Merchant Banking and Financial Services

Unit 5

Unit 5

Theoretical and Regulatory Framework of Leasing

Structure: 5.1 Introduction Objective 5.2 Financial Services 5.2.1 Asset or fund based 5.2.2 Fee based or advisory 5.3 Essential Elements of Leasing 5.3.1 Parties to the contract 5.3.2 Asset 5.3.3 Ownership separated from user 5.3.4 Terms of lease 5.3.5 Lease rentals 5.4 Modes of Terminating Lease 5.5 Classification of Leasing 5.5.1 Finance lease and operating lease 5.5.2 Sale and lease back and direct lease 5.5.3 Single investors lease and leveraged lease 5.5.4 Domestic lease and international lease 5.6 Advantages and Limitation of Leasing 5.7 Applicability of Acts or Laws 5.7.1 Contract Act 5.7.2 Motor Vehicles Act 5.7.3 Indian Stamp Act 5.8 RBI Directions as Applicable to NBFCs on Leasing 5.9 Lease Documentation Procedure and Contents of the Lease Agreement 5.10 Summary 5.11 Glossary 5.12 Terminal Questions 5.13 Answers 5.14 Case-Let

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5.1 Introduction
In the previous unit you learnt about stock broking, custodial services and depository system. Leasing is a contractual arrangement or transaction in which a party owning an asset provides the asset for use to another party over a certain period of time in return for rentals. This unit will give you an overview of financial services and cover the theoretical and regulatory framework of leasing. The essential elements of leasing, classification and its significance and limitations will also be discussed in this unit. Objectives: After studying this unit you should be able to: explain the different types of financial services define the concept and classification of leasing analyse the basic types of leasing applicability of acts or laws describe the lease documentation procedure and contents of the lease agreement

5.2 Financial Services

Financial services are a very important part of the financial system. Financial services enable mobility and allocation of savings through the transformation of savings into investments. A well functioning financial system provides better financial services which empowers individuals, integrates with the economy, contributes to development, and provides protection against economic shocks. Financial services are offered by specialised institutions which help the client to raise funds, manage funds, and transform savings into investments. Financial services are classified into two categories based on the asset creation function of these services Fund based or asset based category and. Fee based or advisory based category. We will study these financial services in the following sections of this unit.

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5.2.1 Asset or fund based Asset based financial services facilitate corporate and other business entities to mobilise resources at lower rates and open up investment opportunities with enhanced returns. These services enable the corporate institutions, in particular, to reject the traditional bank finance and opt for the more competitive financial market. The debt market enables a borrower to organise his borrowings and structure the repayments to match future cash flows. The investment options have widened significantly to enable the corporate entities to use their surplus cash in short-term maturities and increase the revenue. The agreement to asset based securities is facilitated by financial intermediaries through fee based services. The asset based financial service has emerged as an important supplementary source of finance in the industry. The following are some of the asset based financial services: Leasing Leasing is a contractual arrangement or transaction in which a party owning an asset provides the asset for use to another party over a certain period of time in return for rent. Hire-purchase It is a mode of financing the price of the goods to be sold on a future date. The goods are let on hire with an option to the hirer to purchase them Customer credit Consumer credit includes all asset-based financing plans offered to individuals for acquiring durable consumer goods. The main suppliers of consumer credit are multinational banks, commercial banks and non banking finance companies. Factoring Factoring is a fund-based financial service that provides resources to finance receivables as well as facilitates the collection of receivables. Forfaiting Forfaiting is financing of receivables arising from international trade. Bill discounting - Bill discounting is encashing or trading of bills at less than its par value and before its maturity date.

In the next section, we will discuss the various types of fee based corporate financial services offered by the financial intermediaries

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5.2.2 Fee based or advisory Fee based financial services are not used to create assets or liabilities. These financial services facilitate certain financial functions such as managing capital issues, making arrangements for the placement of capital and debt instruments, and arrangement of funds from financial institutions. They also undertake the responsibility of getting all government and other clearances. In addition, this sector does a large number of other services like rendering project advisory services, plan mergers and acquisitions, and guiding in capital restructuring to their clients. In fee based services, the intermediaries charge fees for their financial services, like merchant banking services, assisting in mergers, stock broking and so on. The following are some of the fee based financial services: Issuing of Letters of Credit (LC) LCs successfully complete their purpose to facilitate trade by substituting the credit of the bank for the credit of the customer. There are mainly two types of letters of credit commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism. Issuing Letters of Guarantee (LGs) LGs can be with or without collateral security deposit. While there are different forms of LGs in the context of business usually, Letters of guarantee are concerned with providing safeguards to buyers that suppliers will meet their obligations and are issued by the customer's bank depending on which party seeks the guarantee. The bank essentially becomes a co-signer for the buyer. It pays the seller only if the buyer cannot pay and so the initial buyerseller agreement depends on the seller's credit. Other services The other important fee based financial services generally offered by banks and non banking financial companies include cash management services, foreign exchange services, merchant banking services, registrar, underwriting, custodial services, and credit rating services.

