collateral of working capital
General Ledge => Reconciliation at
materials – raw mat, wip, finished
the end of the day (Day Book)
goods stock) = Drawing power
=>EOD/BOD (End and Beginning)
register =. Customer has full control
of assets Possession => borrower
Channel for delivery of services:
Bank Mitra – Micro ATM – Portals =>
channels are important but very risky
=> Reputation risk => KYC (proper
verification of background) => products
to be delivered through channels =>
wider reach for clients
Eco System: KYC / AML governance
standards => CIBIL score => Regulations
and Governance standards, (bulk SMS
was banned)
Customer management (single window
system)=> CRM / phone banking /
Robots => AI and ML (use some test
data and decide on patterns => given to
a dedicated team for marketing) =>
phone banking => home services =>
ATM and websites => increasingly
computerized
Payments => large value and low values
=> instructions are followed =>
Fiduciary capacity => agent (mistakes
are not covered => high value
insurance)
Buying umbrella insurance for
their fraud related payments
(premia is a cost) = digital
payments (cheque truncation) =>
swift
Risk management = > a)
Operations Risk management =>
people risk (large – own as well as
customers) => Legal risk b) Credit
risk => integrated credit risk
software (classify the customer
according to the internal / external
rating) => limits => cyclical
(demand for goods is very high =>
Commercial vehicles may be
funded) (economy) c) market risk
=> all investment books => (a)
decision with regard to allocation
of funds into various assets (b)
choice of assets