Small Scale Industries can acquire the plant and machinery, plant site/factory shed on hire-purchase basis when they are unable to pay the full price of the assets at one time in lumpsum.

The term, `hire-purchase' symbolises a business transaction which originates from a written agreement under which goods are let on hire, and the hirer has an option to purchase those hired goods in accordance with the terms of such agreement. These terms include the provision of delivering the possession of the goods by the owner to hirer who pays the agreed amount towards the cost of the goods in periodical installment. The agreement also provides that on the payment of the last installment, the property in the goods is to pass to the hirer who has entered into agreement and paid the cost of the goods in instalments. A person who takes the delivery of the goods has the right to terminate the agreement at any time before the property in the goods so passes. However, the ownership is retained by the seller till he is paid fully towards the consideration price of the goods.

The seller has the right to determine the agreement by notice of default in payment of instalments of rent and the right to recover the goods together with arrears of rent up to the date of notice of termination and subsequent damages for failure to deliver the article. The terms of hire-purchase may provide for the payment of an initial amount in the form of premium by the hirer who pays the balance consideration money in monthly/quarterly instalments as may be settled. This initial payment generally covers 20 to 25 per cent of the value of goods. On payment of all the instalments, the ownership interest in property or the article automatically passes on to the hirer. He has an option to return the article during the period of hire.

All NBFCs, leasing and hire purchase companies, subsidiaries of banks provide hire purchase facility and can be availed of by needy SSIs/SSEs. These organisations provide the hire-purchase facility as business risk and would ensure recovery of their dues punctually. They assess the income generating capacity, and the ability to meet the commitments punctually.

They require the SSI to furnish the operational data for last three years for analysis, trust worthiness of promoters of SSIs and other details. Therefore, to avail of this facility the SSI should have a good track record.

The procedure for availing of the hire-purchase facility is very simple, viz, the hirer has to satisfy the hire-purchase company about the requirement of the vehicle or equipment, disclose the income sources to pay the monthly hire-purchase instalments, furnish a guarantee or other security so as to assure punctual payment to the company.

In hire-purchase deals, legal documentation is very important. The number of documents depend upon the number of parties or agencies involved in hire-purchase deals, viz, (a) the hirer, (b) the guarantor, (c) the dealer, (d) the insurance agent, and (e) statutory bodies like sale-tax authority, regional transport authority, etc.

Care should be taken to deal with each of these parties meticulously, communicate in set language, and define the role of the parties in the documents to avoid mis-interpretation and ambiguities.

From the angle of completing the hire-purchase transaction, the following steps covered under different stages are needed: pre-finance stage; release of finance stage—new asset finance; follow-up post-finance stages; recovery of instalments fallen due; assignment of the hire-purchase contract; repossession of the assets; disposal of assets on repossession; and termination of the contract.

At each of the above stages, certain communications are exchanged between the different parties to the hire-purchase contract and/or certain documents are executed between the hire-purchase company and the hirer or other constituents to this transaction. It comprises a general view of the important formalities involved.

Having selected goods, SSIs should obtain from the dealer the letter agreeing to sell the good on the condition to be mentioned therein, like mode of delivery, mode of payment, insurance for the assets, proforma invoice from seller/supplier indicating the sales tax registration number of the dealer, description of assets, price, terms of payment, validity of performa, delivery period, place of delivery, advance acceptance.

In case the proposal is acceptable to the finance company, the hirer is required to enter into a hire-purchase agreement and also execute the guarantee from the hirer or its promoters towards punctual payment under the agreement. Further, the hire-purchase agreement should permit the hirer to assign the hired assets.

In the case of release of finance for new assets, the hire-purchase company may release funds to the dealer for acquiring the new assets by way of (a) advance payment to the dealer for new asset, or (b) full and final payment to the dealer for new asset.

There may be two situations, viz, where the hirer has paid advance directly to the (i) dealer, or (ii) has required the hire-purchase finance company to pay advance covering either a part of the total price or the whole of it.

In the case of ``used asset'', hire-purchase companies do provide finance for the acquisition of used assets particularly for the used motor vehicles, which offer higher rate of return compared to new assets. ``Used'' in this context means the asset already in use by the hirer or the asset newly acquired by the hirer through own resources and finance is sought to be raised to meet cash requirements from the hire-purchase company. For financing acquisition of such assets, the hire-purchase company has to ensure the following matters while releasing funds: viz, (i) The asset must be free from encumbrances and must afford absolute charge to the hire-purchase company. (ii) Ensure the receipt of the following documents, viz, sale invoice, stamped receipt, nil encumbrance certificate, etc.

Once the payments have been made to the dealer for the new asset, the hirer should follow up the following matters: ensure delivery of the asset, ensure receipt of original pucca invoice and delivery receipt, verification of the receipt of invoice and forward these documents to the finance company.

Once the hire-purchase transaction is over, it is basically the duty of the hirer to pay the periodical instalments in time. The hire-purchase company has the right to cancel the agreement and take possession in case of recurring default in payment of hire purchase instalments. The author is Director, Indian Institute of Merchant Banking. He will reply to queries on banking problems. Please direct your letters (in a typed format) to:

The Financial Express, Enterprise Bureau ,9-10, Bahadhur Shah Zafar Marg, Express Building, New Delhi -110 002: Fax. 3739821; 3716037; Tel. 3311111; Ext.243

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.