Chanakya National Law University, Patna

LAW RELATING TO Finance AND CORPORATE FINANCE,

SECURITIES AND COMPETITION

Final Draft on

HIRE PURCHASE COMPANIES

Submitted To:

Prof. Ajay Kumar

Submitted By: Khyati Shree

Roll No.: 1022

Semester: IX, 5th year

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 ACKNOWLEDGEMENT

I owe the present accomplishment of my project to my friends who helped me

immensely with materials throughout the project and without whom I would not
have been completed it in the present way. I would be like to thank my friends who
helped me in many ways for the completion of this project.

I would also like to thank my faculty “Mr. Ajay

Sir” whose guidance helped me a lot. I would also like to extend my gratitude to
my parents and all those unseen hands that helped me out at every stage of my
project.

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 CONTENTS

RESEARCH METHODOLOGY...............................................................................4

INTRODUCTION .....................................................................................................5

MEANING .................................................................................................................5

THEOROTICAL FRAMEWORK.............................................................................6

TERMS OF AGREEMENT ......................................................................................9

Hire-Purchase Agreement .......................................................................................9

Nature Of Agreement............................................................................................10

Essential clauses under Hire-Purchase agreement................................................13

POSITION OF HIRE PURCHASE COMPANIES IN INDIA ...............................14

Rising Incomes and Consumption ........................................................................14

Problem for Monetary Control .............................................................................15

Method of Association ..........................................................................................16

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 RESEARCH METHODOLOGY

Aims and Objectives:

The aim of the project is to present a detailed study on the topic Hire Purchase of
the subject Law relating to Finance and Corporate Finance, Securities and
Competition.

Scope and Limitations:

Though the topic Hire Purchase is an immense project and pages can be written
over the topic but because of certain restrictions and limitations I was not able to
deal with the topic in great detail.

Sources of Data:

The following secondary sources of data have been used in the project-

1. Articles/Journals
2. Books

Method of Writing and Mode of Citation:

The method of writing followed in the course of this research paper is primarily
analytical and doctrinal. The research is followed with Uniform method of citation
throughout the course of this research paper.

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 INTRODUCTION

The British concept of hire-purchase is there in India for more than 6 decades. The
first hire-purchase company is believed to be Commercial Credit Corporation,
successor to Auto Supply Company. It was based in Madras, Motor and General
Finance and Installment Supply Company were set up in North India. These
companies were set up in the 1920s and 1930s. Development of Hire-purchase
took two forms: consumer durables and automobiles. Consumer durables hire-
purchase was promoted by the dealers in the respective equipment. Thus, Singer
Sewing Machine Company, or Murphy radio dealers provide installment facilities
on hire-purchase basis to the customers of their products. Origin can be traced to
1807 in U.S.A. when Cowperwet & Sons, a furniture dealer introduced the system.
In U.K. it was after industrial development by Henry Moore a piano maker in
1846. All early Hire Purchases were financed by manufacturer or dealers. In India
the growth was visible after world war though it was started after 1st world war. It
increases in it’s activities during fifties & sixties.

In 1987-88 the total of hire purchase business in India is Rs.635 Crores. Now not
only automobile but also consumer goods are sold on hire purchase system, with a
growing Indian middle class 100 to 150 million & their willingness to mortgage
the future the future for their present enjoyment have led spectacular growth in this
business.

MEANING

THE COMMONEST METHOD OF selling property is the cash sale. The credit
sale system is an alternative method of cash sale. The third system of selling
property is the installment system. In installment system, property are delivered to

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the buyer immediately but payments is made in periodic installments such as
weekly or monthly, quarterly or half-yearly or yearly so on. Hire purchase and
installment purchase systems are the major parts of installment system. However,
hire purchase installment system is the prime concern of this study. With an
increasing demand for better life, the consumption of property has been on the
uprising scale. This has not been backed up by adequate purchasing power,
transforming it into effectual demand. This has created the market for hire
purchase system. When a person is unable to acquire an asset against immediate
cash payment, he may arrange with the vendor to stagger the payment. Financial
institution plays role of facilitators between buyer and seller to enter into the hire
purchase agreements. Hire purchase agreement makes it possible for
businesspersons, professionals and others to take advantage of assets all of which
enable them to organize and operate their activities effectively. After the
liberalization policy introduced in 1990, the financial sector especially the finance
companies have contributed significantly to increase the hire purchase business in
India.

