SHORT TERM QUESTIONS
UNIT 1
1) Describe SEBI
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government
of India and upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the
SEBI Act on 30th January 1992.
Organization’s Structure , namely:- a ChairmanTwo members, One from the officials of the
Ministry of the Central Government dealing with Finance and second from administration of the
Companies Act, 1956. One member from the officials of the Reserve Bank of India. Five other
members of whom at least three shall be the whole-time members to be appointed by the central
Government.
Functions of SEBI
Regulatory Functions
1.Regulation of stock exchange and self regulatory organizations.
2.Registration and regulation of stock brokers, sub-brokers, Registrars to all issues, merchant
bankers, underwriters, portfolio managers etc.
3.Registration and regulation of the working of collective investment schemes including mutual
funds. Prohibition of fraudulent and unfair trade practices relating to securities market.
3.Prohibition of insider trading Regulating substantial acquisition of shares and takeover of
companies.
Developmental Functions
1.Promoting investor’s education Training of intermediaries Conducting research and publishing
information useful to all market participants.
2.Promotion of fair practices Promotion of self regulatory organizations
2) Define RBI
RBI is an institution of national importance and the pillar of the surging Indian economy.
Reserve Bank of India (RBI) is the central bank of India entrusted with a multidimensional role
which includes implementation of monetary policy and maintaining monetary stability in the
country.
RBI was established on 1st April 1935 under the Reserve Bank of India Act, 1934. RBI was set
up after the recommendations of Hilton young Commission which had submitted its report in the
year 1926.
Later on, in 1931 the Indian Central banking enquiry committee had also recommended for the
establishment of the central bank in India.
Role and functions of RBI
Issue currency notes
Banker to other banks
Banker, agent and financial advisor of the government
Exchange rate management and the custodian of Foreign ExchangeReserves
RBI as the bank of Central clearance, settlement, and transfer
Credit control function
3) Explain money market
The money market is a market for short-term financial assets which can be turned over quickly at
low cost. It provides an avenue for equilibrating the short-term surplus funds of lenders and the
requirements of borrowers.The money market thus may be defined as a centre in which financial
institutions congregate for the purpose of dealing impersonally in monetary assets.
This is a market for borrowing and lending short-term funds. Banks, financial institutions,
investment institutions, and corporates attempt to manage the mismatch between inflow and
outflow of funds by lending in or borrowing from the money market.
The money market is a collection of various sub-markets, such as, call money, notice money,
repo’s, term money, treasury bills, commercial bills, certificate of deposits, commercial papers,
etc. and is concerned to deal in particular type of assets, the chief characteri stic is its relative
liquidity.
UNIT 2
4) What is IPO
IPO or Initial public offer is the first issue of shares by a corporate company to the general public
to raise capital for expansion of its business. IPO is followed by a listing of its shares in the stock
market. The issue of IPO by the Indian companies and the price of share that is fixed is regulated
by SEBI
The Registrar’s role in an IPO can be divided into three phases: Pre-IPO, when the Registrar
completes all preparatory work for the IPO, including instructing the escrow / ASBA bankers
about the procedures they have to follow and the timelines to which they have to adhere. Post
IPO closure but pre-Listing –, during which the Registrar receives the Final BID file from the
exchanges, validates the same, coordinates with the bankers to ensure that final collection
certificates are received along with bank schedules / data. for reconciliation with final bid files
received from Stock Exchanges
5) Define underwriting
It is an agreement whereby the underwriter promises to subscribe to a specified number of shares
or debentures or a specified amount of stock in the event of public not subscribing to the issue.
underwriting is a guarantee for marketability of shares. There are two types of underwriters in
India- Institutional (LIC,UTI, IDBI,ICICI) and Non- institutional
Advantages of underwriting
The issuing company is relieved from the risk of finding buyers for the issue offered to the
public i.e., the company is assured of raising adequate capital
The company is assured of getting the min. subscription within the stipulated time, a statutory
obligation
Underwriters undertake the burden of highly specialised function of distributing securities.
Provide expert advice with regard to timing of security issue, the pricing of issue, the size & time
of securities to the issue, etc.
Underwriters in India may be classified into 2categories:
Institutional underwriters
– Examples are LIC, UTI, IDBI, ICICI, Commercial banks & general insurance companies
Non- Institutional underwriters
– Examples are brokers who view to earning commission are brokers.
6) Explain book building
Book Building is a process undertaken to assess a demand for the securities proposed to be
issued by a corporate body is elicited and built up and the price for such securities is assessed for
the determination of the quantum of such securities to be issued by means of a notice, circular,
advertisement, document or information memoranda or offer document.
