1. THEORETICAL AND REGULATORY FRAMEWORK OF LEASING
M.F.S. CHAPTER – 2 M. Y. KHAN
THEORETICAL AND REGULATORY FRAMEWORK OF LEASING

2. Leasing In India: Evolution Phases
Pre 1970
Post 1995
- Only HP companies
- Automobile financing mainly for commercial vehicles
- Entry into equipment finance through:
* Leasing
* Hire Purchase
- Commencement of car finance
- Access to Capital Markets
- Exit of large no. of companies:
* Small & Large
* Indian & Foreign
- Regulation by RBI
- Few companies diversified into related financial services
Leasing In India: Evolution Phases

3. Leasing Industry: Major Players
Shriram Finance
Tata Finance
Countrywide Finance
Citicorp
SREI International Finance
Sundaram Finance
Cholamandalam Finance
Mahindra & Mahindra
GE Capital

4. Lease Finance: The Concept
“Conceptually, a lease may be defined as a contractual agreement between two parties namely Lessor (owner of the asset) and Lessee (User of the asset) in which the lessor provides an asset/equipment to the lessee for use over a period of time and in return the lessee provides periodical lease rentals to the lessor and at the end of lease period, the asset reverts to the lessor”
A lease is a contractual arrangement where the lessor grants the lessee the right to use an asset in return for periodical payments.
Leasing essentially involves the divorce of ownership from the economic use of an asset/equipment.

5. Essential Elements of Lease:
Parties to the contract
Asset
Ownership separated from user
Term of lease
Lease Rentals
Modes of terminating lease:
The lease is renewed on a perpetual basis or for a definite period.
The asset reverts to the lessor.
The assets reverts to the lessor and the lessor sells it to a third party.
The lessor sells the asset to the lessee.

7. STEPS IN LEASING:

9. Classification of Lease:
1. Finance Lease and Operating Lease
2. Sales and Lease Back and Direct lease
Bipartite Lease
Tripartite Lease
3. Single Investor Lease and Leveraged Lease
4. Domestic Lease and International Lease
Import Lease
Cross Border Lease

10. 1. Finance Lease and Operating Lease:
“According to the International Accounting Standard (IAS - 17), the finance lease is the one in which the lessor transfers to the lessee, substantially all the risks and rewards incidental to the ownership of the asset whether or not the title is eventually transferred”.
Key Features:
FL is suitable for ships, aircrafts, railway wagons, lands, buildings and heavy machines.
FL is long term, non cancellable lease agreements.
In FL the cost of an assets is fully amortized during primary lease period.
In FL, the lessee has an option to purchase the asset at the end of lease period.
FL is also called as “Full Pay Out Lease”.
Maintenance of asset is done by lessee.

11. Operating Lease:
“According to the IAS - 17, an operating lease is one which is not a finance lease. In an operating lease, the lessor does not transfer all the risks and rewards incidental to the ownership of the asset and the cost of the assets is not fully amortized during the primary lease period”.
Key Features:
OL is useful in case of computers, office equipments, automobiles etc.
OL refers to short term lease agreement or the term of lease is always lesser than the economic life of an asset.
The primary lease period does not cover the cost of an asset.
Maintenance of asset is done by lessor.
OL is also called as “service lease”

12. 2. Sale and lease back and Direct lease
“In this, the owner of an asset sales it to the a leasing company (lessor) which leases it back to the owner (lessee)”.
For exp. Safe Deposite Vaults by Banks.
Direct Lease:
A. Bipartite Lease:
“In such lease, there are two parties in the lease transaction namely equipment supplier cum lessor and lessee”.
B. Tripartite Lease:
“In such lease, there are three parties in the lease agreement namely equipment supplier, lessor and lessee.

13. 3. Single Investor Lease and Leveraged Lease:
In such lease, two parties namely lessor and lessee are included in lease transaction.
The leasing co’ (lessor) funds/finance the entire investment by an appropriate mix of debt and equity funds.
Leveraged Lease:
Three parties are involved in lease transaction namely Lessor (equity investor), Lender and Lessee.

14. 4. Domestic Lease and International Lease:
“A lease transaction is classified as domestic if all the parties to the agreement, namely equipment supplier, lessor and lessee are domiciled in the same country”.
International Lease:
“If the parties to the lease transaction are domiciled in different countries, its known as Int. Lease”.
A. Import Lease: “In an import lease, the lessor and lessee are domiciled in the same country but the equipment supplier is located in a different country.
B. Cross Border Lease: “it means the lessor and lessee are domiciled in different countries. The domicile of the supplier is immaterial in this case.

15. Profile of leasing in India
Independent leasing companies
Other Finance Companies
Manufacturer – lessors
In house lessors
Commercial banks

16. Advantages of Leasing – To the Lessee
Financing of capital goods
100% financing of capital goods w/o capital investments.
Lessee is able to commence business w/o making any investment.
Additional source of financing
Less costly (compared to Bank Finance)
Ownership preserved
Avoids conditionalities
viz. conditionalities associated with EQ/DEBT Issue and Bank Loan
Flexibility in structuring of lease rentals
Obsolescence Risk is averted
Simplicity

17. Advantages to Lessor: Full security Tax benefit High profitability
Only becoz of “Ownership Preserved”
Tax benefit
Mainly Depreciation
High profitability
Since return from business is more than CoC
Trading on equity
High growth potential

18. Limitations of Leasing:
Restrictions on use of Equipment
Addition/alteration of asset is not permissible
Loss of residual value
Since Ownership remains with Lessor
Limitations of financial lease
Higher payout obligation in case of premature termination of lease.
Consequences of default
Violation of clauses of Lease Contract may result in to termination of Lease.
Understatement of Lessee assets
Sales tax : Double Taxation

19. Contract Act GENERAL PROVISION: CONTRACT LEGAL OBLIGATION
LAWFUL CONSIDERATION
COMPETENT PARTIES
FREE CONSENT
DISCHARGE OF CONTRACTS
REMEDIES FOR BREACH OF CONTRACT
INDEMNITY AND GUARANTEE

20. Special Provision Leasing as bailment Agreement Liabilities of lessee
Pay the lease rentals periodically
Take reasonable care of the asset
Return the leased asset
Liabilities of lessor
Deliver the asset to the lessee
Authorize the lessee to use the asset
Leave the asset in peaceful possession

21. Acts/Laws RBI NBFC Directions Other Laws Motor Vehicles Act
Indian Stamp Act

22. Lease Documentation and Agreement
Lease Approval Process
Guarantee Agreement
Collateral Security/Hypothecation Agreement
Master Lease and Supplemental Lease Agreements

23. Clauses in Lease Agreements
Nature of the lease
Description
Delivery and redelivery
Period
Lease rentals
Use (Purpose)
Repairs and maintenance (Lessor or Lessee)
Alteration