THEOROTICAL FRAMEWORK

Hire purchase is a form of credit. It is a way to buy property when a buyer cannot
afford to pay the full amount straight away. In this system, a customer agrees to
buy property from a manufacturer or retailer and to pay price in a number of
installments. Three parties—the manufacturer or retailer or vendor; the hiree and
the hirer—involve in the hire purchase agreement. The hirer is a buyer or customer
who buys property. The manufacturer sells property to the hiree who sells it to the
hirer in exchange for the payment to be made over a specified period of time. A
hire purchase installment system is an agreement drawn up, signed by the hirer,
and lending institution. If a retailer is involved, it also signs the agreement and
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supplies the asset in question. It is an agreement whereby a buyer hires property for
a period by paying installments and can own the property after the payment of all
installments1. Manufacturers or retailers often have an agreement with a finance
company to provide the hire purchase finance. In such a case, a hirer makes the
payments to the finance company not to the manufacturer or retailer. The name of
the finance company will be on the hire purchase agreement. As soon as the
contract is signed, the hirer acquires possession of the property and therewith the
right to use the property over an agreed period. However, the ownership of the
property remains with the finance company until the hirer pays all installments.
Each installment paid by the hirer is treated as hire charges for using the property
or assets. In case he fails to pay any of the installments, even the last one, the
vendor or finance company takes back the hired property without compensating the
hirer. Hirer, vendor, or finance company may terminate the hire purchase
agreement at any time on the noncompliance of the terms and condition of the
agreement by any parties. In the hire purchase agreement, the possession of the
assets is transferred to the hirer with an understanding that the hirer will pay agreed
installments over a specified period of time; the ownership of the asset is
transferred to the hirer on the payment of all installments; and the agreement is
terminated on the option of the hirer at any time before the transfer of ownership of
the property. The hire purchase agreement normally specifies the property
specified by the agreement, price of the property and installment. It should specify
both cash price and hire purchase price. The installment should specify the amount
of each installment, the due date of each installment, and the number of
installments. In addition, agreement should state the names and addresses of all
parties to the agreement, the right of the hirer to withdraw from the agreement

11
Allen, N. Nerger, & George, F. Udell. (2005). A More Complete Conceptual Framework for Hire Purchase
Business. SSRN ID:874825
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within 10 days of receiving a copy of the agreement— "cooling off" period, fee
and penalties and whereabouts of the hired property. In hire purchase agreement,
the hirer has an obligation to pay up to the last installment so that the ownership of
property passes to him. If the hirer fails to pay any installments, the vendor has the
right to take the asset back in its actual form without any compensation to the hirer.
Then the hirer is called upon defaulter. The amounts received from the defaulter
through down payment and installments are treated as the hire charges by the
vendor. This act of recovery of possession of the asset is termed as "repossession"
The repossessed assets are ultimately sold to other customers after repairing or
reconditioning, if necessary. A hirer, on the other hand, also can terminate the
agreement at any time by giving notice in writing to the vendor or finance
company. It can also be done by returning the property either in accordance with a
term in the agreement or with the finance company's consent. This is sometimes
called a voluntary repossession. Hirers should be aware that breaking a hire
purchase contract before its normal end date usually involves penalties. The hirer
can terminate the hire purchase agreement if property hired under a hire purchase
agreement is/or become faulty and defective. A guarantee under a hire purchase
agreement applies in the same way as if property were bought outright2. The
manufacturer makes the guarantee. If there is a fault with the Hire Purchase
Financing property, the hirer can choose to have the property repaired under the
guarantee or to seek a full refund or exchange from the owner. Under a hire
purchase plan, the hirer has a duty to take reasonable care of the hired property.
The vendor or finance company entitles to the cost of repairs if the property is
damaged by the hirer and returned to the vendor or finance company.

