LEASING AND HIRE PURCHASE
A lease represents contractual arrangement whereby the â€˜Lessorâ€™ grants the â€˜Lesseeâ€™ the right to use an asset in return for periodical lease rental payments. While leasing of land, buildings, and animals has been known for a long time the leasing of industrial equipments is relatively a recent phenomenon particularly on the Indian scene.
A hire purchase involves the purchase of an asset on the understanding that the purchaser called the â€˜hirerâ€™ will pay in equal periodic installments spread over a length of time. In substance, leasing and hire purchase represent debt- financing in different ways.
Leasing and hire purchase have emerged as a supplementary source of immediate to long-term finance. They are provided mainly by non-banking financial companies, financial institutions and other organizations.
Types of Lease arrangements:
Lease arrangement may be broadly divided into two categories:
1. Operating leases.
2. Financial leases
An operating lease, are service lease has the following features,
(a) It is a short term lease, the lease period being significantly less than the useful life of the equipment.
(b) The lease is not fully amortized. Put differently, the lease rentals payable during the lease period are not sufficient to cover fully the cost of the equipment along with an acceptable return thereon.
(c) The lease is usually cancelable at short notice.
(d) The lessor is responsible for maintenance, insurance, and taxes.
Manufacturers interested in leasing their own products typically write operating leases. Computers, vehicles, copiers, and furniture are examples of assets that are commonly leased under operating lease arrangement. Fairly popular abroad operating leases are virtually unknown in India.
A financial lease, or capital lease, is essentially a form of borrowing. The salient characteristics of a financial lease are:
(a) It is an intermediate term to long term lease arrangement which cannot be cancelled. During the usual lease period referred to as the primary lease period which is usually three years or five years or eight years, the lease cannot be cancelled.
(b) The lessee is responsible for maintenance, insurance and taxes.
(c) The lease is fully amortized during the primarily lease period. This means that during this period the lessor recovers, through the lease rentals, his investment in the equipments along with an acceptable rate of return.
(d) The lessee usually enjoys the option of renewing the lease for further period for very nominal lease rentals.
Sale and Lease Back:
This is a special financial lease arrangement in which a firm (firm A) sells an asset to another firm (firm B) and simultaneously the two firms enter into a financial lease by which firm B leases the asset to firm A. as a result, the seller receives the purchase consideration for the asset (which augment its liquidity position) and also retains the use of the asset in return for periodic lease payments.
Under a leveraged lease arrangement, the lessor borrows a portion of the purchase price of the asset from a lender, which is typically a commercial bank or a financial institution. The loan is secured by the asset and the lease payments. The lender is paid back from the lease payments, often directly by the lesseeâ€”the surplus left after satisfying the claims of the lender goes to the lessor. As owner of the asset, of course, the lessor is entitled to tax shelters associated with ownership. Leases in India are typically financial leases.