Tag: OU B.com free notes

The term ‘lay-off’ has been defined under section 2 (kkk) of the Industrial Disputes Act, 1947, thus lay-off means the failure, refusal or inability of an employer on account of the shortage of coal, power or raw materials or the accumulation of stocks or the breakdown of machinery or natural calamity or for any other unconnected reason to give employment to a workman whose name is borne on the muster rolls of his industrial establishment and who has not been retrenched.

Essentials of lay-off:

(i) There must be failure, refusal or inability on the part of the employer to give employment to a workman.

(ii) The failure, refusal or inability should be on account of shortage of coal, power or raw materials or accumulation of stocks or breakdown of machinery, or natural calamity, or any other connected reason.

(iii) The workman’s name should be on the muster rolls of the industrial establishment.

(iv) The workman should not have been retrenched.

Lay-off is a measure to cope with the temporary inability of an employer to offer employment to a workman to keep the establishment as going concern. It results in immediate unemployment though temporary in nature. It does not put an end to the employer-employee relationship, nor does it involve any alteration in the conditions of service.

Further, lay-off occurs only in a continuing business. When the industrial establishment is closed permanently or it lock-out is declared by the employer, the question of lay-off has no relevance. Lay-off is justified only when it is in conformity with the definition given under Section 2 (kkk) of the Industrial Disputes Act.

Compensation for Lay-Off (Rights of Workmen):

According to Section 25 C of the Industrial Disputes Act, a workman who is laid-off is entitled to compensation equivalent to 50 per cent of the total basic wages and dearness allowance for the period of lay-off.

This right of compensation is, however, subject to the following conditions:

(i) He is not a badli or a casual workman.

(ii) His name should be borne on the muster rolls of the establishment.

(iii) He should have completed not less than one year of continuous service under the employer.

A badli workman means a workman who is employed in place of another workman whose name is borne on the muster rolls of the establishment. However, such a workman ceases to be a badli workman on his completion of one year of continuous service in the establishment.

A workman is entitled to lay-off compensation at the rate equal to fifty per cent of the total of the basic wage and dearness allowance for the period of his lay off except for weekly holidays which may intervene. Compensation can normally be claimed for not more than forty-five days during any period of twelve months.

Even if lay-off exceeds forty-five days during any period of twelve months no compensation is required to be paid for the excess period if there is an agreement to that effect between the workman and the employer.

If the period of lay-off exceeds forty-five days, the employer has two alternatives before him, namely:

(i) to go on paying lay-off compensation for such subsequent periods

(ii) to retrench the workman.

Duties of the Employer in Connection with Lay-Off:

The following duties are laid down for the employer in connection with a lay-off:

(a) The employer must maintain a muster roll of workmen and to provide for the making of entries therein by workmen who may present themselves for work at the establishment at the appointed time during normal working hours notwithstanding that workman in any industrial establishment have been laid off.

(b) The lay-off must be for the reasons specified in Section 2(kkk).

(c) The period of detention of workmen if stoppage occurs during working hours should not exceed two hours after the commencement of the stoppage.

(d) The compensation for lay-off must be at the rate and for the period specified in Section 25-C of the Industrial Disputes Act.

Retrenchment

The term “Retrenchment” has been given a very wide meaning under Section 2(oo) of the ID Act to include termination by the employer for any reason whatsoever, other than a punishment given in disciplinary proceeding.

The provision further states that Retrenchment does not include:

• Voluntary retirement;
• Retirement on reaching age of superannuation;
• Termination of service of workman as a result of non-renewal of contract of employment;
• Termination of workman due to continuous ill-health

Conditions have to be fulfilled for retrenchment

Section 25F of the ID Act is a very essential provision for law relating to retrenchment.

If the conditions or requirements given in this provision are not followed by the employer, then the retrenchment of employee will be illegal and invalid.

According to this provision, a workman employed in any industry who has been in continuous service for not less than one year under an employer cannot be retrenched unless:

• The workman has been given one month’s notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice;
• The workman has been paid compensation at the time of retrenchment;
• Notice in the prescribed manner is served on the appropriate Government.

Retrenchment of White-Collar Employees

The term white collar employees have nowhere been expressly defined under the Indian Law. However, white collar employees are those who work in the managerial capacity.

Thus, the employees who don’t fall under the definition of “workman” under Section 2(s) of ID Act are white collar employees. The definition of workman any person (including an apprentice employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute.

The definition of “workman” specifically excludes those persons who are employed in managerial or administrative capacity.

Closure

The Act defines “Closure” as the permanent closing down of a place of employment or part thereof. Here, the employer is constrained to close the establishment permanently. Nonetheless, the due procedure has to be complied with when it comes to rolling out a plan of closure; the said procedure, as set out by the Act, has been detailed below. These procedures, nonetheless, do not apply to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or for other construction work.

Sec. 25FFF. Compensation to workmen in case of closing down of undertakings.

(1) Where an undertaking is closed down for any reason whatsoever, every workman who has been in continuous service for not less than one year in that undertaking immediately before such closure shall, subject to the provisions of sub- section (2), be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched: Provided that where the undertaking is closed down on account of unavoidable circumstances beyond the control of the employer, the compensation to be paid to the workman under clause (b) of section 25F shall not exceed his average pay for three months.

1 Explanation. An undertaking which is closed down by reason merely of

(i) financial difficulties (including financial losses); or

(ii) accumulation of undisposed of stocks; or

(iii) the expiry of the period of the lease or licence granted to it; or

(iv) in a case where the undertaking is engaged in mining operations, exhaustion of the minerals in the area in which such operations are carried on; shall not be deemed to be closed down on account of unavoidable circumstances beyond the control of the employer within the meaning of the proviso to this sub- section.

Special Provisions: The employer intending to do a closure of his establishment has to necessarily apply at least ninety days in advance to the appropriate government. A copy of the said application has to be given to the representatives of the workmen as well. The said application will be considered and a reasonable opportunity to be heard shall be given to the employer as well as the workmen. After considering the same, the appropriate government may or may not grant the employer to close down. Even here, if the government does not respond within sixty days from application, the permission will be deemed to have been granted. A similar provision for review of the decision exists even here.

Continuous Service

One year of continuous service entails an entitlement for compensation under the Industrial Disputes Act. A workman is said to be in continuous service if he is for that period in uninterrupted service. Interruption owing to sickness authorised leave, an accident, a strike which is not illegal, a lock and a cessation of work which is not due to the fault of the workman will not be taken into consideration for calculating the period of continuous service.

A workman could be deemed to have had one year of continuous service even if the worker hasn’t had a year of continuous service if the worker was in employment for twelve calendar months preceding the date with reference to which calculation is to be made, and in the course of these twelve months, he actually worked for not less than one hundred and ninety days in the case of employment in a mine and two hundred and forty days in any other case.

The said continuous service shall also include the days laid off, days on earned leave and days taken off owing to temporary disablement owing to accident arising out of or in the course of employment. Maternity leave taken, not exceeding twelve weeks shall also be counted in continuous service in case of female workers.

A strike is a powerful weapon used by trade unions or other associations or workers to put across their demands or grievances by employers or management of industries. In another way, it is the stoppage of work caused by the mass refusal in response to grievances. Workers put pressure on the employers by refusal to work till fulfilment of their demands. Strikes may be fruitful for workers’ welfare or it may cause economic loss to the country.

For strike, the industrial dispute act under 2 (q) defines strikes as “a cessation of work by a body of persons employed in any industry acting in combination, or a concerted refusal, or a refusal, under a common understanding of any number of persons who are or have been so employed to continue to work or to accept employment”.

