Bye out leasing: Buy Out leasing is a new concept in leasing which entails purchase of entire existing companies

which are than given on lease to other competent managements or industrials groups. Similar leasing arrangement is widely used in advanced financial markets for takeover of sick industrials units by financially strong groups which may not have the requisite management skills. Buy Out leasing offers twin advantages to leasing companies in the form of physical possession of assets and hedge against inflation through appreciation in prices of land and building. The arrangement involves purchase of an existing company along with its land, building, plant and machinery but without the labour. While typically in conventional leasing, the physical possession of assets lies with the lessee, in bye out leasing the lessor would retain physical possession of the assets. While value of leased assets like plant and machinery depreciates with time, value of land and building appreciates providing a hedge against inflation. Leasing in India: In 1973, Frouk Irani, decided to promote the idea of leasing in India. As a result, First Leasing Company of India (FLCI)was promoted by the Chidambaram group in 1973 and the company undertook leasing of industrial equipments as its main activity. The company was successful in declaring dividend in the second year of its operation. Till 1980, the concept was not popular and could not make much headway in the country. In 1980, Dev Ahuja promoted Twentieth Century Leasing Company (TCLC) as wholly owned subsidiary of the Twentieth Century Finance Ltd. By 1981, four other finance companies also joined the fray. On the excellent performance shown by TCLC and FLCI, Leasing companies begun to attract the industry and general public. The shift in emphasis from ownership to use led to a dramatic development of lease financing. In 1983, three out of every eight consents were given by Controller of Capital Issues related to leasing companies. The blossoming

of the leasing business was spurred by the recognition of the multiple advantages of leasing business as method of financing viz. (1) constant need for modernising equipment and machinery due to obsolescence, (2) shortage of finance from existing traditional sources, (3) optimum utilization of liquid resources, and (4) handsome dividend given by the pioneering leasing companies immediately after inception. These advantages led to a sudden explosion of leasing business in 1983, and the scenario changed entirely. Between March 1983 and March 1986 to be precise, the leasing business road the crest of an unprecedented boom. Two leasing companies were registered every week and almost 400 companies came into market. When everyone was extremely bullish about the industrys future in 1985, the golden era abruptly came to a half and crashed into valley of depression. The development set a downward side for the leasing companies for the following reasons: 1. There was a tremendous rush among entrepreneurs to set up new leasing companies. It led to cut-throat competition between leasing companies for the restricted amount of business available. In the process, lease rentals were almost halved. This made most of the new leasing companies sick, right from their inception. 2. The intensity of rivalry accentuated the strong bargaining power of lessees who could shop around from one lessor to another which resulted in undercutting of lease rentals. 3. Realizing that there existed vast potential in the field of leasing, some financial institution such as ICICI, nationalized banks and Foreign Banks entered the fray by setting up separate units. They started offering lease finance highly competitive rates. 4. Many non-leasing companies declared dividend more than that of leasing companies, wooing individual investors and hence the share prices of the leasing companies fell. 5. A leasing company with a paid-up capital of not less than Rs.10 million is only permitted to be listed on stock exchanges. This provision proved to be a bolt from the blue for many leasing companies which could not satisfy

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this condition. Therefore, they were forced to close down their leasing business. The sales tax on lease rental was payable by the lessee. In case of the lessor absorbed this burden, leasing transaction turned out to be losing one because sales tax had already been paid at the time of purchase of assets. The sales tax levied on lease rental amounted to double taxation. The introduction of clause 115 J in the Income Tax Act 1961 necessitating payment of a minimum levy of 30 percent of the book profits further deteriorated the position of leasing companies. The RBI has fixed a maximum limit three times net owned funds of the leasing company for lending by the commercial banks, created a resource crunch for the leasing companies and restricted their growth. Liberal divided policy, neglect of ploughing back of profits and nonstrengthening of the equity base resulted in lack of sufficient funds for further business. Only ten percent of the leasing companies, however, survived in the leasing industry crash of 1986. They recovered by the end of 1987 and consolidated their position by the year 1989. This was particularly because the RBI implemented the norms of bank finance to public deposits. CRISIL,s rating also helped a few leasing companies to establish their market for public deposits. The 1990-91budget created a conductive climate for the growth of the leasing business by abolishing section 115 of the income Tax Act, 1961. Now, There are 400 odd leasing companies in india with 20 to 25 operating on an all india basis and more than 50 of them listed on different stock exchanges. It the estimated that the leasing business in the country runs to nearly Rs.1000 crore and its scope for expansion is almost unlimited.

Leasing By Public Sector Banks And Financial Institution

Indian public banks entered the leasing field when the Banking Law (Amendment) Act 1983, amended Sections 16 and 19 of the Banking Regulation Act 1949. They can do leasing business by forming a subsidiary company only. The State Bank Of India has taken a lead by covering its merchant banking division into an independent subsidiary with ambitious programme of leasing. The subsidiary has started its business on August 1,1986. The subsidiary of the other nationalized banks have also undertaken leasing as additional activity. The ICICI is doing leasing finance only as a separated departmental activity distinct its merchant banking department. Division has started financing of leasing companies as well as equipment leasing as allied financial services. From March 1993 Reserve Bank Of India (RBI) has allowed banks to undertake leasing, factoring and hire purchase business directly, this will considerably improve banks sagging profitability. RBIs instructions to banks, stipulate that the total leasing portfolio should not exceed 10 percent of their total advances. Further, RBI has told banks that their leasing business should not exceed the prudential norms of 25 percent of banks capital to one borrower and not more than 50 percent to a group