 Leasing, as a financing concept, is an agreement

between two parties, the leasing company or lessor and

the user or lessee.
 The rentals are predetermined and payable at fixed
intervals of time, according to the mutual convenience
of both the parties.
 However, the lessor remains the owner of the
equipment over the primary period.
 It is the process by which a firm can obtain the use of a
certain fixed asset for which it must make a series of
contractual periodic, tax deductible payments (lease
rentals).
 Dictionary of Business and Management defines “lease
as a form of contract transferring the use or occupancy
of land, space, structure or equipment, in consideration
of a payment, usually in the form of a rent”
 According to James C.Van
Horne, “Lease is a contract
whereby the owner of an asset
(lessor) grants to another party
(lessee) the exclusive right to use
the asset usually for an agreed
period of time in return for the
payment of rent”
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.
 Parties to the contract
Lessor
lessee
 Asset
 Ownership separated from the user
 Term of lease
 Lease rentals
 Modes of terminating the lease
 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.
Marketing of leasing is done by financing many
kinds of assets to consumers as well as business
which includes:
 Plant and machinery
 Business cars
 Commercial vehicles
 Agricultural equipments
 Hotel equipments
 Medical and dental equipments.
 Computers including software packages.
 Office equipments etc.
 provides assets for
use for an agreed
time period.

LESSER LESSEE

pays lease rentals

for using the asset.
 Finance lease and operating lease
 Sales and lease back and direct lease
 Single investor lease and leveraged lease
 Domestic lease and international lease
 A financial Lease is also known as Capital lease,
Long-term lease, Net lease & Close lease
 Under a financial lease, the rate of lease would be
fixed based on the kind of lease, the period of
lease, periodicity of rent payment, & the rate of
depreciation & other tax benefits available.
 The high cost of equipments such as office
equipment, diesel generators, machine tools,
textile machinery, containers, locomotives etc., is
leased under financial lease.

11
 Financial leasing is a contract involving payment
over a longer period. It is a long-term lease and the
lessee will be paying much more than the cost of the
property or equipment to the lessor in the form of
lease charges. It is irrevocable. In this type of leasing
the lessee has to bear all costs and the lessor does not
render any service.
 An operating lease is also known as service lease,
short-term lease or true lease.
 The lease is for a limited period may be in a
month, six months, a year or few years.
 Normally, the lease rentals will be higher as
compared to other leases on account of
short period of primary lease.
 In an operating lease, the lessee uses the asset for a
specific period. The lessor bears the risk of
obsolescence and incidental risks. There is an option to
either party to terminate the lease after giving notice. In
this type of leasing
 lessor bears all expenses
 lessor will not be able to realize the full cost of the
asset
 specialized services are provided by the lessor.
 This kind of lease is preferred where the equipment is
likely to suffer obsolescence.
 In a sale and leaseback, a company owning the asset
sells it to the lessor. The lessor pays immediately for
the asset but leases the asset to the seller. Thus, the
seller of the asset becomes the lessee.
 The asset remains with the seller who is a lessee but the
ownership is with the lessor who is the buyer. This
arrangement is done so that the selling company
obtains finance for running the business along with the
asset.
 Direct Lease is a simple form of a lease agreement where
the lessor and the lessee are two separate entities and may
have either the operating or a finance lease agreement.
There can be two types of direct lease: Bipartite
Lease and the Tripartite Lease.
 In a bipartite lease, there are two parties to the lease
agreement; one is the lessor, and the other is the lessee.
Whereas in the case of a tripartite lease agreement, there
are three parties to the agreement, one is the supplier of
the equipment; the other is the lessor, and the third one is
the lessee.
 In the case of a single investor lease there are two
parties to the contract, the lessor and the lessee. Here,
the lessor or the leasing firm raises an optimum mix of
debt and equity to finance the entire investment.
 One important thing to be noted here is, the lender
cannot recover any amount from the lessee in case the
lessor defaults on his debt service obligations. Thus, the
lender is only entitled to recover money from the lessor
and not from the lessee in case the lessor defaults in
paying back to the lender.
 In a leveraged lease, there are three parties to the lease agreement Viz.
Lessor, lessee and lender or loan participant. Here the investment is
financed jointly by the lessor and the lender; wherein the equity is
arranged by the lessor, and the debt is financed by the financier. In this
kind of a lease agreement, the lender has the direct connection to the
lessee which means in case the lessor defaults in his debt obligations,
the lender can recover his money from the lessee.
 Hence, the major difference between the single investor lease and
leveraged lease is that in the case of the former lease type, the lender has
no direct connection to the lessee and cannot recover money from him
in case the lessor defaults. Whereas in the case of the leveraged lease,
the lender can recover money from the lessee in case the lessor defaults
and thus, has the direct connection to the lessee.
A leverage lease is used for financing those assets
which require huge capital outlay.
The outlay for purchase cost is generally from ` 50
lakhs to ` 2 crore.
Asset has economic life of 10 years or more.
The Lessor acquires the assets as per the terms of
the lease agreement but finances only a part of the
total investment, say 20%-50%
When all the parties to the lease
agreement Viz. Lessor, lessee and the
equipment supplier are domiciled or
belongs to the same country, is called as
a domestic lease.
 The international lease refers to the type of lease
agreement where one or more parties to the lease
agreement reside or are domiciled in different
countries.
 There are two types of international lease: the Import
Lease and the Cross Border Lease. In the former type
of lease, both the lessor and the lessee belong to the
same country, but the equipment supplier stays in some
other country. In the case of a cross-border lease, both
the lessor and the lessee stay in different countries,
irrespective of where the equipment supplier stays.
 History of leasing dates back to 200 BC when
Sumerians leased goods.
 Romans had developed a full body law relating to lease
for movable and immovable property.
 Modern Leasing appeared first time in 1877 when Bell
Telephone Co. began renting telephones in USA.
 Since WW II, the use of leasing has been greatly
expanded and is constantly used for new products
and new industries.
 Henry Scholfeld set up US Leasing Corporation
with a capital of $20,000 in May 1952.
 The concept of financial leasing was pioneered in
India during 1973, First company was set up by
Chidambaram group in 1973.
“The delivery of goods by one person to another,
for some purpose, upon a contract that they shall,
when the purpose is accomplished, be returned
or otherwise disposed of according to the
directions of the person delivering them. The
person delivering the goods is called the ‘bailor’
and the person to whom they are delivered is
called the ‘bailee’.”
THE FOLLOWING IMPLICATIONS FOR THE
LESSER AND LESSE