Common Reasons for Strike

Strikes generally occur in industries due to disputes between employees and employers, employees and employees or among employers and employers mostly due to the following issues:

• Working hours
• Working Conditions
• Salary, Incentive etc
• Time payment of wages
• Reduction in salary/wages
• Issue related Minimum wages
• Leave/Holidays
• Dissatisfaction with the company policy
• PF, ESI, Profit Sharing etc
• Retrenchment of workmen and closure of establishment
• Any other issue.

Under the following situation as given under section 22, on these grounds the strikes can be considered as illegal:

• Without giving to employer notice of strike within six weeks before striking.
• Within fourteen days of giving such notice.
• Before the expiry of the date of strike specified in any such notice as aforesaid.
• During the pendency of any conciliation proceedings before a conciliation officer and seven days after the conclusion of such proceedings.

Further, the provisions under section 23 are general in nature. It imposes general restrictions on declaring strike in breach of contract in both public as well as non- public utility services in the following circumstances mainly:

• During the pendency of conciliation proceedings before a board and till the expiry of 7 days after the conclusion of such proceedings;
• During the pendency and 2 months after the conclusion of proceedings before a Labour Court, Tribunal or National Tribunal;
• During the pendency and 2 months after the conclusion of the arbitrator, when a notification has been issued under subsection 3 (a) of section 10 A;
• During any period in which a settlement or award is in operation in respect of any of the matter covered by the settlement or award.

Types of Strike

Primary Strike: The strikes that are directly projected against the employer are known as Primary Strikes. Below are types of Primary strikes which workers adapt to push the employer to get them on terms agreed to workers.

• Gherao is adopted by the factory workers to push the management to agree to their demand by restricting access to office or factory premises where nobody could move in or out.
• Picketing is the process of highlighting their issues on playcard or banners to show their demand to the public at large and media. In this union members are being talked to resolve the issue peacefully.
• Boycott is a process where no worker is allowed to carry out any work and union members push other workers not to do work and participate in their strike.
• Pen down strike where workmen come to work on a regular basis but do not do any work and sit idle for whole office hours.
• Go Slow Strike is also a very harmful way of strike where workmen intentionally work very slow to slow down operation. This harms the employer where order has strict timelines to deliver.
• Hunger Strike is the most common and oldest method used by workmen where they go for indefinite fasting and sit around factory or employer residence to project their demand.

Secondary Strikes: The other name for the secondary strike is the sympathy strike. In this, the force is applied against the third person having sound trade relations with the organization to indirectly incur a loss to the employer and the business. The third person does not have any other role to play in such a strike.

Nowadays third kind of strikes have also become popular which are adopted by the General Public to show their anger or objections against Government Policies for roll back of government policies. Recently we have seen outrage over Farmer’s bill where Bharat Bandh, No Purchase at Government Mandis kind of actions has been adopted at various states.

Consequences of illegal Strike

Economic Consequences: Losses incurred by strikes are humungous and serious, in some cases can even lead to the bankruptcy of the industry. The economic losses caused by the strike may be serious for the employer. During strikes, production stops, sales go down, due to which rival companies use this opportunity to capture their market and industry loses its consumers and their trust, strikes badly affects the market goodwill of the company.

Both parties i.e, employer and employee are at loss; for employers the quick losses capital loss, loss of profits, the delaying of orders and loss of goodwill as well as the possible incurring of insurance or strike-breaking expenses while on the worker’s side there is the loss of wages, the contracting of debts and all the personal hardships that may be involved.

The losses incurred by a strike are difficult to be calculated economically. Strike can have adverse effect leading to an unstable foreign investment in an economy. Furthermore, the negative effects on international trade include the hindrance of economic development and creating great economic uncertainty especially as the global media continues to share details, images and videos of violence, damage to property and ferocious clashes between strikers and security.

Social Consequences: the social consequences of the strike are serious, and mostly affect the employees; as they are the ones who are losing their wages, they are at greater risk of losing their jobs. Loss of wages or loss of jobs will directly affect in curtailing their consumption and expenses and further strikes in essential utility services effects the tripod of any industry i.e, suppliers, manufactures ( both employer and employees ) & customers. 

A hostile attitude on the part of the employer towards their employees lead Dismissal of workmen.

Legal consequences: The legitimateness of a strike may rely upon the article, or reason, of the strike, on its planning, or the direction of the strikers. The article, or items, of a strike and whether the articles are legitimate are matters that are not in every case simple to decide A strike, legal or illegal, justified or unjustified does not dissolve the employer-employee relationship.

Normally taking part in the illegal strike amounts to misconduct on the part of a workman for which they invite the punishment of dismissal. Whether the employer is free to punish dismissal from services in such cases has been subject to regular domestic enquiry to determine the quality of misconduct and quantum of punishment by finding out whether they were peaceful strikes or violent strikers. It is only after complying with these requirements, a workman if found guilty of the charges may be dismissed.

Lockouts

This is the only method adopted by the Employers against employees to make employees agree to their new rules and procedures. In lockouts, the employer temporarily closes the workplace or stops the work or takes action like suspending the workers to force them to follow the new terms and conditions.

The trade Unions Act, 1926 provides for registration of trade unions with a view to render lawful organisation of labour to enable collective bargaining. It also confers on a registered trade union certain protection and privileges.

The Act extends to the whole of India and applies to all kinds of unions of workers and associations of employers, which aim at regularising labour management relations. A Trade Union is a combination whether temporary or permanent, formed for regulating the relations not only between workmen and employers but also between workmen and workmen or between employers and employers.

The different legislation on labour in the country are as follows:

• Apprentices Act, 1961: The object of the Act was the promotion of new manpower at skills and improvement and refinement of old skills through practical and theoretical training.
• Contract Labour (Regulation and Abolition) Act, 1970: The object of the Act was the regulation of employment of contract labour along with its abolition in certain circumstances.
• Employees’ provident funds and misc. Provision Act, 1952: The Act regulated the payment of wages to the employees and also guaranteed them social security.
• Factories Act, 1948: The Act aimed at ensuring the health of the workers who were engaged in certain specified employments.
• Minimum wages Act, 1948: The Act aimed at fixing minimum rates of wages in certain employments.
• Trade Union Act, 1926: The Act provided for registration of trade unions and defined the laws relating to registered trade unions.

Registration of Trade Unions

The Trade Union Act of 1926 was passed in the year 1926 but it came into effect in the year 1927. The Act contains the provisions related to registration, regulation, benefits, and protection for trade unions. Section 3 to Section 14 of Chapter 2 of the Act deals with the registration of trade unions in the territory of India.

Section 3: Appointment of Registrars

Section 3 of the Act empowers the appropriate government to appoint a person as the registrar of a trade union. The appropriate government can also appoint as many additional and deputy registrars in a trade union as it deems fit for carrying on the purposes of the Act.

Section 4: Mode of Registration

Section 4 of the Act provides for the mode of registration of the trade union. According to the Section, any seven or more than seven members of a trade union may by application apply for the registration of the trade union subject to the following two conditions:

• At Least 7 members should be employed in the establishment on the date of the making of the application.
• At Least 10% or a hundred members whichever is less, are employed in the establishment should be a part of it on the date of making the application.

