What is Leasing?

Case breakdown: Movie Alaap

The above scene shows a dialogue between Asraani and Amitabh Bachchan about Sarjo bai. Sarjo bai is Asraani’s landlord who had taken land on lease and made a hut on that land. He also later took a hut on rent.

What is Leasing?

A lease represents a contractual agreement whereby the lessor grants the lessee the right to use an asset in return for periodical lease rental payments. Leasing of land, building, and animals has been known for time immemorial, the leasing of industrial equipment is a relatively new concept, in the Indian context.

Types of Leases:

Finance Lease:

It is a long-term non-cancellable arrangement. During the initial lease period, referred to as the ‘primary lease period, which is usually 3-8 years, the lease cannot be canceled. During the lease period, the lessor recovers through lease rentals, his investment in the equipment along with an acceptable rate of return. The lessee is responsible for maintenance, insurance, and taxes. The lessee usually enjoys the option of renewing the lease for further periods at substantially reduced lease rentals.

Operating Lease:

The lease term is significantly lower than the economic life of the equipment. In this lease, the lessee enjoys the right to terminate the lease at short notice without any significant penalty. The lessor usually provides the operating know-how and the related services and undertakes the responsibility of ensuring and maintaining the equipment.

Sale and Leaseback:

The vendor of an asset sells the asset to a leasing company and leases it back in order to enjoy the uninterrupted use of the asset in his business. The leaseback arrangement in this transaction can be structured in the form of either a finance lease or an operating lease.

Leveraged Lease:

In a leveraged lease transaction, the leasing company (called the equity participant) and a lender (called the loan participant) jointly fund the investment in the asset to be leased to the lessee. The funding provided by the loan participant is usually structured in the form of a fixed-rate loan without recourse to the lessor.