For these financial services the bank will charge fees. However, they are associated with risk. For example, in the event of invocation of guarantee or letters of credit, the payment liability immediately falls on the banks and then

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becomes a fund based. It will of course have recourse against the defaulter in whose favour the bank has issued the LC or LG. Self Assessment Questions 1. Asset based services enable the corporate bodies to replace ________________ bank finance and enter into the more competitive financial market. 2. ____________ is defined as a contractual arrangement or transaction in which a party owning an asset provides the asset for use to another party over a certain period of time in return of rentals. 3. Fee based financial services create assets or liabilities. (True/False)

5.3 Essential Elements of Leasing

As we have already learnt, leasing is a contractual arrangement in which a party owning an asset provides the asset for use to another party over a certain period of time in return for a rental. The transaction is generally done for fixed assets, notably equipment, machinery and planes. We will now discuss the elements of leasing. 5.3.1 Parties to the contract Two parties are essential for the contract of lease financing. It is an agreement between the owner who is the lessor, and the user of the asset who is known as lessee. The lessor and lessee can be an individual, joint stock companies, corporation or financial institutions. There are cases when there will be a third party to the contract, the manufacturer, who will enter into a contract with the lessee through the financial intermediary who arranges the transaction between the manufacturer and the user. 5.3.2 Asset An asset is the property or the equipment which the lessor leases. It is the subject of the contract of lease financing. The lessor can lease an automobile, factory, plant and machinery and so on. 5.3.3 Ownership separated from user The ownership of the asset stays with the lessor according to the contract. The user can only have the right to use it. After the expiry of the term of the lease, the asset is returned to the lessor.

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5.3.4 Terms of lease The owner and the user decide the tenure of the lease and accordingly prepare the contract. It is necessary that the agreement identify, with certainty, the Commencement Date, the period of the limited interest, and the termination date. Sometimes the lease period may stretch over the entire economic life of the asset which we call as financial lease and sometimes the lease may run shorter than the economic life which is called an operating lease. Sometimes, the lease may be perpetual, with an option at the end of the lease to renew the lease for a further specific period. 5.3.5 Lease rentals The rentals are the payment which the lessor and the lessee fix while preparing the contract. In the structure of the rental, lessor includes the depreciation charges, the interest on the investment, repairs and servicing charges over the lease period. Activity 1 Consider you own a building. ABC Company wants to take the building on a five year lease. Discuss the essential elements of leasing with your lessee. Refer to the following link for guidance: http://books.google.co.in/books?id=CXMm5_L0tdEC&pg=SA21PA1&dq=Essential+Elements+of+Leasing&hl=en&ei=bf6uTJLBOYqKvQP 414S_Bg&sa=X&oi=book_result&ct=result&resnum=2&ved=0CDUQ6AEw AQ#v=onepage&q=Essential%20Elements%20of%20Leasing&f=true Self Assessment Questions 4. At least three parties are essential for the contract of lease financing. (True/False) 5. Asset is the property or the equipment which lessee leases. (True/False) 6. The __________ are the payment which the lessor and the lessee fix while preparing the contract.

5.4 Modes of Terminating Lease

The termination of lease takes place at the end of the lease period. The parties mutually agree and select any one of the modes of termination at the beginning of the lease term. The following are modes to terminate a lease:
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Renewal - The lessor and the lessee renew the lease either on a perpetual basis or for a specific period. Generally, the period of the lease is for a number of years based on the life of the asset. The cost of the equipment and the interest on investment are recovered during this period. This period is known as the primary period and the second term is known as secondary period. Return to lessor - The asset again goes to the custody of the lessor if the lease is not renewed. Selling equipment to third party - The lessor sells the asset to a third party after the expiry of the lease period. Selling of equipment to lessee - The lessor sells the asset to the lessee permanently after the expiry of the lease period.