Section 6: Provisions to be contained in the rules of a Trade Union

Section 6 of the Act enlists the provisions which should be contained in the rules of trade union and it provides that no trade union shall be recognized unless it has established an executive committee in accordance with the provisions of the Act and its rules specify the following matters namely:

• Name of the trade union;
• The object of the establishment of the trade union;
• Purposes for which the funds with the union shall be directed;
• A list specifying the members of the union shall be maintained. The list shall be inspected by office bearers and members of the trade union;
• The inclusion of ordinary members who shall be the ones actually engaged or employed in an industry with which the trade union is connected;
• The conditions which entitle the members for any benefit assured by the rules and also the conditions under which any fine or forfeiture may be imposed on the members;
• The procedure by which the rules can be amended, varied or rescinded;
• The manner within which the members of the manager and also the alternative workplace bearers of the labour union shall be elective and removed;
• The safe custody of the funds of the labour union, an annual audit, in such manner, as may be prescribed, of the accounts thereof, and adequate facilities for the inspection of the account books by the workplace bearers and members of the labour union, and;
• The manner within which the labour union could also be dissolved.

Section 7: Power to call for further particulars and require alteration of the name

Section 7 of the Act furnishes upon the registrar power to call for information in order to satisfy himself that any application made by the trade union is in compliance with the Section 5 and 6 of the Act. in matters where the discrepancy is found the registrar reserves the right to reject the application unless such information is provided by the union.

This Section also confers power to the registrar to direct the trade union to alter its name or change the name if the registrar finds the name of such union to be identical to the name of any other trade union or if it finds its name to so nearly resemble the name of any existing trade union which may be likely to deceive the public or members of either of the trade union.

Section 8: Registration

According to Section 8 of the Act, if the registrar has fully satisfied himself that a union has complied with all the necessary provisions of the Act, he may register such union by recording all its particulars in a manner specified by the Act. 

Section 9: Certificate of Registration

According to Section 9 of the Act, the registrar shall issue a registration certificate to any trade union which has been registered under the provision of Section 8 of the Act and such certificate shall act as conclusive proof of registration of the trade union.

Section 9A: Minimum requirement related to the membership of a Trade Union

Section 9A of the Act lays down the minimum number of members required to be present in any union which has been duly registered, the Sections mandates that a trade union which has been registered must at all times should continue to have not less than 10% or one hundred of the workmen, whichever is less, subject to a minimum of seven, engaged or utilized in an institution or trade with that it’s connected, as its members.

Section 10: Cancellation of Registration

The registrar, according to Section 10 of the Act has the power to withdraw or cancel the registration certificate of any union in any of the following conditions:

• On an application made by the trade union seeking to be verified in such manner as may be prescribed;
• If the registrar is satisfied with the fact that the trade union has obtained the certificate by means of fraud or deceit;
• If the trade union has ceased to exist;
• If the trade union has wilfully and after submitting a notice to the Registrar, has contravened any provision of the Act or has been continuing with any rule which is in contravention with the provisions of the Act;
• If any union has rescinded any rule provided under Section 6 of the Act.

Section 11: Appeals

According to Section 11 of the Act, any union which is aggrieved by a refusal to register or withdrawal of registration made by the registrar can file an appeal:

• In any High Court, if the head office of the trade union is located in any of the presidency towns;
• In any labour court or industrial tribunal, if the trade union is located in such a place over which the labour court or the trade union has jurisdiction;
• If the head office of the trade union is situated in any other location, an appeal can be filed in any court which is not inferior to the Court of an additional or assistant choose of a principal Civil Court of original jurisdiction.

Section 12: Registered office

Section 12 of the Act lays down that all communications and notices to any trade union must be addressed to its registered office. If a trade union changes the address of its registered office, it must inform the same to the registrar within the period of fourteen days in writing and the registrar shall record the changed address in the register mentioned under Section 8 of the Act.

Section 13: Incorporation of Registered Trade Union

Section 13 of the Act states that every trade union which is registered according to the provisions of the Act, shall:

• Be corporate by the name under which it is registered.  
• have perpetual succession and a common seal.
• Power to contract and hold and acquire any movable and immovable property.
• By the said name can sue and be sued.

Rights and Liabilities of Registered Trade Unions

Section 15 to Section 28 elucidates the rights which a registered trade union has and also the liabilities which can be imposed against it.

Section 15: Objects on which general funds may be spent

Section 15 of the Act lays down the activities only on which a registered trade union can spend its funds. These activities include:

• Salaries to be given to the office-bearers.
• The cost incurred for the administration of the trade union.
• Compensation to the workers due to any loss arising out of any trade dispute.
• Expenses incurred in the welfare activities of the workers.
• Benefits conferred to the workers in case of unemployment, disability, or death.
• The cost incurred in bringing or defending any legal suit.
• Publishing materials with the aim of spreading awareness amongst the workers.
• Education of the workers or their dependents.
• Making provisions for medical treatment of the workers.
• Taking insurance policies for the welfare of the workers.

The Section also provides that the reason of non-contribution to the said fund and also a contribution to the fund can not be made as a criterion for admission into the union.

Section 16: Constitution of a Separate Fund for Political purposes

Section 16 provides that a trade union, in order to promote the civic and political interests of its members can constitute a separate fund from the contributions made separately for the said purposes. No member of the union can be compelled to contribute to the fund. 

Section 17: Criminal conspiracy in Trade Disputes

Section 17 of the Act states that no member of a trade union can be held liable for criminal conspiracy mentioned under subSection 2 of Section 120B regarding any agreement made between the members of the union in order to promote lawful interests of the trade union.

Section 18: Immunity from civil suits in certain cases

Section 18 of the Act immunes the members of trade union from civil or tortious liabilities arising out of any act done in furtherance or contemplation of any trade disputes. 

For example. in general, a person is subject to tortious liability for inducing any person to breach a contract. But, the trade unions and its members are immune from such liabilities provided such inducement is in contemplation or furtherance of any trade disputes. Further, the inducement should be awful and should not involve any aspect of any violence, threat or any other illegal activity.

Section 19: Enforceability of agreement

According to Section 25, any agreement in restraint of trade is void. But under Section 19 of the Trade Unions Act, 1926 any agreement between the members of a registered trade union in restraint of trade activities is neither void nor voidable. However such right is available only with the registered trade unions as the unregistered trade unions have to follow the general contract law.

Section 20: Right to inspect the books of Trade Union

According to Section 20 of the Act, the account books and the list of the members of any registered trade union can be subjected to inspection by the members of the trade union at such times as may be provided under the rules of the trade union.

Section 21: Rights of minors to membership of Trade Union

Section 21 provides that a person who is above 15 years of age can be  a member of any trade union and if he becomes a member he can enjoy all the rights conferred upon the members of the trade union subject to the conditions laid down by the trade union of which he wants to be a part of.

Section 21-A: Disqualifications of office-bearers of Trade Union

Section 21A of the Act lays down the conditions the fulfilment of which disqualifies a person from being a member of the trade union. The conditions laid down in the Act are as follows:

• If the member has not attained the age of majority
• If he has been convicted by any of the courts in India for moral turpitude and has been sentenced to imprisonment unless a period of five years has elapsed since his release. 

Section 22: Proportion of office-bearers to be connected with the industry

Section 22 of the Act mandates that not less than half of the members of the trade union should be employed in the industry or work with which the trade union is connected. For example trade union is made for the welfare of the agricultural labourers then, as per this Section half of the members of such a trade union should be employed in agricultural activities. 

Section 23: Change of name

Section 23 states that any registered union is free to change its name provided it does so with the consent of not less than 2/3rd of its members and subject to the fulfilment of the conditions laid down in Section 25 of the Act.

