M.F.S.

THEORETICAL AND
REGULATORY FRAMEWORK
OF LEASING

In
India:
PreLeasing
1970
1970
- 1995Evolution
Post 1995
- Only HP
companies

- Automobile
financing
mainly for
commercial
vehicles

Phases

- 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 Industry: Major Players

SREI International
Finance
Sundaram Finance

Cholamandalam

Finance

Mahindra &

Mahindra

GE Capital

Shriram Finance

Tata Finance
Countrywide
Finance
Citicorp

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.

Essential Elements of Lease:

Parties to the contract

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

STEPS IN LEASING:

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

1. Finance Lease and Operating Lease:

Finance 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.

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

2. Sale and lease back and Direct lease

Sale and lease back:
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.

3. Single Investor Lease and Leveraged

Lease:
Single investor 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.

4. Domestic Lease and International

Lease:
Domestic 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.

Profile of leasing in India

Independent leasing companies

Other Finance Companies
Manufacturer lessors
In house lessors
Commercial banks

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

Advantages to Lessor:
Full security
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

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

Contract Act

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

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

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

Lease Documentation and

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

Clauses in Lease
Agreements

Nature of the lease

Description
Delivery and redelivery
Period
Lease rentals
Use (Purpose)
Repairs and maintenance (Lessor or Lessee)
Alteration