In book building process, the price at which securities will be issuedto the public is not known
while in case of offer of shares through normal public issue, price is known in advance to
investor.
In case of Book Building, the demand can be known everyday as the book is built. But in case of
the public issue, the demand is known at the close of the issue. The Book should remain open for
a minimum of 3 working days.
7) What is Prospectus
As per the definition given in section 2 (70), prospectus means any document described or issued
as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus
referred to in section 31 or any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of a body corporate.
Prospectus is an offer document in case of a public issue, which has all relevantdetails including
price and number of shares or convertible securities being offered. This document is registered
with ROC before the issue opens in case of a fixed price issue and after the closure of the issue in
case of a book built issue.
UNIT 3
8) Explain characteristics of Hire purchase
It is a method of buying goods through making instalment payments over time. Hire Purchase is
a method of selling good. In a hire purchase transaction, the goods are let out on hire by a
finance company (creditor) to the hire purchase customer (hirer). The buyer is required to pay an
agreed amount in periodical installments during a given period. The ownership of the property
remains with creditor and passes on to hirer on the payment of last installments.
FEATURES OF HIRE PURCHASE AGREEMENT
1. Under hire purchase system, the buyer takes possession of goods immediately and agrees to
pay the total hire purchase price ininstallments.
2. Each installment is treated as hirecharges.
3. The ownership of the goods passes from buyer to seller on the payment of the installment
4. In case the buyer makes any default in the payment, the seller has the right to repossess the
goods from the buyer and forfeit the amount already received treating it as hirecharges.
5. The hirer has the right to terminate the agreement any time before the property passes. That is,
he has the option to return the goods in which case he need not pay installments falling due
thereafter. However, he cannot recover the amount already paid as it is considered as hirecharges.
9) Define leasing and it's mechanism
Leasing is a general contract between the owner and user of the asset over a specified period of
time. The asset is purchased initially by the lessor (leasing company) and thereafter leased to the
user (lessee company) which pays a specified rent at periodical intervals. Thus, leasing is an
alternative to the purchase of an asset out of own or borrowed funds. Moreover, lease finance can
be arranged much faster as compared to term loans from financial institutions.
Here's a breakdown of the mechanism:
1. Contractual Agreement:
The process begins with a formal contract between the lessor and the lessee, detailing the terms
and conditions of the lease.
2. Asset Transfer:
The owner of the asset (lessor) grants the right to use the asset to the lessee.
3. Periodic Payments:
In return for this right, the lessee makes regular, agreed-upon payments (lease rentals) to the
lessor.
4. No Large Upfront Investment:
A significant benefit is that the lessee avoids the substantial initial investment required to
purchase the asset outright.
5. Asset Use vs. Ownership:
The lessee uses the asset for their business operations but doesn't own it during the lease period.
6. End-of-Lease Options:
After the lease term expires, one of the following typically occurs:
Return to Lessor: The asset is returned to the lessor.
Renewal: The lease contract is renewed for another term.
Purchase by Lessee: The lessee has the option to purchase the asset, often at a predetermined or
discounted price.
10) Define seed capital
Seed Financing: During the developments stage of a venture’s lifecycle, the primary source of
funds is in the form of seed financing to determine whether the idea can be converted into a
viable business opportunity. The primary source of funds at the development stage is the
entrepreneur’s own assets. As a supplement to this limited source, most new ventures will also
resort to financial bootstrapping, i.e., creative methods, including barter, to minimize the cash
needed to fund the venture. Money from personal bank accounts and proceeds from selling other
investments are likely sources of seed financing.
11) Write a brief note on evolution of leasing
Leasing activity was initiated in India in 1973. The first leasing company of India, named First
Leasing Company of India Ltd. was set up in that year by Farouk Irani, with industrialist A C
Muthia. For several years, this company remained the only company in the country until 20th
Century Finance Corporation was set up – this was around 1980.
By 1981, the trickle started and Shetty Investment and Finance, Jaybharat Credit and Investment,
Motor and General Finance, and Sundaram Finance etc. joined the leasing game. The last three
names, already involved with hire-purchase of commercial vehicles, were looking for a tax break
and leasing seemed to be the ideal choice.
The industry entered the third stage in the growth phase in late 1982, when numerous financial
institutions and commercial banks either started leasing or announced plans to do so. ICICI,
prominent among financial institutions, entered the industry in 1983 giving a boost to the
concept of leasing.