Section 24: Amalgamation of Trade Unions

Section 24 lays down that two or more trade unions can join together and form one trade union with or without dissolution or division of the fund. Such amalgamation can take place only when voting by half of the members of each trade union has been effectuated and that sixty per cent of the casted votes should be in favour of the proposal.

Section 25: Notice of change of name or amalgamation

Section 25 of the Act provides that: 

• A notice in writing of every change of name and of every amalgamation which is duly signed by the Secretary and by seven members of the Trade Union changing its name, and, in the case of an amalgamation, by the Secretary and by seven members of each and every Trade Union which is a party thereto, should be sent to the Registrar.
• If the Registrar feels that the proposed name is identical with the name of any other existing Trade Union or, it so nearly resembles such name as it is likely to deceive the public or the members of either Trade Union, the Registrar may refuse to register the change of name.
• If the Registrar of the State in which the head office of the amalgamated Trade Union is situated is satisfied that the provisions of this Act have complied with the amalgamation shall be given effect from the date of such registration.

Section 27: Dissolution

Section 27 of the Act talks about the dissolution of a firm as follows:

• If a registered trade union has been dissolved, a notice of such dissolution which must be signed by seven members and by the Secretary of the Trade Union should be served to the registrar within 14 days of such dissolution and if the registrar is satisfied that the dissolution has been effected in accordance with the rules laid down by the trade union may register the dissolution.
• Where a union has been dissolved but its rules do not lay down the way in which the fund is to be distributed after its dissolution, the registrar may distribute the funds in any prescribed manner.

Section 28: Returns

Section 28 provides that each trade union should send the returns to the registrar annually on or before such a day as may be prescribed by the registrar. The return includes:

• General statement 
• Audit report
• All the receipts and expenditure incurred by the trade union
• Assets and liabilities of the firm on the 31st day of December

Sub-Section 2 of the Section provides that along with the general statement a copy of the rules of the trade union corrected up to the date of dispatch thereof and a statement indicating all the changes made by the union in the year to which the statement is referred to be sent to the registrar.

Whenever any registered trade union alters its rules, such alterations should be conveyed to the registrar in a period of not less than 15 days from making such alterations.

Regulations

Section 29 to Section 30 of Chapter 4 of the Act lays down the regulations which shall be imposed on the trade union.

Section 29: Power to make regulations

Section 29 of the Act confers the right on the appropriate government to make provisions in order to ensure that the provisions of the Act are fairly executed. Such regulations may provide for any or all of the matters, which are as follows:

• The manner in which a trade union or its rules shall be registered;
• The manner in which the registration of a trade union has to be transferred which has changed its head office;
• The manner of appointment and qualification of the person who shall audit the accounts of the registered trade union; 
• Circumstances under which the documents kept by the registrar shall be allowed to be inspected and also the fees that shall be levied in lieu of the inspection so made.

Section 30: Publication of Regulations

Section 30 states that:

• The power of making regulations conferred to the government is subject to the condition that such regulation has been made after the previous publication.; 
• The date from which the regulation shall be given effect shall be specified in accordance with clause (3) of Section 23 of the General Clauses Act, 1897, and the date should not be less than three months from the date on which the draft of the proposed regulations was published for general information;
• The regulations which are made must be specified in the official gazette of India and it shall have the effect of an enacted law.

Penalties and Procedure

Section 31 to Section 33 of the Trade Union Act lays down the penalties and the procedure of its application upon a trade union which is subject to such penalty.

Section 31: Failure to submit returns

Section 31 states that:

• If any trade union was required to send any notice, statement or any document to the registrar under the Act and if the rule did not prescribe a particular person in the union to provide such information then in case of default each member of the executive shall be imposed with the fine extendible to five rupees. In case of continuing default, the fine may be extended to five rupees a week.
• If any person willfully makes or causes to be made any false entry or omission in the general statement required under Section 28 of the Act shall be punishable with fine extendible to 500 rupees.

Section 32: Supplying false information regarding Trade Unions

Article 32 states, the following:

• Any person who in order to deceive a member of any trade union or any other person who purports to be the part of the trade union, 
• Gives a copy of the document with the pretext of it containing the rules of a trade union. 
• Which he knows or has reason to believe that it is not a correct copy of such rules and alteration and,
• Any person with the like intent give the copy of any document purporting it to be a copy of the rules of a registered trade union which in reality is an unregistered union,
• Shall be imposed with fine which may extend to two hundred rupees.

Section 33: Cognizance of offences

Section 33 contains the provisions with respect to the cognizance of offence. It says that no court which is inferior to presidency magistrate or magistrate of the first class shall try an offence under the Act. courts can take cognizance of the offences under the Act only in the following cases:

• When the complaint has been made with the previous sanction of the registrar
• When a person has been accused under Section 32 of the Act, he shall be tried within six months of the commission of the alleged offence.

Collective Bargaining and Trade Disputes

When an organized body negotiates with the employer and fixes the terms of employment by means of bargaining is known as Collective Bargaining. The essential element of Collective Bargaining is that it is between interested parties and not from outside parties.

International labour organization in its manual in the year 1960 defined the meaning of collective bargaining as:

“Negotiations about working conditions and terms of employment between an employer, a group of employees or one or more employers organization on the other, with a view to reaching an agreement.” the terms of agreement are used to ascertain the rights and obligations by which each party is bound towards one another during the course of employment.

Section 8 of the Industrial Relations Act 1990 define trade dispute, according to the Act, industrial dispute refers to any dispute which arises between the employers and the workers and it is usually in connection with any one of the following:

• employment or non-employment, 
• the terms or conditions of the employment,
• Something which affects the employment of any person.

Essential conditions for collective bargaining

• Favourable political and social climate: all the collective bargaining which took place in the past bears the testimony to the fact that favourable political and social climate is the prerequisite of collective bargaining. The reason for the same is quite obvious as almost all the trade unions in India subscribe to one or the other political view and therefore, trade unions usually favour the employees not on the basis of the merit of the issues they raise but on the basis of their political considerations.
• Trade union: in any democratic country like India which recognizes the right to speech as a fundamental right, the right to form a trade union is a direct consequence of it and so all the employers should recognize the trade unions and its representative.
• Problem-solving attitude: it means that both the parties while negotiating a bringing up their relative concerns should adopt a problem-solving attitude and should aim at amicably solving the problem without trying to put the opposite party into a loss.
• Continuous dialogue: the dialogue between the employer and the workers may sometimes end up without any fruitful negotiation or there may arise a bargaining impasse, in such a case the free flow of dialogue between the employer and employee should not be stopped and sometimes keeping aside the bone of contention helps bring up a better solution.

Purposes of collective bargaining

• To provide an opportunity for the workers to voice their complaints and grievances regarding the working conditions.
• To pave the way for the employer and workers to reach an amicable solution peacefully without having any ill will towards one another.
• To sort out all the disputes and conflicts between the employer and worker.
• To prevent any dispute which is likely to take place in the future by mutually agreeing on the contract.
• To foster a peaceful and stable relationship between the workers and the organization.

Forfaiting in French means to give up one’s right. Thus, in forfaiting the exporter hands over the entire export bill with the forfaiter and obtains payments. The exporter has given up his right on the importer which is now taken by the forfaiter. By doing so, the exporter is benefited as he gets immediate finance for his exports. The risk of his exports is now borne by the forfaiter. In case if the importer fails to pay, recourse cannot be made on the exporter.

Forfaiting is the provision of medium-term financial support for the import and export of capital goods. The forfaiter can be thought of as a third party to transactions in the import and export industry. The forfaiter operates similarly to a central clearing counterparty in the OTC markets, where they take on risks from importers and exporters in return for a margin.