5.5 Classification of Leasing

An equipment lease transaction differs on the basis of the following: Reassignment of risks and rewards or ownership. Number of parties to the transactions. Domicile of the equipment manufacturer, the lessor and the lessee. We will now study the classifications of leasing as illustrated in Figure 5.1.

Leasing

Finance lease and Operating lease

Sale and leaseback and Direct lease

Single investors lease and Leveraged lease

Domestic lease and international lease

Import lease and Cross-border lease

Figure 5.1: Classification of Leasing Sikkim Manipal University Page No. 98

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5.5.1 Finance lease and operating lease Let us now study the finance and operating lease. Finance lease In finance lease, the transfer of risks takes place. All the risks and secondary rewards incidental to the ownership of the asset are transferred to the lessee by the lessor, whether or not the title is eventually transferred. It involves payment of rentals over a compulsory, non-cancellable lease period which must be sufficient to repay the capital outlay of the lessor and leave some profit. Such a lease is also known as full payout lease. The lessor is essentially interested in the transaction as a financier and has no interest in the asset which is essentially required for the lessee for his business. Assets included under finance lease are ships, aircraft, land, buildings, heavy machinery, and so on. Operating lease In an operating lease, transfer of all the risks and the rewards associated therewith does not take place and the cost of the asset is not fully recovered during the primary lease period. The lessor does not depend on a single lessee for recovering the cost of the asset. Services such as maintenance, repair and technical advice are provided by the lessor to the lessee. It is also known as service lease. Operating lease is generally used in case of assets like computers, office equipment, automobiles and so on. 5.5.2 Sale and lease back and direct lease Let us now study the sale and lease back and direct lease. Sale and lease back Sale and lease back is an indirect form of leasing. The owner of an asset sells the asset to a lessor and the lessor leases it back to the owner who acts like the lessee. The sale and lease back of safe deposits vaults by banks is a good example of this type of leasing. The lease back arrangement in sale and lease back type of leasing can either be in the form of a finance lease or operating lease. Direct lease In direct lease, the lessee and the owner are two different bodies. A direct lease is of two types: bipartite and tripartite lease.

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Bipartite lease It consists of two parties the equipment supplier being the lessor. This lease is typically structured as an operating lease with inbuilt facilities, like upgradation of the equipment. The lessor maintains the asset and, if needed, replaces it with similar equipment. Tripartite lease This lease involves three parties, the equipment supplier, the lessor and the lessee. Reference about the customer is provided by this lease to the leasing company. There are also different variants to tripartite lease.

5.5.3 Single investors lease and leveraged lease Next, we will learn about single investor lease and leveraged lease. Single investor lease In single investors lease, there are only two parties, the lessor and the lessee. The leasing company manages the fund of the entire investment by an appropriate mix of debt and equity funds. The lender is not entitled to payment from the lessee when there is a default in servicing. The debt raised by the leasing company to finance the asset is without recourse to the lessee. Leveraged lease In leveraged lease, there are three parties - the lessor, lender and the lessee. In such a lease, the leasing company buys the asset through considerable borrowing according to the requirement of the lessee. The lender obtains an obligation of the lease and the lessee has to pay rentals. The deal is routed through a trustee who looks after the interest of the lender and lessor. After receiving the receipt of the rentals from the lessee, the trustee sends the debt service component of the rental to the loan participant and the balance to the lessor. 5.5.4 Domestic lease and international lease Let us now study about domestic lease and international lease. Domestic lease In domestic lease, all parties mentioned in the agreement are the residents of the same country. The party consists of the equipment supplier, lessor and the lessee. This lease is less prone to risks.

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International lease In international lease, the parties to the lease transaction reside in different countries. Import lease and cross-border lease are the sub classifications of international lease. This lease is affected by two types of risks - country and currency risk. Import lease The lessor and the lessee are resident of the same country but the equipment provider is located in a different country Cross-Border lease The lessor and the lessee are resident of different countries and the residence of the supplier is not at all important Self Assessment Questions 7. In a finance lease, transfers of _________ take place. 8. Services such as maintenance, repair and technical advice are provided by the lessor to the lessee in _______________ lease. 9. In single investors lease, there are only two parties, the lessor and the lessee. (True/False) 10. In leveraged lease the deal is routed through a trustee who looks after the interest of the lender and lessor. (True/False) 11. Which of the following leases are affected by country and currency risk? a) single investors lease b) finance lease c) international lease d) domestic lease

