Leasing in India, Legal Aspects of Leasing

Leasing in India

Leasing industry in India is of recent origin. It was pioneered in 1973 when for the first time ‘Leasing Company of India’ was set up in Madras. For almost seven years in the country, this company was the sole leasing company. In 1980 another leasing company known as “20th Century Leasing” came into existence. Both these leasing companies were promoted by management qualified professionals from city bank.

Thereafter, a virtual explosion in the leasing industry was noticeable. In 1981 four organisations, viz., Shetty Investment and Finance, ‘Paybharat Credit and Investment’, ‘Motor and General Finance’ and ‘Sundaram Finance’ joined the leasing business essentially for taking tax advantage.

The leasing industry entered the third stage in the growth phase in late 1982 when numerous financial institutions and commercial banks either started leasing or announced plans to do so. ICICI embraced leasing activity in 1983 where-after the trickle soon developed into flood and leasing became the new gold mine.

This was also the time when the profit performance of the first two dozen companies had been made public which was so fascinating as to attract many more companies in leasing business. In the meantime, International Finance Corporation announced its decisions to open four leasing joint ventures in India.

To add to the leasing boom, the Finance Ministry announced strict measures for enlistment of investment companies on stock exchange, which made many investment companies to turn overnight into leasing companies. Foreign banks in India particularly Grind-lays did commendable work in marketing the leasing idea.

At present, there are about 300 leasing companies in the country. Apart from these, many companies engaged in other businesses are also leasing out mainly to employ their investible surplus in tax-benefit. Over the period 1980-88, gross leased assets of these companies expanded by Rs. 700 crores indicating the extent to which leasing companies have played significant role in asset formation. This is a basic fact that requires recognition and encouragement by the government. It is most intriguing to note that the leasing industry is being singled out for discriminatory practices.

Leasing is coming of age in India, as is evidenced by phenomenal growth of leasing industry by over 100 per cent in recent few years. Against only Rs. 3000 crore of lease deals done during 1993-94, the buzz in the leasing industry puts leasing volume in 1994-95 at close to Rs. 7000 crores.

A large part of this unprecedented growth was contributed by the Public Sector Units (PSUs). For instance, the IDBI single handedly did a Rs. 50 crores lease deal for the Shipping Corporation of India for financing the acquisition of a single ship.

SBI capital markets syndicated a Rs. 240 crore lease deal for Mangalore Refinery and Petrochemical Ltd. Similarly, Infrastructural Leasing and Financial Services Ltd. syndicated a Rs. 200 crore lease deal for Maharashtra State Electricity Board (MSEB).

KDTK Mahindra Finance Ltd. has structured Rs. 300 crore transmission and distribution equipment’s lease deal for MSEB.

IDBI Sanctioned Lease finance to the tune of Rs. 1007 crore in 1997-98 which was more than what was provided during 1994-95. The institution is looking at financing leasing of small aircraft for spraying pesticides and ferrying executives and large allocation for shipping. Telecom and the power sector.

The SBI group is forming a consortium for lease financing.

A syndicate of leasing companies provided Rs. 250 crore lease finance to the Rajasthan State Electricity Board.

Banks and bank-subsidiaries:

Till 1991, there were some ten bank subsidiaries active in leasing, and over-active in stock-investing. The latter variety was ravaged in the aftermath of the 1992 securities scam.

In Feb., 1994, the RBI allowed banks to directly enter leasing. So long, only bank subsidiaries were allowed to engage in leasing operations, which was regarded by the RBI as a non-banking activity. However, the 1994 Notification saw an essential thread of similarity between financial leasing and traditional lending.

Though State Bank of India, Canara Bank etc have set up leasing activity, it is not currently at a scale to make any difference on the leasing scenario. This is different from the rest of the World, where banks are front-runners in leasing markets.

Legal Aspects of Leasing

“The delivery of goods by one person to another, for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’ and the person to whom they are delivered is called the ‘bailee’.

Financial leasing represents a “Distinctive triangular relationship” requiring three discrete parties:

(1) A lessor who advances funds for the purchase of the equipment which constitutes the subject of the leasing transaction.

(2) A lessee who selects the equipment and pays a rental fee for the right to use it.

(3) A supplier who sells the equipment to the lessor. Financial leasing also links two separates, albeit interrelated, contracts: a leasing agreement between the lessor and lessee, and a supply agreement between the supplier and lessor.

International Financial Leasing means at least there are one or more international elements in a transaction. Basically, in a finance lease transaction, if the supplier, lessor and lessee are all have their places of businesses in different countries; or regardless of the place of business of the supplier, the lessee and the lessor have their places of business in different countries, the contract of the financial leasing can be thought as an international financial leasing contract.

Since an equipment lease transaction is regarded as a contract of bailment, the obligations of the lessor and the lessee are similar to those of the bailor and the bailee (other than those expressly specified in the least contract) as defined by the provisions of sections 150 and 168 of the Indian Contract Act. Essentially these provisions have the following implications for the lessor and the lessee.

The lessor has the duty to deliver the asset to the lessee, to legally authorise the lessee to use the asset, and to leave the asset in peaceful possession of the lessee during the currency of the agreement.

The lessor has the obligation to pay the lease rentals as specified in the lease agreement, to protect the lessor’s title, to take reasonable care of the asset, and to return the leased asset on the expiry of the lease period.

Contents of a lease agreement:

The lease agreement specifies the legal rights and obligations of the lessor and the lessee. It typically contains terms relating to the following:

• Description of the lessor, the lessee, and the equipment.
• Amount, time and place of lease rentals payments.
• Time and place of equipment delivery.
• Lessee’s responsibility for taking delivery and possession of the leased equipment.
• Lessee’s responsibility for maintenance, repairs, registration, etc. and the lessor’s right in case of default by the lessee.
• Lessee’s right to enjoy the benefits of the warranties provided by the equipment manufacturer/supplier.
• Insurance to be taken by the lessee on behalf of the lessor.
• Variation in lease rentals if there is a change in certain external factors like bank interest rates, depreciation rates, and fiscal incentives.
• Options of lease renewal for the lessee.
• Return of equipment on expiry of the lease period.
• Arbitration procedure in the event of dispute.