Forfaiting process or Parties involved in forfaiting

1. Before resorting to forfaiting, the exporter approaches the forfaiting company with the details of his export and the details of the importer and the importing country.
2. On approval by the forfaiter, along with the terms and conditions, a sale contract is entered into between the exporter and importer.
3. On execution of the export, the exporter submits the bill to the forfaiter and obtains payment. In this way, the three parties involved in the forfaiting process are the exporter, the importer and the forfaiter.
4. If the exports are done against Document Acceptance Bill, it has to be signed by the importer and since the importer’s bank has guaranteed through the L/C, it will be easy for the forfaiter to collect payment.
5. All the trade documents, connected with exports, are handed over by the exporter to his bank which in turn hands over the documents to the importer’s bank.
6. The proof of all these documents will be submitted by the exporter to the forfaiter who will make payment for the export.
7. The cost of forfaiting is included in the bill. The exporter may not lose much as the interest will be included in the invoice and recovered from the importer. However, the forfaiter is exposed to the risk of fluctuations in the exchange rate, interest rate and commercial risk, and to cover these risks, he charges suitably.

Advantages of forfaiting

1. It provides immediate funds to the exporter who is saved from the risk of the defaulting importer.
2. It is an earning to commercial banks who by taking the bills of highly valued currencies can gain on the appreciation of currencies.
3. The forfaiter can also discount these bills in the foreign market to meet more demands of the exporters.
4. There is very little risk for the forfaiter as both importer’s bank and exporter’s banks are involved.
5. Letter of Credit plays a major role for the forfaiter. Moreover, he enters into an agreement with the exporter on his terms and conditions and covers his risks by separate charges.
6. As forfaiting provides 100% finance to exporter against his exports, he can concentrate on his other exports.

Disadvantages or Drawbacks of Forfaiting

1. Forfaiting is not available for deferred payments especially while exporting capital goods for which payment will be made on a deferred basis by the importer.
2. There is discrimination between Western countries and the countries in the Southern Hemisphere which are mostly underdeveloped (countries in South Asia, Africa and Latin America).
3. There is no International Credit Agency which can guarantee for forfaiting companies which affects long-term forfaiting.
4. Only selected currencies are taken for forfaiting as they alone enjoy international liquidity.

Forfaiting in India

For a long time, Forfaiting was unknown to India. Export Credit Guarantee Corporation was guaranteeing commercial banks against their export finance. However, with the setting up of export-import banks, since 1994 forfaiting is available on liberalized basis.

The exim bank undertakes forfaiting for a minimum value of Rs. 5 lakhs. For this purpose, the exporter has to execute a special Pronote in favor of the exim bank. The exporter will first enter into an agreement with the importer as per the quotation given to him by the exim bank. The exim bank on its part, gets quotation from the forfaiting agency abroad. Thus, the entire forfaiting process is completed by exporter agreeing to the terms of the exim bank and signing the Pronote.

Forfaiting business in India will pick up only when there is trading of foreign bills in international currencies in India for which the value of domestic currency has to be strengthened. This would be possible only with increasing exports. At present, India’s share stands at 1.7 percent in the world exports. Perhaps, this will bring a push to the forfaiting market.

Information Does a Forfaiter Need

• The identity of the buyer
• Buyer’s nationality
• Nature of goods sold
• Detail of the value
• Currency of contract
• Date and duration of the contract
• Credit terms
• Payment schedule
• Interest rate
• Know what evidence of debt will be used, e.g., promissory notes, bills of exchange, letter of credit, etc.
• The identity of the guarantor of payment

Documents Required by the Forfaiter from the Exporter

• Copy of supply contract, or its payment’s terms
• Copy of shipping documents, including airway bill, bill of lading, certificates of receipt, railway bill, or equivalent documents
• Copy of signed commercial invoice
• Letter of assignment and notification to the guarantor
• Letter of guarantee

Forfeiting and factoring are services in international market given to an exporter or seller. Its main objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is a shorttermed receivables (within 90 days) and is more related to receivables against commodity sales.

The terms forfeiting is originated from a old French word ‘forfait’, which means to surrender ones right on something to someone else. In international trade, forfeiting may be defined as the purchasing of an exporter’s receivables at a discount price by paying cash. By buying these receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment from the importer.

How forfeiting Works in International Trade

The exporter and importer negotiate according to the proposed export sales contract. Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details about the importer, and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate.

The exporter then quotes a contract price to the overseas buyer by loading the discount rate and commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter. Export takes place against documents guaranteed by the importer’s bank and discounts the bill with the forfeiter and presents the same to the importer for payment on due date.

Documentary Requirements

In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected in the following documents associated with an export transaction in the manner suggested below:

• Invoice: Forfeiting discount, commitment fees, etc. needs not be shown separately instead, these could be built into the FOB price, stated on the invoice.
• Shipping Bill and GR form: Details of the forfeiting costs are to be included along with the other details, such FOB price, commission insurance, normally included in the “Analysis of Export Value “on the shipping bill. The claim for duty drawback, if any is to be certified only with reference to the FOB value of the exports stated on the shipping bill.

Forfeiting

1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to execute a specific forfeiting transaction at a firm discount rate within a specified time.
2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfaiter from the amount paid to the exporter against the availised promissory notes or bills of exchange.

Benefits to Exporter

• 100 per cent financing: Without recourse and not occupying exporter’s credit line That is to say once the exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt.
• Improved cash flow: Receivables become current cash inflow and its is beneficial to the exporters to improve financial status and liquidation ability so as to heighten further the funds raising capability.
• Reduced administration cost: By using forfeiting, the exporter will spare from the management of the receivables. The relative costs, as a result, are reduced greatly.
• Advance tax refund: Through forfeiting the exporter can make the verification of export and get tax refund in advance just after financing.
• Risk reduction: forfeiting business enables the exporter to transfer various risk resulted from deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank.
• Increased trade opportunity: With forfeiting, the export is able to grant credit to his buyers freely, and thus, be more competitive in the market.

Benefits of forfaiting to importers:

• The Importer can match repayments to projected revenues, allowing for grace periods.
• The Importer can obtain 100% financing, and avoid paying out cash in advance.
• The Importer can pay interest on a fixed rate basis for the life of the credit, which will make budgeting simpler and safer.
• The Importer can access medium to long term financing which may be prohibitively expensive or completely unavailable locally.
• The Importer may be able to take advantage of export subsidy schemes which are often available from the Exporter’s government.

Sale and Leaseback is a simple financial transaction which allows a person to lease an asset to himself after selling it. Under the transaction, an asset previously owned by the seller is sold to someone else and is leased back to the first owner for a long term. The transaction thus allows a person to be able to use the asset and not own it. One usually makes a leaseback transaction for high value fixed assets such as real estate and goods like airplanes and trains. Sale and leaseback is shortly called as leaseback.

Leaseback, short for “sale-and-leaseback”, is a financial transaction in which one sells an asset and leases it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done for fixed assets, notably real estate, as well as for durable and capital goods such as airplanes and trains. The concept can also be applied by national governments to territorial assets; prior to the Falklands War, the government of the United Kingdom proposed a leaseback arrangement whereby the Falklands Islands would be transferred to Argentina, with a 99-year leaseback period, and a similar arrangement, also for 99 years, had been in place prior to the handover of Hong Kong to mainland China. Leaseback arrangements are usually employed because they confer financing, accounting or taxation benefits.