As per RBI’s records by 31st March, 1986, there were 339 equipment leasing companies in India
whose assets leased totaled Rs. 2395.5 million. One can notice the surge in number – from
merely 2 in 1980 to 339 in 6 years.
LONG ANSWER QUESTIONS
UNIT 1
1) Explain structure of Indian financial market system and it's types
The financial system of any country consists of several ingredients. It includes financial
institutions, markets, financial instruments, services, transactions, agents, claims and liabilities in
the economy. An efficient financial system not only encourages savings and investments, it also
efficiently allocates resources in different investment avenues and thus accelerates the rate of
economic development.
Money Market
The money market acts as a marketplace for short-term borrowing and lending. At the wholesale
level, it involves large-volume transactions between traders and institutions. At the retail level,
the money market involves mutual funds bought by individual investors and accounts opened by
bank customers.
The assets traded in the money market are risk-free and highly liquid. As the maturity period is
less, the risk of volatility is low and the returns are low as well.
Common examples of instruments traded in the money market are treasury bills, commercial
papers, certificates of deposits, bankers’ acceptance, etc.
Capital Market
As opposed to the money market, capital markets deal in long-term securities. The securities that
have a maturity period of more than a year are traded in the capital market. Subsequently, the
market trades in both debt as well as equity-oriented securities.
Participants of the capital market include Foreign Institutional Investors (FIIs), financial
institutions, NRIs, individuals, and so on. The capital market is further divided into Primary
Market and Secondary Market.
FUNCTIONS OF THE FINANCIAL SYSTEM
In modem economy, the financial system performs the following functions.
a) It provides a payment system for the exchange of goods and services.
b) It enables the pooling of funds for undertaking large scale enterprises.
c) It provides a mechanism for spatial and temporal transfer of resources.
d) It provides a way for managing uncertainty and controlling risk.
e) It generates information that helps in coordinating decentralized decision-making.
f) It helps in dealing with the problems of informational asymmetry.
2) Explain classification of financial services and it's services
Financial services refer to services provided by the finance industry. The finance industry
consists of a broad range of organisations that deal with the management of money. These
organisations include banks, credit card companies, insurance companies, consumer finance
companies, stock brokers, investment funds and some government sponsored enterprises.
Financial services may be defined as the products and services offered by financial institutions
for the facilitation of various financial transactions and other related activities.
Financial services can also be called financial intermediation. Financial intermediation is a
process by which funds are mobilised from a large number of savers and make them availablto
all those who are in need of it and particularly to corporate customers.
Characteristics or Nature of Financial Services
Intangibility: Financial services are intangible. Therefore, they cannot be standardized or
reproduced in the same form.
Inseparability: Both production and supply of financial services have to be performed
simultaneously.
Perishability: Like other services, financial services also require a match between demand and
supply.
Variability: In order to cater a variety of financial and related needs of different customers in
different areas, financial service organisations have to offer a wide range of products and
services.
Information based: Financial service industry is an information based industry. It involves
creation, dissemination and use of information. Information is an essential component in the
production of financial services.
Types of Financial Services
Provision of funds:
(a) Venture capital
(b) Banking services
(c) Asset financing
(d) Trade financing
(e) Credit cards
(f) Factoring and forfaiting
Managing investible funds:
(a) Portfolio management
(b) Merchant banking
(c) Mutual and pension funds
3. Risk financing:
(a) Project preparatory services
(b) Insurance
(c) Export credit guarantee
4. Consultancy services:
(a) Project preparatory services
(b) Project report preparation
(c) Project appraisal
(d) Rehabilitation of projects
(e) Business advisory services
(f) Valuation of investments
(g) Credit rating
(h) Merger, acquisition and reengineering
3) Explain bereifly about global financial Markets
Global financial markets contribute significantly to the world economy by facilitating the
movement of capital, financial instruments, and investments across national borders. The
markets provide financial transactions for individuals, corporations, and governments, providing
liquidity, price stability, and economic growth.
Global Financial Markets is a system in which financial assets such as stocks, bonds, derivatives,
and currencies are exchanged across nations. Global Financial Markets link borrowers, investors,
and financial institutions around the globe, enabling the free movement of capital from one
country to another.
Stock Markets
The stock markets are where investors buy and sell company shares, assisting businesses in
raising capital to grow. The New York Stock Exchange (NYSE), London Stock Exchange (LSE),
and Tokyo Stock Exchange (TSE) are examples of major stock exchanges. Investors go to profit
dividends and price appreciation. A bountiful stock market helps spur economic growth and
investment opportunities.