2
Canbank Factors Limited: http://www.canbankfactors.com

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 TERMS OF AGREEMENT

The basic principle underlying the transaction is that the installment determined is
taken as hire (rental) till the time the agreement envisages such payments. On
determination of the said period the Hirer (Purchaser) has the option of paying a
nominal amount to become the owner of the goods.

Hire-Purchase Agreement

1. In a hire-purchase agreement, the owner hires goods to the hirer with an

option to purchase the goods when he has made the payment of a certain
sum.
2. By this system, the purchaser who is unable to pay the full price of the asset
at one lump sum, gets facilities to acquire an asset and after making the
payment of an initial amount called premium, the purchaser pays the balance
consideration money in installments.
3. After the payment of all the installments, the property in the goods passes to
the hirer.
4. The hirer has an option to return the goods during the period of hire. In a
hire-purchase agreement, the hirer has the right to terminate the agreement
for hire at his pleasure and is not bound to pay the value of the goods.
5. A hire-purchase agreement is a form of bailment; the hirer is given the right
to purchase the goods on certain conditions. That, however, is an option not
an obligation to purchase.
6. The hirer may elect to purchase the goods and when he does so, after he
fulfills all the conditions prescribed in the agreement, the title to the goods
will pass to him. But he may elect not to do so, and in that event he is
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 entitled to return the goods and terminate the agreement in the manner
provided therein3.

Forms of Hire-Purchase Agreements

Hire-purchase agreements are of two forms.

1. In the first form the goods are purchased by the financier from the dealer and
i. the financier obtains a hire-purchase agreement from the customer,
ii. under which the customer becomes the owner of the goods
iii. on payment of all the installments of the stipulated hire and exercising
his option to purchase the goods on payment of a nominal price.
iv. The owner gets his money from the financier, who recovers the cost
from the customer.
2. In other form
i. the customer purchases the goods and he executes a hire-purchase
agreement with a financier,
ii. under which he remains in possession of goods, subject to payment of
amount paid by the financier on his behalf to the owner.
iii. The financier gets a right to seize the goods in the event of non-
fulfillment of conditions of hire-purchase agreement by the customer.

Nature Of Agreement

The true nature of the transaction is determined from the terms of the agreement
and the court unless prohibited by statute can go behind the documents to
determine the true nature of the transaction.

3
Anna, Lau Siew Lin. (2008, June). Securing Financial Resources and Hire Purchase in Malaysia. ebscohost
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If the purchaser desiring to purchase the goods, who is not having sufficient money
for purchasing the same, borrows the amount from a third party and pays it over to
the vendor, the transaction between the customer and the third party will be a loan
transaction.

The true nature of the transaction will not change if the lender himself is owner of
the goods and he accepts the promise by the purchaser to pay the balance money
due against delivery of good4s.

Termination of Hire-Purchase Agreement

The hire-purchase agreement can be terminated in any of the following ways:-

1. In terms of the agreement- The hire-purchase agreement stipulates the

circumstances in which the agreement can be terminated. The agreement is
generally terminated by return of the goods by the hirer, notice of
termination by the owner on account of hirer's breach of conditions or notice
of termination by the hirer.
2. By performance- The hire-purchase agreement is terminated by
performance on the exercise of the option to purchase the goods by the hirer.

3. By renewal- The parties to an agreement may enter into a fresh agreement

terminating the hire-purchase agreement, which has not already been
terminated.

 4
Chris, Miller. (2009). Hire Purchasing can be an option when traditional financing isn't. Hudson Valley
Business Journal Business Resource Guide, 22-24.

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 4. Notice by either party- The hire-purchase agreement can be terminated by
notice given by either party.

5. By acceptance of repudiation by other party- An agreement is terminated,

when a party to an agreement renounces his future obligations under the
agreement or commits a breach of the agreement, which indicates that he
does not want to remain bound by its provisions, and the other party accepts
the renunciation or breach as discharging the contract.

6. By release- Where one party to an agreement releases the other party from
the performance of the obligations by him under the agreement, the
agreement comes to an end.

7. By frustration- When performance of the agreement becomes impossible

by reason of some act or event occurring subsequent to the formation of the
agreement, comes to an end and the parties will be discharged from further
obligations under the agreement e.g. when the goods are destroyed during
the currency of hire-purchase agreement without negligence on the part of
the hirer, the agreement comes to an end.