For example, X owns a land. Under the leaseback transaction, X will sell the land to Y and will get a lease on the same land from Y for a long term.

Advantages of Sale & Lease Back financing

1. Financing of the full investment amount

In the case of classic bank loans, it is usually expected that the investment will be partially financed by the company’s own funds. Banks value the asset based on “loan-to-value” calculations and thus only finance between approx. 60-80% of the acquisition costs. With a sale and leaseback, on the other hand, 100% of the investment costs are usually borne by the lessor.

2. Continued access to the sold asset

Even after the asset has been sold, the company retains the full value in use through the simultaneous signing of a lease agreement, i.e. the company continues to have full access to the asset sold.

3. Flexible conditions of the leasing contract

Both the term of the leasing contract and the retransfer of the asset at the end of the leasing period can be agreed individually. In the case of real estate, for example, expansion investments in the property as well as subleases can also be arranged together with the Lessor.

4. Matching maturities

When an investment is financed by means of classic bank loans, the credit period and the useful life of the asset usually diverge. As a result, the loan is regularly repaid long before the actual end of the asset’s useful life, i.e. the redemption payments on the loan exceed the depreciation. In a sale and leaseback, on the other hand, the financing payments (repayment component) and imputed costs (depreciation based on the useful life of the asset) are balancing if the leasing period is chosen accordingly.

5. No financial covenants

In contrast to traditional bank loans, a sale & lease back does not contain any financial covenants that have to be observed. The lessor obtains ownership rights by purchasing the leased asset and is the lessor through the leasing contract, but not a lender.

A company usually enters a leaseback transaction for accounting and taxation purposes. For example, a company may transfer its asset to the holding company but still will be able to use it. Also, transferring to holding company will allow the parent company to track the assets’ worth and profitability. Another example is, that in case of financial distress or when a company needs money for some purpose, instead of getting a loan or raising money from outside, a company can sell the asset. The buyer of the asset is someone who is only interested in a securing a long term investment and will lease the asset back to the company. This way the company gets the cash influx and will still be able to use the asset.

Advantages to the Lessee

Enables Expansion of the Business

If a company doesn’t have funds to own the asset, it can purchase the asset and enter a leaseback transaction. This way the company can get back 100% of the investment and still be able to use the asset. Similarly, in case when a company already owns an asset but wants some cash for expansion or even regular business use, the leaseback agreement will allow the company to get cash influx. This will also enable the company the to use the asset as before, by paying rent under the lease agreement.

Improve Company’s Balance Sheet

An asset purchased on debt affects the company’s balance sheet. The company can reduce its debt and improve balance sheet health by entering a leaseback transaction. This will improve the balance sheet in three ways. First, the liability on the balance sheet will reduce. Second, there will be an increase in current assets in the form of cash and lease agreement. Third, the asset turnover of the company will improve. The asset turnover will improve as the fixed assets will reduce but the revenue generating capability of the asset will still be in the hands of the company.

Reduction in Tax Liability

This works in two ways, the company which has now sold the asset and has it on lease, does not have to pay tax on any appreciation of the asset and also the rent outlet will reduce the profit in the profit and loss (p&l) account which will in-turn reduce the tax liability. Depreciation charge on the asset would has a similar impact on the p&l account. However, the depreciation amount will be lower than the lease amount. Also, there is no depreciation is charge on real estate assets like land.

One can avoid paying tax on the sale of asset, by re-investing the sale proceeds in the business or by buying another asset.

Limited Risk

Once sold, the company is free from volatility risks of the asset that has to be borne in case of cyclical market variations.

Advantages to the Investor

Fair Return on Investment

The investor is buying an asset which the seller will be using in the future. The buyer’s interest will ensure that the asset is a fair investment which will provide a decent return on the investment.

Regular Stream of Income

The buyer does not have to worry about the return, as they have a reliable tenant for a long term. This ensures that the investment earns a fixed return on the property and has a continuous stream of cash flow.

“Merchant Banking refers to the financial intermediary services provided by specialised banks called Merchant Bank (other than commercial banks) for business corporates and individual with high net worth.”

Merchant banks act as an intermediary/ middleman between business corporates and investors. In other words, merchant banking is financial intermediation between the business entities which require funds and the investors who possess ready capital and seeking an opportunity for investment so that they can make a return. 

Problems

You may have added reporting requirements to meet.

A merchant bank will help you make sure that you’re aware of your regulatory requirements. What they will not do is create the reports for you. When you begin working with a merchant bank, there may be a need for added disclosure to any stakeholders that are associated with your business. There are almost always additional costs associated with added reporting and compliance requirements.

These merchant banking advantages and disadvantages help to show the power of investments within a portfolio. Some investments involved tangible assets, while others involve smart decision-making with stocks, bonds, and mutual funds. When you can put together a diverse portfolio for yourself or your company, a merchant bank will help you find ways to grow your assets, so you can reach your overall business goals.

Your account will be more expensive than a traditional bank account.

Merchant banks tend to charge higher fees for their services compared to traditional banking services and products. You may be required to have a minimum net worth to work with the bank, have a specific portfolio already developed, or have a strong credit profile with a history of project development to qualify for the bank’s services. Although you may receive the initial consultation or evaluation for free, there is no guarantee your company will be accepted.

You do not have a guarantee of a renewal or extension.

When funds are made available through merchant banking, they are generally accessible for a short time period only. Receiving an extension of the agreement, or a renewal, may be uncertain if not impossible. Long-term funding is sometimes available through merchant banking, but most of the projects that are approved are based on a 5-year period or less. The only exception to this rule involves those who use merchant banks for investment purposes instead of funding purposes.

You will be investigated as part of the funding process.

It may be marketed as a free evaluation, but what a merchant bank is really doing is a detailed investigation of all your business affairs. They will look at your financial structure, evaluate the security of your assets, and even judge your personal sureties. If something is found to be out-of-order during their investigation, it could impact the credit profile of the company. At the very least, the terms and conditions requested of you may be nearly impossible to meet, which means either changing the structure of your business or looking for funding elsewhere.

You may not have access to every potential product.

Traditional banks may be willing to lend money to you when a merchant bank does not. That is because traditional banks tend to offer a variety of products which lowers their overall risk profile internally, which is a practice that not every merchant bank may follow. If you’re thinking about creating CD ladders and other conservative investments, it may be worthwhile to see what your local bank or credit union could offer, even if your business is classified as a large corporation.

You may not receive complete funding.

One way that merchant banks help to spread risk levels around is to provide incomplete funding for leases, expansions, and other investment needs. That forces your company to work with multiple merchant banks instead of one. They benefit because each new contributor lowers their overall risk. You’re stuck making multiple payments for multiple products or paying duplicate fees for similar services until your risk profile can be lowered.

You have no control over your interest rates or returns.

This issue may be the biggest disadvantage of working with a merchant bank. Most will not provide a guaranteed return if you have them managing your investment portfolio. If you take on a lending product to expand the physical assets of your company, then you have little control over the interest rates assigned to the lending product. Your profile is based on the perceived and real risks that the bank feels are present when working with you. If your company is seen as high-risk, even if it turns out to be a low-risk venture, you’re going to pay more for the services received.

You’re not going to receive start-up funding.

Most merchant banks are in the business of helping your company scale upward. The focus is usually on international markets, but in the United States, moving into a new state or community may qualify for banking support. What you’re not going to receive is start-up funding. Your business must have an established record of some success to take advantage of the services which are being offered. And, if you are approved and your business is still young, you’ll have strict repayment guidelines and smaller amounts offered for funding.