Bond Markets
In the bond market, participants issue and trade debt securities. It consists of government bonds,
corporate bonds, and municipal bonds. Governments issue bonds to fund infrastructure and
development projects and use corporations to expand and fund operations. Despite the volatility,
bond investments offer steady returns and lower risks, thus appealing to conservative investors.
Foreign Exchange (Forex) Markets
It covers the basis of the foreign exchange (Forex) market, the largest financial market in the
world based on the total volume of currencies traded globally. It decides exchange rates,
affecting foreign trade and investments. Some of the most prominent players are central banks,
commercial banks, hedge funds and multinationals. They enable businesses to hedge against
currency risks and settle payments across borders.
Derivatives Markets
Derivatives are financial contracts linked to an underlying asset’s value, such as stocks,
commodities, or interest rates. Also, futures, options, and swaps are widely used to hedge
against price change and market volatility. This market serves as a mechanism for risk
management and speculation on future relative prices.
Commodity Markets
Commodity markets are traded for raw materials, including gold, silver, oil, and agricultural
products. Commodities become a hedge for investors against inflation and economic
uncertainties. The more notable commodity exchanges include the Chicago Mercantile
Exchange (CME) and the London Metal Exchange (LME). It is a key market for global trade and
pricing stability.
Role of Global Financial Markets:
Economic Development and Growth
Wealth Generation for Investors
Risk Management and Hedging
Regulation and Financial Stability
International Trade and Investment
UNIT 2
4) Explain organisation of stock exchanges with functions
Stock Broking –Brokers are members of stock exchange. They enter into share trading
transactions either on their own account or on behalf of their clients. They have to get
registration from SEBI before starting their operations and have to comply with the prescribed
code of conduct.
Custodial Services –The custodians play a critical role in the secondary market. SEBI Custodian
of Securities Regulation, 1996 was framed for the proper conduct of their business.
According to SEBI regulations, custodial services in relation to securities of a client or gold/gold
related instrument held by a mutual fund or title deeds of real estate assets held by a real estate
mutual fund mean safekeeping of such securities or gold/gold related instruments or title deeds
of real estate assets and providing related services.
Depository System–A major reform of the Indian stock markets has been the introduction of the
depository system and scripless trading mechanism. The Depository Act was passed in 1996 to
provide further fillip to the process.
The issuers should enter into an agreement with the depository to enable the investor s to
dematerialize the securities.
Functions of Stock Exchanges
Liquidity and Marketability of Securities: The basic functions of the stock market are to provide
liquidity to the securities of a company. This can be achieved when investors can sell their
securities at the prevalent market price at that time and get the required amount.
Fair Price Determination: Fair price is determined through the demand and supply forces. As the
market is almost perfectly competitive, there are large number of buyers and sellers that ensures
an honest and just determination of prices of securities.
Source for Long term Funds: Stock exchanges provide a reliable long term sources of funds to
the corporates, government and the public bodies. The advantages of the securities place in the
stock exchanges are that they are negotiable and transferable.
Helps in Capital Formation: It means the savings of the people are mobilized and channelized
into those sectors which are in need of money. So, stock exchanges facilitate capital formation i.e.
it helps in transfer of funds from those people who have surplus money to sectors which are in
need of money.
(e) Services provided by Stock Exchanges: Stock exchanges ensure that the shares issued to the
public are transparent and according to prescribed rules and regulations.
Reflects the General State of Economy: The stock market is a reflection of an economy. When
economy is doing badly, the stock market also reflects the same negativity in the form of
declining share prices. On the other hand, when the economy is doing well, the stock market also
shows a boosting effect in the form of higher share prices.
5) Discuss about primary and secondary markets
Primary Market
Primary market is a market where buying and selling of new securities are taken place for the
first time. In other words, the market, where the first public offering of equity shares or
convertible securities by a company take place which is followed by the listing of a company’s
shares on a stock exchange is called a primary market.
ASPECTS OF PRIMARY MARKET
Different kinds of issue of securities
Public Issue: When shares or convertible securities are issued to new investors, it is called a
public issue. Public issue can be further sub-divided into Initial Public Offer (IPO) and Further
Public Offer (FPO). The significant features of each type of public issue are illustrated below:
(i) Initial Public Offer (IPO): When the shares and debentures of a company are issued to the
public for the first time, it is called an IPO. It then set the stage for listing and trading of the
issuer’s shares or convertible securities on the Stock Exchanges.