5.6 Advantages and Limitation of Leasing

Advantages of leasing Leasing has many advantages for the lessee as well as for the lessor. Lease financing offers the following benefits to the lessee: One hundred percent finance without immediate down payment for huge investments, except for his margin money investment. Facilitates the availability and use of equipments without the necessary blocking of capital funds. Acts as a less costly financing alternative as compared to other source of finance. Offers restriction free financing without any unduly restrictive covenants.
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Enhances the working capital position. Provides finance without diluting the ownership or control of the lessor. Offers tax benefits which depend on the structure of the lease. Enables lessee to pay rentals from the funds generated from operations as lease structure can be made flexible to suit the cash flow. When compared to term loan and institutional financing, lease finance can be arranged fast and documentation is simple and without much formalities. The lessor being the owner of the asset bears the risk of obsolescence and the lessee is free on this score. This gives the option to the lessee to replace the equipment with latest technology

The following are the benefits offered by lease financing to the lessor: The lessors ownership is fully secured as he is the owner and can always take possession in case of default by the lessee. Tax benefits are provided on the depreciation value and there is a scope for him to avail more depreciation benefits by tax planning. High profit is expected as the rate of return increases Return on equity is elevated by leveraging results in low equity base which enhance the earnings per share. High growth potential is maintained even during periods of depression. Limitations of leasing The following are some of the limitations of leasing: Lessee is not capable of adding or altering anything to the leased asset because of the restrictive conditions of the lease agreement. Financial lease can bring about higher payout accountability if machinery is not found useful, and the lessee is planning to cancel the lease agreement or opts for premature termination of the lease contract. Termination of the lease happens when lessee fails to continue with the terms and conditions of the lease and the lessor can take possession of the leased asset, In case of financial lease, the lessee may be made liable for damages and compelled to make payment of his lease rental in an accelerated manner. Double sales tax can be charged once at the time of purchase of the asset by the lessor and again when it is leased out to the lessee.
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Self Assessment Questions 12. Leasing __________ the working capital position. 13. Leasing offers tax benefits which depend on the structure of the lease. (True/False) 14. Low growth potential is a limitation of leasing. (True/False) 15. Termination of the lease happens when lessee fails to continue with the terms and conditions of the lease. (True/False)

5.7 Applicability of Acts or Laws

Acts and laws are always applicable to contracts or deals. Acts are also applicable to leasing made by a lessor to a lessee. There are various acts which are regulated by the government of India. Let us discuss the following acts related to leasing: Contract Act. Motor Vehicles Act. Indian Stamp Act. 5.7.1 Contract Act The Law of Contract applies to all contracts including leasing and hire purchase. There are certain provisions of the Law of Contract which are applicable to leasing transactions. It is an agreement enforceable by law. The following are the important elements of a contract: A contract creates legal obligation. After the preparation of agreement, lessor and lessee are bound by the agreement. Each of the parties must give and take something which is legal, and moral. Additionally, the person or his property must not be damaged. The contract should not be void under any law. Parties cannot enforce a void contract. The parties eligible for leasing must be of 18 years of age and of sound mind. There must not be any legal disqualification or charges against the parties entering into a contract. As per the provisions of the contract act, a contract may be discharged in different ways and these provisions are applicable to lease agreement.

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Non performance of a contract by a party provides for remedial measures in the contract act and these provisions are attracted in case of lease agreements also. The other important provisions of the contract act relating to payment of monetary compensation and damages, claim for specific performance, lodging a suit for Injunction, indemnity and guarantee are all applicable to lease contracts. Most importantly, leasing is a bailment agreement and the provisions of the contract act apply to lease agreements.

5.7.2 Motor Vehicles Act The Motor Vehicles Act consolidates and amends the law relating to motor vehicles. The lessor is considered as dealer and the lessee as the legal owner of the asset. Under the act, the owner must register the vehicle. In case the vehicle is financed under lease agreement, the lessor is treated as a financier. 5.7.3 Indian Stamp Act According to this act the payment of stamp duty is necessary on all documents creating a right in monetary terms. The contracts for equipment leasing are subject to stamp duty and vary from state to state. Self Assessment Questions 16. _____________ is an agreement enforceable by law. 17. Consideration means that each of the parties has to give and take something which is _________, moral and must not harm a person or his property. 18. Which of the following is an important element of contract: a) Non competent parties b) Void contract c) Legal agreement d) Indian stamp law 19. In the Motor Vehicle Act, the lessor is the dealer and the lessee the legal owner of the asset and this is necessary for the purpose of registration of the vehicle under the Act. (True/False)