You will always have the risk of a mixed chance for success.

Merchant banks might decide to work with you on a financing package, but that is only one step toward eventual success. Assets are often required for the underwriting process, especially when a business is new to an industry, first getting started, or entering into their first international market. Those assets might need to come from the personal assets of the C-Suite to secure some financing. Merchant banks are like all other banks they like to invest when they know there is a good chance for a return.

You have size considerations which must be met.

Thanks to the Internet, any startup or SMB has the potential to enter into an international market. Just because you are present somewhere internationally does not mean that you’re going to qualify for the services a merchant bank provides. There are usually size considerations that must be met, which may include revenue minimums, business structure, and more. If you’re structured as a partnership or sole proprietor, you’re less likely to get the chance to work with a merchant bank on a project unless you’re trying to expand the portfolio of the company.

Scope

1) Underwriting of Debt and Equity:

Underwriting/ management of debt securities such as debentures and share capital is one of the most important functions of a merchant banker. The merchant banks act as middlemen between the issuer of debt securities and individual or institutional investor and assists the companies in raising funds from the market. Merchant banks evaluate the value of the business and the number of shares or debentures is to be issued.

2) Placement and Distribution:

The merchant bankers facilitate in distributing various securities like equity shares, debt instruments, mutual funds, fixed deposits, insurance policies, commercial papers and distribution network of the merchant banker can be classified as institutional and retail.

3) Corporate Advisory Services:

Merchant bankers offer customised solutions to their clients’ financial problems and financial structuring includes determining the right debt-equity ratio and gearing ratio for the client and appropriate capital structure theory is framed as well.

Merchant banker explores the refinancing alternatives for the client and evaluates cheaper sources of funds. It also provides Rehabilitation, Turnaround and Risk management services such as designing a revival package in coordination with banks and financial institutions for sick industrial units, appropriate hedging strategies to reduce the risk associated.

4) Project Advisory Services:

Merchant bankers help their clients in various stages of the project undertaken by the clients:

• They assist them in conceptualising the project idea in the initial stage
• Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project
• They also assist the client in preparing different documents like a detailed project report

5) Loan/ Credit Syndication:

Merchant bankers arrange tie-up loans for their clients. This takes place in a series of steps. Firstly, they analyse the pattern of the client’s cash flows, based on which the terms of borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. The banks then negotiate the terms of lending based on which the final allocation is done.

6) Provide Venture Capital and Mezzanine Financing:

Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies. They also help small organisations and entrepreneurs to obtain initial funding, other business ideas and opportunities, Government policies and incentives.

In addition, merchant bankers also provide various other services as well.

7) Portfolio Management Services:

Merchant banks offer portfolio management service to their clients. They guide their clients regarding profitable, easy liquid and less risky investment avenue. They also update their clients with important and crucial news and updates regarding investment opportunities and market fluctuations.

8) Interest/ Dividend Management:

Merchant bankers also facilitate their client on computing, declaration and allocation of interest on debt securities such as debentures and dividend of shares/stocks.

9) Brokerage Services:

Merchant banks also act as a broker in the stock exchange. They purchase or sell the shares on behalf of their clients and also provide guidance on which or when to buy or sell shares.

10) Manage Money Market Instruments:

Merchant bankers also manage money market instruments like Government bonds, Treasury bills, commercial papers, certificate of deposits for the Government entities as well as large companies and financial institutions.

Definition:

(i) Lessor:

The party who is the owner of the equipment permitting the use of the same by the other party on payment of a periodical amount.

(ii) Lessee:

The party who acquires the right to use equipment for which he pays periodically.

Lease Rentals:

This refers to the consideration received by the lessor in respect of a transaction and includes:

(i) Interest on the lessor’s investment;

(ii) Charges borne by the lessor. Such as repairs, maintenance, insurance, etc;

(iii) Depreciation;

(iv) Servicing charges.

Types of Leases:

The different types of leases are discussed below:

1. Financial Lease:

This type of lease which is for a long period provides for the use of asset during the primary lease period which devotes almost the entire life of the asset. The lessor assumes the role of a financier and hence services of repairs, maintenance etc., are not provided by him. The legal title is retained by the lessor who has no option to terminate the lease agreement.

The principal and interest of the lessor is recouped by him during the desired playback period in the form of lease rentals. The finance lease is also called capital lease is a loan in disguise. The lessor thus is typically a financial institution and does not render specialized service in connection with the asset.

Main features of a Financial Lease

• The lessee (borrower or customer) selects an asset (equipment, software, vehicle
• The lessor (finance company) purchases that asset
• The lessee uses that asset during the lease
• The lessee pays a series of installments or rentals for using that asset
• The lessor recovers a large part or almost complete cost of the asset in addition to earning interest from the rentals paid by the lessee
• The lessee has the option of acquiring ownership of the asset (bargain option purchase price or paying the last rental)

Impact of Financial Lease on Accounting

• Being capitalized, a financial lease leads to an increase in assets as well as liabilities present in the balance sheet. Consequently, working capital falls, but an additional leverage is created by an increase in the debt-equity ratio.
• Lease obligations are not recognized under operating lease conditions, thus, resulting in understated leverage ratios and overstated ratios of return.
• In a cash flow statement, part of lease payments are reported under operating cash flow and part under financing cash flow because of financial lease expenses being allocated between principal expense and interest expense akin to a loan or bond.

2. Operating Lease:

It is where the asset is not wholly amortized during the non-cancellable period, if any, of the lease and where the lessor does not rely for is profit on the rentals in the non- cancellable period. In this type of lease, the lessor who bears the cost of insurance, machinery, maintenance, repair costs, etc. is unable to realize the full cost of equipment and other incidental charges during the initial period of lease.

The lessee uses the asset for a specified time. The lessor bears the risk of obsolescence and incidental risks. Either party to the lease may termite the lease after giving due notice of the same since the asset may be leased out to other willing leases.

Operating Lease Accounting by Lessee

• A lease cost in each period, where the total cost of the lease is allocated over the lease term on a straight-line basis. This can be altered if there is another systematic and rational basis of allocation that more closely follows the benefit usage pattern to be derived from the underlying asset.
• Any variable lease payments that are not included in the lease liability
• Any impairment of the right-of-use asset

After the commencement date, the lessee measures the right-of-use asset at the amount of the lease liability, adjusted for the following items:

• Any impairment of the asset
• Prepaid or accrued lease payments
• Any remaining balance of lease incentives received
• Any unamortized initial direct costs

Operating Lease Accounting by Lessor

At the commencement date of an operating lease, the lessor shall defer all initial direct costs. In addition, the lessor must account for the following items subsequent to the commencement date of the lease:

• Lease payments. Lease payments are recognized in profit or loss over the term of the lease on a straight-line basis, unless another systematic and rational basis more clearly represents the benefit that the lessee is deriving from the underlying asset. Profits cannot be recognized at the beginning of an operating lease, since control of the underlying asset has not been transferred to the lessee.
• Variable lease payments. If there are any variable lease payments, record them in profit or loss in the same reporting period as the events that triggered the payments.
• Initial direct costs. Recognize initial direct costs as an expense over the term of the lease, using the same recognition basis that was used for the recognition of lease income.

3. Sale and Lease Back Leasing:

To raise funds a company may-sell an asset which belongs to the lessor with whom the ownership vests from there on. Subsequently, the lessor leases the same asset to the company (the lessee) who uses it. The asset thus remains with the lessee with the change in title to the lessor thus enabling the company to procure the much-needed finance.