 The lesser has the duty to deliver the asset to the lessee,
 The lessee has the obligation to pay the lease rentals as
specified in the lease agreement
To the lessee:
 Financing of capital goods
 Additional source of finance
 Less costly
 Ownership preserved
 Avoids conditionalities
 Flexibility in structuring of rentals
 Simplicity
 Tax benefits
 Obsolescence risk is averted
To the lessor:
 Full security
 Tax benefits
 High profitability
 Trading on equity
 High growth potential
 Restrictions on Use of Equipment A lease arrangement may
impose certain restrictions on use of the equipment, or require
compulsory insurance, and so on. Besides, the lessee is not free
to make additions or alterations to the leased asset to suit his
requirement.
 Limitations of Finance Lease A finance lease may entail higher
payout obligations, if the equipment is found not useful and the
lessee opts for premature termination of the lease agreement.
Besides, the lessee is not entitled to the protection of express or
implied warranties since he is not the owner of the asset.
 Loss of Residual Value The lessee never becomes the owner of
the leased asset. Thus, he is deprived of the residual value of the
asset and is not even entitled to any improvements done by the
lessee or caused by inflation or otherwise, such as appreciation in
value of leasehold land.
 Consequences of Default If the lessee defaults in
complying with any terms and conditions of the lease
contract, the lessor may terminate the lease and take over
the possession of the leased asset. In case of finance lease,
the lessee may be required to pay for damages and
accelerated rental payments.
 Understatement of Lessee's Asset Since the leased assets
do not form part of the lessee's assets, there is an effective
understatement of his assets, which may sometimes lead to
gross underestimation of the lessee. However, there is now
an accounting practice to disclose the leased assets by way
of footnote to the balance sheet.
 Double Sales Tax With amendment of sale tax laws of
various States, a lease financing transaction may be charged
to sales tax twice—once when the lessor purchases the
equipment and again when it is leased to the lessee.
 The process of financial appraisal in a lease
transaction generally involves three steps:
 Appraisal of the client
 Evaluation of the security/collateral security offered
and
 Financial evaluation of the proposal
 Description of the lessor, the lessee, and the equipment.
 Amount, time, and place of lease rental payments.
 Time and place of equipment delivery.
 Lessee’s responsibility for taking delivery and
possession of the leased equipment.
 Lessee’s responsibility for maintenance, repairs,
registration, etc.
 Lessee’s right to enjoy the benefits of the warranties
provided by the equipment manufacturer.
 Insurance to be taken by the lessee on behalf of the
lesser.
 Variation in lease rentals.
 Option of lease renewal for the lease period.
 Return of equipment on expiry of the lease period.
 Arbitration procedure in the event of dispute.
Introduction:
• Hire Purchase is the legal term for a contract, in which
persons usually agree to pay for goods in parts or a
percentage at a time.
• When a sum equal to the original full price plus interest
has been paid, the buyer may then exercise an option to
buy the goods or return the goods to the owner.
 Higher Purchase is the hiring of goods at a stated rental with
the option to buy the goods at the end of the hire purchase
term.

 The individual availing HP financing is the hirer and the

financier is the owner.

 The rental payment is inclusive of the repayment of principal

as well as interest.

 The hire purchaser acquires the goods immediately on signing

the hire purchase agreement but the ownership of the same is
transferred only when the last installment is paid.
 HP transactions are governed by the Hire Purchase Act 1972.

 The HP Act sets out the forms and contents of HP agreements,

the legal rights, duties, obligations of hirers and financiers.

 The HP Act is administered by the Ministry of Domestic Trade

and Consumer Affairs.