8. By efflux of time- When the hirer is given time to exercise option to

purchase the goods within a stated period and he does not exercise the option
within the said period, the agreement comes to an end5.

5
Ibid.
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Essential clauses under Hire-Purchase agreement

1. Nature of the agreement- This clause will contain the purpose of the
agreement. Say, you want to buy a television. The nature of the
agreement will be for personal use. If you are buying machinery for your
business, then nature of the agreement will be for a commercial purpose.
This clause also defines the commencement of the agreement and its
termination. This clause will also contain payment details, how often to
pay, the amount to pay, when to pay, the name and address of the owner.

2. Delivery of goods- Date, time, and place of delivery of goods. This

clause also defines the hirer’s responsibility to pay for the delivery
charges.

3. Risk clause- In the case of any damage to the goods, the hirer owes full
responsibility for such damage. The hirer should get it repaired at his
own cost. An explanation of the rights of hirer and the owner and also
with regards to rights of the hirer, rights such as the right of termination.
Explanation of owner’s right such as, right to repossess, termination, etc.

4. The charges, or how much it costs you to borrow- By adding, finance

(or interest charge) for the number of months, booking fee, maintenance
and repairs, insurance required by the finance company, other charges
such as credit check fee6.

 6
Christer, Bergquist, & Linus, Dahg. (2007). The impact of financial gap on growth and development of
Hire Purchase. SVCA ID: 863.

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 POSITION OF HIRE PURCHASE COMPANIES IN INDIA

Rising Incomes and Consumption

The basic objective of India's Five-Year Plans is to increase the per capita income,
to provide a high level of employment and thereby raise the standard of living of
the masses of the people. The aim of Government policy also is to establish a
welfare state. When our economy is expanding and national income is increasing
and efforts are being made to train up more and more technicians, and a
redistribution of income in favour of the skilled wage earners is being effected, the
demand for hire purchase facilities is likely to increase. Today it is an exception
rather than the ru-e for married women to give up work after marriage. The
relatively high earnings of young people, together with the tendency of married
women to continue to work after marriage, will serve to increase further the
demand for hire purchase as has happened in other countries. The possibilities of
hire purchase finance in India's developing economy are immense.

The growth of hire purchase or consumer instalment credit raises two important
problems, one cyclical, the other long run. Instalment credit may intensify cyclical
fluctuations, in anticipation of increases in their incomes, people may be induced
to purchase durable consumer goods. Such increased investment in durables would
have the usual multiplier and accelerator effects. Similarly in a downswing, with
declining incomes and increasing burden of repayments, people may be obliged to
spend a decreasing proportion of their incomes on current consumption which
would intensify the recession7.

7
Constantinos Stephanou & Camila Rodriguez. (2008). Bank Financing to Hire Purchase Enterprises in Colombia.
SSRN ID:1086860.

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Problem for Monetary Control

The growth of hire purchase finance may pose a problem for monetary control.
The rise of non-banking financing institutions in the shape of hire purchase or sales
finance companies is likely to complicate the whole process of enforcing monetary
control measures by the central bank. Borrowers and lenders find ways of
circumventing the monetary system. An important question is whether the
monetary tools of the central bank would be seriously blunted. A corollary is
whether the central bank should be empowered to regulate these non-banking
institutions and if so by what methods. A further question is whether controls
should operate on the cost or the terms of hire purchase arrangements. In this
connection, the respective potency of the effects of general and selective controls
over consumer credit would also call for careful evaluation.

The long run problem consists in the possibility of a growth of consumer credit out
of all proportion to the rise in the national product. In such an event it would be a
'borrowed' and 'sham' prosperity. In the United States, where consumer instalment
debt has grown to enormous proportions, the debt Is financed by dealers, finance
companies and the commercial banks. Banks there handle more of this business
than any other institution and do so through direct participation as well as by loans
to finance companies and retailers8. In Australia, banks have, direct participation in
the equity capital of finance companies and also grant overdraft facilities. In recent
years there has been a decline in bank overdrafts which has been matched by an
increase in direct participation. Banks have 40-45 per cent interest in finance
companies. Some have wholly owned finance subsidiaries.