5.8 RBI Directions as Applicable to NBFCs on Leasing

The Non Banking Financial Companies (NBFCs) play a vital role in expanding the access to financial services and enhancing competition. It
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also diversifies the financial sector. This sector is recognised as a complementary to the banking system which absorbs financial risks. To coordinate, control and regulate the functioning of all NBFCs, the Reserve Bank of India (RBI) issues direction from time to time under the RBI Act. The RBI has notified the following directions applicable to NBFCs: NBFCs acceptance of pubic deposits (Reserve bank) Directions, 1998. Non Banking Financial Companies (Deposit Accepting or Holding) Prudential Norms (Reserved Bank) Directions, 2007, and Non Banking Financial Companies (Non deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions,2007. Non Banking Financial Companies Auditors Report (Reserve Bank) Directions, 1998. The principle on which these directions are issued is that they are aimed at deposit accepting NBFCs and are applicable in a restrictive manner (with of compliance requirements) to NBFCs accepting or holding deposits and in a limited manner (with lease compliance requirements) to NBFCs not accepting deposits. Classification of NBFCs Figure 5.2 illustrates the classification of NBFC based on their acceptance of public deposits.
NBFC

Accepting public deposits

Not accepting public deposits

Figure 5.2: Classifications of NBFCs

Regulation for NBFCs not accepting public deposits The NBFCs that do not accept public deposits are further classified in the following categories: NBFCs engaged in loan investment, hire purchase finance and equipment leasing. NBFC which acquire shares of their group companies.
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The RBI decides which company is eligible for leasing. The following are the NBFCs registered with the RBI: Equipment leasing company. Hire-purchase company. Loan company. Investment company. The reclassification of NBFCs was done as given below: Asset Finance Company (AFC) Investment Company (IC) Loan Company (LC) The AFC is a financial institution which carries on its major business like the financing of physical assets that support economic activities such as tractors, automobiles, lathe machines, moving on own power, and general purpose industrial machines generator sets, earth moving and material handling equipments. For leasing, the Institute of Chartered Accountants of India (ICAI) has defined Accounting Standard (AS) 19 Accounting for Leases. The accounting standard is important with regard to lease agreements or financial leases. The lessor has to show the assets given on lease only as receivables in its balance sheet and not in fixed assets. Self Assessment Questions 20. _______________ recognised as a complementary to the banking system which absorbs financial risks. 21. The NBFCs that accept public deposits are further classified in _____ categories. 22. The NBFCs engaged in loan investment, hire purchase finance and equipment leasing is a type of NBFCs not accepting public deposits. (True/False)

5.9 Lease Documentation Procedure and Contents of the Lease Agreement

There are formalities and legal documents involved in lease transactions. It is mandatory to document the lease agreement properly and formalise the deal.
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Let us now learn about the aspects of lease documentation and agreement. Purposes The lease document provides evidence of indebtedness, security and, evidence regarding terms and conditions between the lessor and lessee. It also helps the leasing companies to take legal action in case of default. Legal rights One of the requirements of lease agreement is that the persons executing the contract must have legal right to do so. The document must be in a disciplined and predefined format, properly stamped, and witnessed. It is also necessary to register the document with the appropriate authorities. Lease approval process The lease approval process is as follows: The lessee receives a letter of offer mentioning the terms of the lease facility. Lessee signs and returns a copy of offer letter within a stipulated time and then passes a resolution at a Board meeting accepting the offer. The lessor obtains attendant lease documents from the lessee. The attendant lease documents include purchase order, invoice, bill of sale from supplier, delivery note and so on. The insurance of the leased asset is processed regardless of who pays the premium. The policies must be in the custody of the lessor. The policies are renewed before the expiry date. Contents of the lease agreement The following are some of the important elements in a lease agreement are: Details of the lessor and lessee, and their addresses. Term of the lease. Lease rent and the mode of payment. Details of property leased its location and identification. Effective date of commencement of the rent agreement and the duration. Lease rent and the mode of payment. Declaration by the lessor that he is either the owner of the property or is duly authorised by the owner to give the property on lease.