4. Sales Aid Lease:

Under this arrangement the lessor agrees with the manufacturer to market his product through his leasing operations, in return for which the manufacturer agrees to pay him a commission.

5. Specialized Service Lease:

In this type of agreement, the lessor provides specialized personal services in addition to providing its use.

6. Small Ticket and Big-Ticket Leases:

The lease of assets in smaller value is generally called as small ticket leases and larger value assets are called big ticket leases.

7. Cross Border Lease:

Lease across the national frontiers is called cross broker leasing. The recent development in economic liberalisation, the cross-border leasing is gaining greater importance in areas like aviation, shipping and other costly assets which base likely to become absolute due to technological changes.

8. Leverage Lease

A leveraged lease or leased lender is a lease in which the lessor puts up some of the money required to purchase the asset and borrows the rest from a lender. The lender is given a senior secured interest on the asset and an assignment of the lease and lease payments. The lessee typically makes payments directly to the lender as the lease payments are assigned to the lender.

The term may also refer to a lease agreement wherein the lessor, by borrowing funds from a lending institution, finances the purchase of the asset being leased.

The lessor pays the lending institution back by way of the lease payments received from the lessee. Under the loan agreement, the lender has rights to the asset and the lease payments if the lessor defaults.

A leveraged lease is a tax-advantaged lease arrangement in which a lessor borrows funds to acquire an asset that is then leased to a lessee. In this situation, the lender holds title to the leased asset, while all lessee payments are collected by the lessor and passed to the lender. The lender can repossess the asset in the event of a lessee payment default. In this arrangement, the lessor can recognize depreciation expense on the asset for tax purposes, while the lessee can deduct its lease payments from taxable income.

The name of this lease refers to the financing position of the lessor, which has used debt (leverage) to pay for most of the cost of the asset that is being leased.

Merits of Leasing:

(i) The most important merit of leasing is flexibility. The leasing company modifies the arrangements to suit the leases requirements.

(ii) In the leasing deal less documentation is involved, when compared to term loans from financial institutions.

(iii) It is an alternative source to obtain loan and other facilities from financial institutions. That is the reason why banking companies and financial institutions are now entering into leasing business as this method of finance is more acceptable to manufacturing units.

(iv) The full amount (100%) financing for the cost of equipment may be made available by a leasing company. Whereas banks and other financial institutions may not provide for the same.

(v) The ‘Sale and Lease Bank’ arrangement enables the lessees to borrow in case of any financial crisis.

(vi) The lessee can avail tax benefits depending upon his tax status.

Demerits of Leasing:

(i) In leasing the cost of interest is very high.

(ii) The asset reverts back to the owner on the termination of the lease period and the lesser loses his claim on the residual value.

(iii) Leasing is not useful in setting up new projects as the rentals become payable soon after the acquisition of assets.

(iv) The lessor generally leases out assets which are purchased by him with the help of bank credit. In the event of a default made by the lessor in making the payment to the bank, the asset would be seized by the bank much to the disadvantage of the lessee.

Financial innovation is the process of creating new financial products, services, or processes.

Financial innovation has come via advances over time in financial instruments and payment systems used in the lending and borrowing of funds. These changes which include updates in technology, risk transfer, and credit and equity generation have increased available credit for borrowers and given banks new and less costly ways to raise equity capital.

Financial innovation is the act of creating new financial instruments as well as new financial technologies, institutions, and markets. Recent financial innovations include hedge funds, private equity, weather derivatives, retail-structured products, exchange-traded funds, multi-family offices, and Islamic bonds (Sukuk). The shadow banking system has spawned an array of financial innovations including mortgage-backed securities products and collateralized debt obligations (CDOs).

There are 3 categories of innovation: institutional, product, and process. Institutional innovations relate to the creation of new types of financial firms such as specialist credit card firms like Capital One, electronic trading platforms such as Charles Schwab Corporation, and direct banks. Product innovation relates to new products such as derivatives, securitization, and foreign currency mortgages. Process innovations relate to new ways of doing financial business, including online banking and telephone banking.

Economic theory has much to say about what types of securities should exist, and why some may not exist (why some markets should be “incomplete”) but little to say about why new types of securities should come into existence.

One interpretation of the Modigliani-Miller theorem is that taxes and regulation are the only reasons for investors to care what kinds of securities firm’s issue, whether debt, equity, or something else. The theorem states that the structure of a firm’s liabilities should have no bearing on its net worth (absent taxes). The securities may trade at different prices depending on their composition, but they must ultimately add up to the same value.

Furthermore, there should be little demand for specific types of securities. The capital asset pricing model, first developed by Jack L. Treynor and William F. Sharpe, suggests that investors should fully diversify and their portfolios should be a mixture of the “market” and a risk-free investment. Investors with different risk/return goals can use leverage to increase the ratio of the market return to the risk-free return in their portfolios. However, Richard Roll argued that this model was incorrect, because investors cannot invest in the entire market. This implies there should be demand for instruments that open up new types of investment opportunities (since this gets investors closer to being able to buy the entire market), but not for instruments that merely repackage existing risks.

If the world existed as the Arrow-Debreu model posits, then there would be no need for financial innovation. The model assumes that investors are able to purchase securities that pay off if and only if a certain state of the world occurs. Investors can then combine these securities to create portfolios that have whatever payoff they desire. The fundamental theorem of finance states that the price of assembling such a portfolio will be equal to its expected value under the appropriate risk-neutral measure.

Remittances are another area that financial innovation is transforming. Remittances are funds that expatriates send back to his or her country of origin via wire, mail, or online transfer. Given the volume of these transfers worldwide, remittances are economically significant for many of the countries that receive them. In the early 2000s, the World Bank established a database, where people could compare prices of different transfer services. The Gates Foundation subsequently began tracking remittances in 2011. Western Union and Moneygram once monopolized remittances; however, in recent years startups such as Transferwise and Wave have competed with their lower cost apps.

Finally, mobile banking has made major innovations for retail customers. Today, many banks like T.D. Bank offer comprehensive apps with options to deposit checks, pay for merchandise, transfer money to a friend, or find an ATM instantly. It is still important for customers to establish a secure connection before logging into a mobile banking app in order to avoid his or her personal information being compromised.

Spanning the market

Some types of financial instrument became prominent after macroeconomic conditions forced investors to be more aware of the need to hedge certain types of risk.

• Interest rate swaps were developed in the early 1980s after interest rates skyrocketed
• Credit default swaps were developed in the early 2000s after the recession beginning in 2001 led to the highest corporate-bond default rate in 2002 since the Great Depression

It is widely believed there are six primary causes for financial innovation, they are:

• Increased volatility of interest rates, inflation, equity prices, and exchange rates.
• Advances in computer and telecommunications technologies.
• Greater sophistication and educational training among professional market participants.
• Financial intermediary competition.
• Incentives to get around existing tax laws.
• Changing global patterns of financial wealth.

Financial innovation can also be classified in three main categories. Market broadening instruments, which increase market liquidity and availability of funds; risk management instruments, which redistribute financial risk to those who are more willing to bear the risk; and arbitraging instruments and processes, which allow the investor to take advantage of certain market perceptions such as information, taxation and regulation. No matter the cause or category of the financial innovation the industry will benefit if the innovation stands the test of time and improves upon the efficiency of the financial market.

Takeaways

Financial innovation refers to the process of creating new financial or investment products, services, or processes.

These changes can include updated technology, risk management, risk transfer, credit and equity generation, as well as many other innovations.

Recent financial innovations have included crowdfunding, mobile banking technology, and remittance technology.