(ii) Further Public Offer (FPO) or Follow on Offer: When an already listed company makes
either a fresh issue of shares or convertible securities to the public or an offer for sale to the
public, it is called a FPO.
(b) Right Issue (RI): When an issue of shares or convertible securities is made by an issuer to its
existing shareholders as on a particular date fixed by the issuer (i.e. record date), it is called a
right issue.
Bonus Issue: When an issuer makes an issue of shares to its existing shareholders without any
consideration based on the number of shares already held by them as on a record date, it is called
a bonus issue. In Bonus Issue, the shares are issued out of the Company’s free reserve or share
premium account in a particular ratio.
(e) Private Placement: When an issuer makes an issue of shares or convertible securities to a
select group of persons not more than 50 but can extend upto 200, it is called a private placement.
It should not either be a right issue or a public issue.
Secondary Market
Secondary market is a market in which purchase and sale of securities which are already issued
to the public for the first time and listed on the stock exchange takes place. Therefore, secondary
markets are called stock exchanges and the over-the-counter market. When the securities are
transferred from the first holder to another, the securities are said to be traded in secondary
market.
Equity shares, bonds, preference shares, debentures, etc. are some of the key products available
in a secondary market.
trading at stock exchanges are now taking place through an open electronic limit order book, in
which order matching is done by the trading computer. The buy or sell orders placed by the
investors are matched automatically with the order which is best for them.
Investors buy/sell securities on stock exchange platform by placing buy/sell orders through their
stock brokers with whom they are registered as client.
6) Explain trading and settlement procedure
Rolling settlement is basically settlement of transaction in stock market in a certain number of
days after the trade is agreed.
Rolling settlement can be explained with the help of following table:
Trading Day (T Day)
T stands for trading. Trading can be done during the entire day i.e. from 9.00 A.M. to 3.30 P.M.
Trading can be done on any working day (except Saturday and Sunday and other holidays as
intimated by the stock exchange from time to time).
Clearing Activities (T+1 day)
Clearing is a process of determination of obligations, after which obligations are discharged by
settlement. On the T+1 day i.e. one day after the trading day, first of all, the National Securities
Clearing Corporation Ltd. (NSCCL) confirms the trade executed during the day from the Stock
Exchange which helps it to determine the obligation of each member (broker) in terms of funds
and securities. After that, the netting of obligations is done. This entire process of determining
the obligation is done by the custodians/clearing corporation which works under the NSCCL.
Settlement Activities (T+2 Day)
On the second working day i.e. T+2 day, all the brokers has to pay-in the required funds and
securities to the NSCCL by 10.30 A.M. giving the required instructions to the respective clearing
banks and members on the same day. Moreover, by 1.30 on the same day, brokers get the
required funds through the NSCCL. This is called pay-out of funds
UNIT 3
7) Define the concept and features of venture capital financing and it's stages
A venture capital company is defined as ‘a financing institution which joins an entrepreneur as a
co-promoter in a project and shares the risks and rewards of theenterprise
FEATURES OF VENTURE CAPITAL
Some of the features of venture capital financing are as under:
1. Venture capital is usually in the form of equity participation. It may also take the form of
convertible debt or long-termloan.
2. Investment is made only in high risk but high growth potentialproject.
3. Venture capital is available only for commercialisation of new ideas or new technology and
not for enterprises which are engaged in trading, booking, financial services, agency, liaison
work or research anddevelopment.
4. Venture capitalist joins the entrepreneur as a co-promoter in projects and shares the risks and
rewards of theenterprise.
5. There is continuous involvement in business after making an investment by theinvestor
6. Once the venture has reached the full potential, the venture capitalist disinvests his holdings
either to the promoter or in the market. The basic objective of investment is not profit but capital
appreciation at the time of thedisinvestment.
7. Venture capital is not just injection of money but also an input needed to set up the firm,
design its marketing strategy and organize and manageit.
8. Investment is usually made in small – and medium – scaleenterprises.
STAGES OF FINANCING OFFERED IN VENTURE CAPITAL
There are typically six stags of financing offered in Venture Capital, that roughly correspond to
these stages of a company‘s development:
1. Seed Money: Low level financing needed to prove a new idea (often provided by “angle
investors”)
Seed Financing: During the developments stage of a venture’s lifecycle, the primary source of
funds is in the form of seed financing to determine whether the idea can be converted into a
viable business opportunity. The primary source of funds at the development stage is the
entrepreneur’s own assets. As a supplement to this limited source, most new ventures will also
resort to financial bootstrapping, i.e., creative methods, including barter, to minimize the cash
needed to fund the venture. Money from personal bank accounts and proceeds from selling other
investments are likely sources of seed financing.