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Security deposit amount paid, whether it is interest-free or not, and the circumstances when it is refundable. Advance rent payable, if any, and the mode of its adjustment. Grounds for termination of the agreement. Notice period required for termination of the lease. Rent escalation clause regarding the rate of increase of rent.

The other elements depend upon the commercial terms which have been agreed upon by the parties. There is no bar on the number of years a lease can be given by the lessor to the lessee. Registration must be done if a lease of property is given for more than one year. The stamp duty to be paid depends on the rates in each area in the country. Self Assessment Questions 23. It is not mandatory to document the lease agreement properly and formalise the deal. (True/False) 24. The purpose of lease document is that it provides evidence of indebtedness and security and, evidence related to terms between lessor and lessee. (True/False) 25. ____________ of the leased out asset is done irrespective of the fact who pays the premium and the policies should be in the custody of the lessor. 26. Which of the following is not an element of a lease agreement? a) The lease rent and the mode of payment. b) Security deposit amount paid, whether it is interest-free or not, and the circumstances when it is refundable. c) The effective date of commencement of the rent agreement and the duration. d) Details of drainage system.

5.10 Summary
Let us now summarise the important point we learnt in this unit on the theoretical and regulatory framework of leasing: Financial services are the services which are provided by the finance industry. Asset-based financial services facilitate the corporate entities to mobilise resources at lower rates and open up investment opportunities with
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enhanced returns. Asset based financial services have emerged as an important supplementary source of finance in industry. Fee based financial services do not create any assets or liabilities. However, they facilitate financial functions. Two parties those are essential for the contract of lease financing known as lessor and lessee. The termination of lease takes place at the end of the lease period. The Contract Act, Motor Vehicle Act and Indian Stamp Act are important laws that are applicable to leasing transactions. The NBFCs play a vital role in expanding the access to financial services and enhancing competition.

5.11 Glossary
Accountability: Responsibility to someone or for some activity Acquisitions: The act of acquiring or gaining possession Complementary: Acting as or providing a complement Contractual: Part of a binding legal agreement Custodial: Providing protective supervision Depreciation: A decrease or loss in value Diversifies: To create different forms Enforceable: Capable of being enforced Liquidated: To convert to cash Obligation: Terms of an agreement Receivables: Money expected to receive from notes or accounts Statutory: Authorised by an established law Trustee: A person to whom the legal title to property is entrusted to hold or use for another's benefit

5.12 Terminal Questions

1. 2. 3. 4. 5. 6. Discuss the difference between asset and fee based financial services. Analyse the essential elements of leasing. Classify leasing, based on the different types. What are the advantages and limitations of leasing? Discuss the applicability of the Contract Act. What are the RBI directives applicable to NBFCs on leasing?
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5.13 Answers
Self Assessment Questions 1. Traditional 2. Leasing 3. False 4. False 5. False 6. Rentals 7. Risks 8. Operating 9. True 10. True 11. c) International lease 12. Enhances 13. True 14. False 15. True 16. Contract 17. Legal 18. c) Legal agreement 19. True 20. NBFCs 21. Two 22. True 23. False 24. True 25. Insurance 26. d) Details of drainage system Terminal Questions 1. Asset based financial services facilitate the corporate entities to mobilise resources at lower rates and open up investment opportunities with enhanced returns. Refer to section 5.2.1- Asset or fund based and section 5.2.2 - Fee based or advisory for more details. 2. The leasing is a contractual transaction in which a party who is having asset gives it to another party the right to use the asset over a period of

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3. 4. 5.

6.

time in return for rentals. Refer to section 5.3 - Essential Elements of Leasing for more details. Reassignment of risks and rewards or ownership. Refer to section 5.5 Classification of Leasing for details. Leasing has many advantages for lessee as well as for lessor. Refer to section 5.6- Advantages and Limitation of Leasing for details. Law of contract applies to all contracts including leasing and hire purchase. Refer to section 5.7 - Applicability of Contract Act and Other Acts or Laws for more details. In order to coordinate, control and regulate the functioning of all NonBanking Financial Companies, RBI issues direction from time to time under the RBI Act. Refer to section 5.8 - RBI Directions as Applicable to NBFCs on Leasing for further details.

