SYMBIOSIS LAW SCHOOL, PUNE
Constituent of Symbiosis International University, Pune
(Accredited by NAAC (UGC) with `A’ Grade)

Managerial Economics Internal Assessment
REPORT ON
‘LEASE AND HIRE PURCHASE COMPANIES’

Submitted by
SIVAGNANAM KARTHIKEYAN
ROLL NO: 135
DIV ‘B’
BBA. LLB. BATCH 2013-18

LEASING
A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals). The important feature of a lease contract is separation of the ownership of the asset from its usage. Lease financing is based on the observation made by Donald B. Grant:
“Why own a cow when the milk is so cheap? All you really need is milk and not the cow.”
Leasing industry plays an important role in the economic development of a country by providing money incentives to lessee. The lessee does not have to pay the cost of asset at the time of signing the contract of leases. Leasing contracts are more flexible so lessees can structure the leasing contracts according to their needs for finance. The lessee can also pass on the risk of obsolescence to the lessor by acquiring those appliances, which have high technological obsolescence. Today, most of us are familiar with leases of houses, apartments, offices, etc.
Two important categories of leases are: Operating Leases and Financial Leases.
Operating leases are short term, cancellable leases where the risk of obsolescence is borne by the lessor. Financial leases are longterm, non-cancellable leases where any risk in the use of the asset is borne by the lessee and he enjoys the returns too.
The other sub-parts of finance lease are: sale and lease back and leveraged financing. Under sale and lease back lease the owner of an asset sells the asset to a party, who in turn leases back the same asset to the owner in consideration of lease rentals. Under leveraged leasing a third party (i.e. financier or lender) is involved beside lessor and lessee. Direct lease another type of leases, which is popularly used. Under this, a firm acquires the right to use an asset from the manufacturer directly. Leasing plays an important role in the economic development of a country by providing money incentives to lessee. Lease financing has several advantages. In India, the First Leasing Company Ltd. was set up in Madras in 1973. As per the industrial investment, lease finance in India just like a newborn baby.

Advantages of leasing
(1) Saving of capital: Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin money as there is no down payment. In this way the saving in capital or financial resources can be used for other productive purposes e.g. purchase of inventories.
(2) Flexibility and convenience: The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees.
(3) Planning cash flows: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets.
(4) Improvement in liquidity: Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique.

HIRE PURCHASE
A 'hire-purchase transaction' has been defined as "a system of financing where goods are bought by putting down a deposit and then periodically paying off the balance of the purchase price plus interest". The process involves the drafting and signing of an agreement between the hirer (the consumer) and the owner (the lending institution). The process of hire-purchase financing has become an alternative option for consumers who want to buy large and expensive items which may otherwise be difficult to afford. The transactions allow the buyer to pay for items without cashing in investments or savings, and to spread the cost of expensive items over an extended period. In such transactions ownership of goods is transferred to a finance company at a discounted price, and the company hires out and then sells those goods to the buyer.
A hire purchase agreement is defined in the Hire Purchase Act, 1972 as peculiar kind of transaction in which the goods are let on hire with an option to the hirer to purchase them, with the following stipulations:
a. Payments to be made in installments over a specified period.
b. The possession is delivered to the hirer at the time of entering into the contract.
c. The property in goods passes to the hirer on payment of the last installment.
d. Each installment is treated as hire charges so that if default is made in payment of any installment, the seller becomes entitled to take away the goods, and
e. The hirer/ purchase is free to return the goods without being required to pay any further installments falling due after the return.
Hire purchase should be distinguished from instalment sale wherein property passes to the purchaser with the payment of the first instalment. But in case of HP (ownership remains with the seller until the last instalment is paid) buyer gets ownership after paying the last instalment.
Advantages of hire purchases
1. Spread the cost of finance – Whilst choosing to pay in cash is preferable,. A hire purchase agreement allows a consumer to make monthly repayments over a pre-specified period of time;
2. Interest-free credit – Some merchants offer customers the opportunity to pay for goods and services on interest free credit.
3. Higher acceptance rates – The rate of acceptance on hire purchase agreements is higher than other forms of unsecured borrowing because the lenders have collateral.
4. Sales – A hire purchase agreement allows a consumer to purchase sale items when they aren’t in a position to pay in cash.
5. Debt solutions - Consumers that buy on credit can pursue a debt solution, such as debt management plan, should they experience money problems further down the line.
Difference between leasing and hire purchase
A lease transaction is a commercial arrangement, whereby an equipment owner or manufacturer conveys to the equipment user the right to use the equipment in return for a rental while Hire purchase is a type of instalment credit under which the hire purchaser agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. In lease financing no option is provided to the lessee (user) to purchase the goods except in certain cases. Whereby in Hire purchase an option is provided to the hirer (user). Lease rentals paid by the lessee are entirely revenue expenditure of the lessee. While in case of higher purchase only interest element included in the HP instalments is revenue expenditure by nature. Lease rentals comprise of 2 elements (1) finance charge and (2) capital recovery. HP instalments comprise of 3 elements (1) normal trading profit (2) finance charge and (3) recovery of cost of goods/assets.

BIBLOGRAPHY 1. Ghosh P.K. and Gupta G.S., Fundamentals of Leasing and Lease Financing, Vision Book Pvt. Ltd., New Delhi 1985. 2. Monga J.R., Financial Accounting: Concept & Applications, Mayur Paperbacks, 19th Edition. 3. Pandey I.M., Financial Management, Vikas Publishing House Pvt. Ltd. 8th Edition. 4. Agrawal N.K. & P.L. Joshi, “Accounting for Leases”, the Chartered Accountant Aug., 1983, page 92-97. 5. Ghosh T.P., “Leasing: A financing decision”, the Chartered Accountant, June 1987, page 996-967. 6. Mukhopadhyay D., “Lease Financing- An Overview”, the Management Accountant, May 1995, page 354-356. 7. Ramanujam K.M., R. Thennsyhi, “Accounting for Leases”, the Management
Accountant, Nov., 1995, page 850-852.