Start-up: Early stage firms that need funding for expenses associated with marketing and product
development. Start- up financing coincides with the start-up stage of the venture’s lifecycle; this
is financing that takes the venture from having established a viable business opportunity to the
point of initial production and sales. Start-up financing is usually targeted at firms that have
assembled a solid management team, developed a business model and plan and are beginning to
generate revenues.
3. First-Round: Early sales and manufacturing funds. The survival stage in a venture’s lifecycle
is critical to whether the venture will succeed and create value or be closed and liquidated. First
round financing is external equity financing typically provided by venture investors during the
venture’s survival stage to cover the cash shortfalls when expenses and investments exceed
revenues.
4. Second – Round: Working capital for early stage companies that are selling product, but not
yet turning a profit. The major sources of financing during the rapid growth stage come from
business operations, suppliers and customers, commercial banks and financing intermediated by
investment bankers.
5. Third- Round: Also called Mezzanine financing, this is expansion money for a newly
profitable company. Even when the business of the entrepreneur is established it requires
additional finance, which cannot be secured by offering shares by way of the public issue.
Venture capital funds prefer later stage financing as they anticipate income at a shorter duration
and capital gains subsequently.
8) Difference between leasing and hire purchase
Ownership – in a contract of lease , the ownership rests with the lessor throughout and the lessee
(hirer) has no option to purchase thegoods
2. Method of financing–leasing is a method of financing business assets whereas hire purchase is
a method of financing both business assets and consumerarticles
Depreciation – In leasing, depreciation and investment allowance cannot be claimed by the
lessee. In hire purchase, depreciation and allowance can be claimed by the hirer.
4. Tax benefits – the entire lease rental is tax deductible expense .only the interest component of
hire purchase installment is taxdeductible.
5. Salvage value – the lessee not being the owner of the asset, does not enjoy the salvage value of
the asset. The hirer, in purchase, being the owner of the asset, enjoys the salvage value of
theasset.
6. Deposit – lessee is not required to make any deposit whereas 20 percent deposit is required in
hire purchase.
7. Rent purchase – with lease, we rent and with hire purchase we buy thegoods.
8. Extent of finance – lease financing is invariably 100 percent financing .it requires no
immediate down payment or margin money by the lessee. In hire purchase, a margin equal to 20-
25 percent of the asset is to be paid by thehirer.
9. Maintenance – the cost of maintenance of the hired asset is to be borne by the hirer himself .in
case of finance lease only, the maintenance of leased asset is the responsibility of thelessee.
10. Reporting - the asset on hire purchase is shown in balance sheet of the hirer .the leased assets
are shown by way of footnoteonly.
9) Explain leasing and it's types
Lease can be defined as a right to use equipment or capital goods on payment of periodical
amount. This may broadly be equated to an instalment credit being extended to the person using
the asset by the owner of capital goods with small variation.
There are two principal parties to any lease transaction as under:
Lessor - is the actual owner of equipment permitting use to the other party on payment of
periodical amount.
Lessee - acquires the right to use the equipment on payment of periodical amount.
Operating Lease: In this type of lease transaction, the primary lease period is short and the lessor
would not be able to realize the full cost of the equipment and other incidental charges thereon
during the initial lease period. Besides the cost of machinery, the lessor also bears insurance,
maintenance and repair costs etc. The lessee acquires the right to use the asset for a short
duration.
Agreements of operating lease generally provide for an option to the lessee/lessor to terminate
the lease after due notice.
Computers and other office equipments are the very common assets whi ch form subject matter
of many operating lease agreements.
Financial Lease: As against the temporary nature of an operating lease agreement, financial lease
agreement is a long-term arrangement, which is irrevocable during the primary lease period
which is generally the full economic life of the leased asset. Under this arrangement lessor is
assured to realize the cost of purchasing the leased asset, cost of financing it and other
administrative expenses as well as his profit by way of lease rent during the initial (primary)
period of leasing itself.
Financial lease involves transferring almost all the risks incidental to ownership and benefits
arising therefrom except the legal title to the lessee against his irrevocable undertaking to make
unconditional payments to the lessor as per agreed schedule.
Sales and Lease Back Leasing: Under this arrangement an asset which already exists and is used
by the lessee is first sold to the lessor for consideration in cash. The same asset is then acquired
for use under financial lease agreement from the lessor. This is a method of raising funds
immediately required by lessee for working capital or other purposes.