8
Constantinos Stephanou & Camila Rodriguez. (2008). Bank Financing to Hire Purchase Enterprises in Colombia.
SSRN ID:1086860.

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Method of Association

What should be the most appropriate method of association of banks with hire
purchase finance? Should it be in the form of participation in the equity capital of
sales finance companies or in the form of providing ordinary overdraft facilities?
Should the banks go in direct for hire purchase business as in USA? If so, should
they do so by establishing a wholly owned subsidiary or by setting up a special
department staffed by experts?

Hire purchase business may be akin to but is not entirely the same as banking
business. In some respects credit granted to a trader to extend hire purchase
facilities to his customers does not differ from other forms of bank credit. Hire
purchase conforms to the self-liquidating principle, since, as the seller receives
instalments from the buyers, he is placed in funds to repay his bank. The basic
difference between banking business and hire purchase lie's in the fact that the
banker takes into consideration primarily the character and standing of the
customer and only secondarily, the collateral security which he offers. But the hire
purchase financier looks into security first, second and perhaps for all time. Hire
purchase, moreover, may call for its own expertise and may perhaps be better
entrusted to specialised institutions or specialised departments of commercial
banks9.

Through the notification issued on 7-9-1990 of Banking Regulation Act, 1949,

Government of India permitted banks to engage in Hire Purchase business with
taking into account the guidelines from R.B.I

No banks at present can undertake directly the Hire Purchase business.

9
Daniel, S. Levine. (1998).Hire Purchase Agreements. ebscohost.

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The banks which are already engaged in merchant banking or equipment leasing
can undertake this business but only after prior approval from R.BI10.

The investment of bank in the shares of subsidiary set up for hire purchase
business shall not in the aggregate exceed 10% of paid up and reserve.

CONCLUSION

Hire purchase and installment purchase systems are the major parts of installment
system. However, hire purchase installment system is the prime concern of this
study. With an increasing demand for better life, the consumption of property has
been on the uprising scale. This has not been backed up by adequate purchasing
power, transforming it into effectual demand. This has created the market for hire
purchase system. When a person is unable to acquire an asset against immediate
cash payment, he may arrange with the vendor to stagger the payment. Financial
institution plays role of facilitators between buyer and seller to enter into the hire
purchase agreements. Hire purchase agreement makes it possible for
businesspersons, professionals and others to take advantage of assets all of which
enable them to organize and operate their activities effectively. After the
liberalization policy introduced in 1990, the financial sector especially the finance
companies have contributed significantly to increase the hire purchase business in
India.

10
Dimitri, B. Papadimitriou, Ronnie, J. Philips, & L., Randall Wray. (1994). Community based HP companies.
SSRN ID: 133418.

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 BIBLIOGRAPHY

 Canbank Factors Limited: http://www.canbankfactors.com

 Allen, N. Nerger, & George, F. Udell. (2005). A More Complete Conceptual Framework
for Financing Enterprises. SSRN ID:874825.
 Anna, Lau Siew Lin. (2008, June). Securing Financial Resources and Hire Purchase in
Malaysia. ebscohost.
 Chris, Miller. (2009). Hire Purchasing can be an option when traditional financing isn't.
Hudson Valley Business Journal Business Resource Guide, 22-24.
 Christer, Bergquist, & Linus, Dahg. (2007). The impact of financial gap on growth and
development of Hire Purchase. SVCA ID: 863.
 Constantinos Stephanou & Camila Rodriguez. (2008). Bank Financing to Hire Purchase
Enterprises in Colombia. SSRN ID:1086860.
 Daniel, S. Levine. (1998).Hire Purchase Agreements. ebscohost.
 David, Dagan. (2009). Businesses explore alternative financing known as Hire Purchase.
Central Penn Business Journal, 7.
 David, Irwin. (2006). Barriers faced by Hire Purchase in raising finance from banks.
irwingrayson id: ISBE 06financeBarriers.
 Dimitri, B. Papadimitriou, Ronnie, J. Philips, & L., Randall Wray. (1994). Community
based HP companies. SSRN ID: 133418.
 Don, Sadler. (2011, June 15). Costco Connection, 26(6), 24.

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