 Hire purchase should be distinguished from installment sale

wherein property passes to the purchaser with the payment of
the first installment.
 The origin of hire purchase system can be traced back
to the advent of industrial development in UK.
 Cowper wait & sons, a furniture dealer introduced the
system of Hire purchase in USA, in 1807.
 Bishogate piano-maker introduced the system of Hire
purchase in 1846, in UK.
 In India, Hire purchase finance started only after WW I.
 However, it was only after WW II that it’s growth
assumed visible dimensions.
 With the increase in economic activity, many Non-
Banking financing companies entered the scene in the
fifties and sixties.
 Possession of goods
 Credit purchase
 Each installment is treated as hire charges.
 Ownership
 Default in the payment
 Terminate the agreement
Hire-purchase agreements are of two forms.
 In the first form
◦ the goods are purchased by the financier from the dealer and
◦ the financier obtains a hire-purchase agreement from the customer,
◦ under which the customer becomes the owner of the goods
◦ on payment of all the instalments of the stipulated hire and exercising his
option to purchase the goods on payment of a nominal price.
◦ The owner gets his money from the financier, who recovers the cost from the
customer.
 In other form
◦ the customer purchases the goods and he executes a hire-purchase agreement
with a financier,
◦ under which he remains in possession of goods, subject to payment of
amount paid by the financier on his behalf to the owner.
◦ The financier gets a right to seize the goods in the event of non-fulfillment of
conditions of hire-purchase agreement by the customer.
 Spread the cost of finance.
 Interest free credit.
 Higher acceptance rates.
 Sales
 Debt solutions.
 Personal debt
 Final payment
 Bad credit
 Creditor enhancement.
 Repossession rights.
HP agreements must be in writing and signed by both the parties.

They must clearly lay out the following information:

 A clear description of the goods

 The cash price for the goods
 The HP price
 The deposit
 The monthly installments
 Rights to parties
 Capital adequacy
 Liquidity considerations
 Flexibility considerations
 Nature of asset
 Availability of finance
 Debt capacity
 Grants and incentives consideration
 Borrowing restrictions
 Administrative considerations
45
 LEASING HIRE PURCHASE
OWNERSHIP OF ASSET Ownership lies with the The hirer has the option
lesser. The lessee has the to purchase. The hirer
right to use the becomes the owner of
equipment and does not the assets/equipments
have an option to immediately after the
purchase. installment is paid.

DEPRECIATION The depreciation is Here, the depreciation

claimed as an expense in claim is allowed to the
the books of lesser. hirer.

RENTAL PAYMENTS The rentals cover the The installment is

cost of using an asset. inclusive of the principal
Normally, it is derived amount and the interest
with the cost of an asset for the time period the
over the asset life. asset is utilized.
 LEASING HIRE PURCHASE

DURATION Lease agreements are These agreements are

generally done for longer done mostly for shorter
duration and for bigger duration and cheaper
assets like land, property assets like hiring a car,
etc. machinery etc.

TAX IMPACT The total lease rentals In hire purchase, the

are shown as the hirer claims the
expenditure by the lessee depreciation of asset as
in the lease agreement. an expense.

REPAIRS AND Repairs and maintenance In hire purchase, the

MAINTENANCE of the asset in financial responsibility lies with
lease is the responsibility the hirer.
of the lessee but in
operating lease, it is the
resposibility of the
lesser.
 LEASING HIRE PURCHASE

 In Leasing, the maintenance  In Hire Purchase, the cost of

of leased asset is the maintenance of hired assets
responsibility of the Lessee. is to be borne by the Hirer
himself.
REPORTING
 The leased assets are shown
 The assets on hire purchase
by way of footnote only.
is shown in the balance
sheet of the Hire.
 LEASING
 In lease, ownership lies
with the lesser. The
lessee has the right to use
the equipment and does
not have an option to
purchase.
METHOD OF FINANCING
 Leasing is a method of
financing business assets
only.
HIRE PURCHASE
 in hire purchase, the hirer has
the option to purchase. The
hirer becomes the owner of the
asset/equipment immediately
after the last installment is
paid.
 Hire Purchase is a method of
financing both business assets
and consumer articles.
 LEASING HIRE PURCHASE

 In Leasing, depreciation and  In Hire Purchase

investment allowance depreciation and investment
cannot be claimed by the allowance can be claimed
Lesser. by the Hirer.

TAX BENEFITS

 The entire lease rental is tax  Only the interest

deductible expense. components of the Hire
Purchase installment are tax
deductible.
 LEASING HIRE PURCHASE

 The lessee, not being the  The hirer, in purchase being

owner of the assets and does the owner of assets and
not enjoy the salvage value enjoy the salvage value of
of the assets. the assets.
DEPOSIT
 In Hire Purchase, the Hirer
 In Leasing the Lessee is not
is required to deposit 20%
required to make any
of the cost.
deposit.
 LEASING HIRE PURCHASE

 In Leasing, the Lessee take  In Hire Purchase the asset is

the asset on a rent basis. purchased by the Hirer.

EXTENT OF FINANCE
 Lease financing is  In Hire Purchase, a margin
invariably 100% financing. equal to 20-25% of the cost
It does not required any of the assets to be paid the
immediate down payment Hirer.
or margin money by the
Lessee.