5.14 Case-Let
The Genius Group has been supporting leasing companies and governments to improve the legal and regulatory framework for leasing. Its efforts are helping to develop healthy leasing industries in several countries, which in turn, are raising capital investment and economic development. Designing tax incentives for equipment leasing The economy of Alien Bank was hardly recovering from negative growth experienced and the CEO was working hard to re-establish faith in the company and its economy. Its strategy for reducing public expenditure through a popular referendum had failed. The country was taking into account new tax reform actions designed to raise revenues in order to decrease the fiscal deficit and the load of public debt for public finances. The Genius Group was confident that tax reform will provide a prospect to propose a legal strategy for stimulating domestic investment and strengthening the Indian leasing industry. The strategy would increase government revenues by increasing the economic base that feeds taxes. The Indian Leasing Association (ILA) retained Geniuss services to commence a study that compiled all economic analyses which established the link between leasing tax incentives and economic gains. The study proved that leasing tax incentives can benefit a company by
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expanding fixed capital investment, improving economic welfare, generating jobs, enhancing productivity and driving overall economic growth. Geniuss study was the source for a formal lobbying effort where ILA influenced the Indian government and Congress to pass leasing tax incentives. These incentives included tax deduction of lease rentals for finance leases, and bonus depreciation for the acquisition of capital goods. The growth of the leasing industry following the tax change was exceptional. Indias economic press reported that the leasing industry grew 130 percent in three months. The Indian economy as a whole has also expanded. Genius succeeded in proving how valuable equipment leasing is for the good health of national economies. Bringing best practices The International Finance Corporation (IFC), a World Bank dedicated to developing capital markets in rising economies, retained The Genius Group to evaluate the legal and regulatory environment in Madhya Pradesh and Gujarat. IFC specifically wanted Genius to find out the best regulatory practices for strengthening the equipment leasing industries in both the states. Genius designed a map for establishing solid leasing industries in Madhya Pradesh and Gujarat. After submitting the study, Genius led a presentation panel to discuss the report with all relevant stakeholders in Gujarat, including government officials, legislators, bankers, attorneys, major industry associations and academia. The study prompted the government to draft a new leasing law in Gujarat. Discussion Questions 1. Discuss Genius Groups initiatives to improve the legal and regulatory framework for leasing. (Hint: The economy of Alien Bank was hardly recovering from negative growth experienced and the government.) 2. How can leasing tax incentives help in economic growth? (Hint: The study proved that leasing tax incentives can benefit a country.) Source: http://www.theGeniusgroup.com/articles/case-studies/ improving-the-legal-and-regulatory-framework-for-leasing-businesses-inemerging-markets
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References Khan M. Y. (2007). Financial Services. New Delhi. Tata McGraw Hill Education. Subramanyam, Pratap G. Investment Banking. The McGraw Hill. New Delhi. E-References http://books.google.co.in/books?id=noJ1TiqHbOYC&pg=RA1PT14&lpg=RA1PT14&dq=fund+based+financial+services&source=bl&ots=bX8LPvT4_e &sig=PLbTL4WSif8xdGWVEcWqvzH8sV0&hl=en&ei=aKOuTN6yA4uEv gPQm5CtBg&sa=X&oi=book_result&ct=result&resnum=6&ved=0CC4Q6 AEwBQ#v=onepage&q=fund%20based%20financial%20services&f= false http://books.google.co.in/books?id=hd_y8FG8c4C&pg=PA290&dq=what+are+the+fund+based+financial+servi ces&hl=en&ei=oKauTOjLYK4vQPRmLGBBw&sa=X&oi=book_result&ct=result&resnum=4&ved =0CEUQ6AEwAw#v=onepage&q=what%20are%20the%20fund%20bas ed%20financial%20services&f=false - Retrieved on 7th October, 2010. http://books.google.co.in/books?id=yT5IsWw9Ic8C&pg=PA156&dq=wha t+are+the+fund+based+financial+services&hl=en&ei=oKauTOjLYK4vQPRmLGBBw&sa=X&oi=book_result&ct=result&resnum=1&ved =0CDUQ6AEwAA#v=onepage&q=what%20are%20the%20fund%20bas ed%20financial%20services&f=false http://books.google.co.in/books?id=AmHmS1pj57AC&pg=PA394&dq=no n+fund+based+financial+services&hl=en&ei=j_WuTKjPC5HqvQPfyZjAB g&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDIQ6AEwAA#v= onepage&q=non%20fund%20based%20financial%20services&f=false http://economictimes.indiatimes.com/features/financial-times/Contentsof-a-lease-agreement/articleshow/2695945.cms http://www.nabard.org/pdf/report_financial/Chap_I.pdf - Retrieved on 8th October, 2010.

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