In the last post, we defined commodities, discussed the risk-return pattern of the commodities and variuous terms related to commodity trading.
In this post, let us discuss the various modes of trading in commodities.
TRADING IN SPOT MARKET
This involves buying and selling of commodities for immediate delivery. Prices reflect the current demand-supply conditions.
As it involves physical delivery of the commodities, it may involve transportation and storage costs. Along with that in the case of agricultural products, shelf life can limit the time till which the commodities can be stored. This also poses the risk of loss due to deterioration in the quality of the commodities and the increase in storage costs.
COMMODITY FORWARD AND FUTURES CONTRACTS
Contracts for buying and selling of commodities at a future (settlement) date at a predefined price. These contracts can be classified on how they are settled as
1. Physical Settlement
Physical commodities are transferred from seller to buyer.
2. Cash Settlement
No physical transfer takes place. The settlement is based on the futures price decided on the contract and the current spot price at the settlement date. For example, consider an investor has a long position on a commodity of one unit using a futures contract with a futures price of Rs. 100. If at the settlement date the unit spot price of the commodity goes to Rs. 90, she will pay the futures seller Rs. 10 per unit. If the unit spot price of the commodity goes to Rs. 110, she will receive Rs. 10 per unit from the futures seller.
Cash settlement allows the buyer and seller to avoid the cost of transportation and storage. Also, investors can bet on the price of commodities without physically handling the commodities.
INVESTING IN COMMODITY COMPANIES
Apart from spot market or futures markets, investing in securities of companies which deal in commodities gives exposure to the commodities. Investing in such securities offer benefits such as professional management but also may introduce the default risk of the company which may use excessive leverage.
INVESTING IN COMMODITY FUNDS
Commodity funds are funds which primarily invest in specified commodities and track the market price of the commodity. There various type of commodity fund
1. Natural Resource funds
These funds invest in companies who deal with natural resources such as crude oil or natural gas.
2. Basic/ true commodity funds
These funds mostly invest in physical commodities such as Gold funds.
3. Index Funds
These funds try to mimic commodity indices.
4. Combination Funds
A mix of basic commodity funds and commodity futures.
WHAT IS A COMMODITY?
Commodities are basic goods which can be bought and sold and are interchangeable irrespective of source. Agricultural products such as cotton and coffee, fuels such as crude oil and metals such as Gold and Silver – are examples of commodities.
COMMODITIES AS AN ASSET CLASS
Commodities provide diversification opportunities from the other asset classes. Metals such as Gold and Silver historically has been a refuge for investors during financial market turmoils.
Another benefit of commodities is that their prices are often tied to inflation. Commodities can be a good hedge for inflation.
While real estate can provide diversification and inflation-hedge, it is often an illiquid investment. Whereas commodity investing can be considerably more liquid.
Investing in commodities can provide a higher return but most commodities are extremely volatile.
Prices of commodities such as Crude Oil, Gold, Silver etc. are linked with the international market and often speculated heavily. Also, the investor is inadvertently taking on the exchange-rate risk because the prices are set by international markets.
Prices for agricultural products in India are often exposed to government control and thus political risk which may limit the returns.
BASIC COMMODITY MARKET TERMS
1. Spot Price
It is the current market price of the commodity for immediate delivery and payment. Also called the cash price.
2. Futures Price
A futures price is quotation based on a transaction at a future (settlement) date.
The difference between the spot price and the futures price for a commodity is called the basis.
4. Long position
A long position is synonymous to betting on an asset. The investor may or may not actually hold the asset (derivatives can create positions without holding an asset) but will benefit from an increase in the prices of the asset.
5. Short Position
A Short position is the opposite of a long position. In this case, the investor will benefit if the asset prices go down.
In general sense, arbitrage means risk-less profit. It can be achieved by taking advantage of any mismatch in pricing. The pricing mismatch can be in different exchanges or between a spot and futures price.
When the futures prices are higher than the spot prices.
When the spot prices are higher than the futures prices.
9. Commodity Forward and Futures Contracts
A forward contract is a customised contract to buy or sell a specified amount of a commodity at a specified future date at a predefined price.
A futures contract is similar to forward contract but standardised and traded in exchanges.
Read more about futures and forward contracts.
10. Commodity Options
Options are derivative contracts which give right but not obligation to get into a transaction. A call option gives right but no obligation to buy an asset whereas a put option gives right but no obligation to sell an asset.
WHAT IS DEPRECIATION?
Consider you are a freelance software developer or a professional service provider. Now, while calculating your taxes you will deduct the expenses – for example the rent of the premises used to carry out your practice, expenses related to business travel, the cost for the consumables such as electricity and water etc. Deducting all these costs reduces your income tax liability.
But, you also use your laptop for your business as well as the pieces of furniture. Also, you use a car for business related travels. The fuel cost can be directly expensed. But, the laptop, the pieces of furniture and the car will be used for multiple years. So, simply considering the price of these assets as cost in one year does not make sense.
Depreciation allows you to use a multi-year approach in accounting the cost for these assets.
WHO CAN CLAIM DEPRECIATION AS DEDUCTION?
Depreciation as a deduction can be claimed for income from business and profession. Businesses can be a sole proprietorship, limited liability partnerships, private companies, public companies or joint ventures.
Professionals such as engineers, legal professionals, architects, medical professionals also can claim depreciation as a deduction for income from individual practice.
Freelancers can also claim depreciation as deduction.
ASSETS ELIGIBLE TO BE DEPRECIATED FOR INCOME TAX CALCULATIONS
As per section 32 of the Income Tax Act 1961 (the Act), depreciation is allowed on
1. Tangible Assets such as buildings, machinery, plant or furniture etc.
2. Intangible assets such as know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature etc.
CONDITIONS FOR CLAIMING DEPRECIATION
1. The assets must be wholly or partly owned by the assessee.
2. The assets must be used for the purpose of business or profession. If the asset is being used partly for the business and profession, the depreciation deduction will be the fair proportional part which an assessing officer may determine as per section 38 of the Act.
3. Land cannot be depreciated.
4. In the case of co-owned assets, depreciation can be claimed on the part owned by the assessee.
DEPRECIATION CALCULATION METHODS
For the sake of knowledge, we will discuss a few different depreciation methods. But, for income tax calculations only the ‘Written Down Method’ (WDM) is allowed.
1. Straight Line Method
Straight Line Method is the simplest way to calculate depreciation. Consider we have an asset which we acquired at a cost Rs. 100, the useful life for the asset is 5 years and we expect to sell it after 5 years for Rs.10.
As per the straight-line method, the depreciation in every year is
= (Rs. 100 – Rs. 10) / 5
= Rs. 19
2. Written Down Value Method (WDV)
Consider you bought a new asset for Rs. 100 which is intended to be used for the purpose of your business. You made the purchase more than 180 days before the end of the fiscal year.
Note: If an asset is put into use less than 180 days before the fiscal end, 50% of the amount calculated using WDV can be claimed.
Now, consider that the depreciation rate for the asset is 15%. So, the depreciation calculations for the first three years are as follows
Opening WDV = Rs. 100
Depreciation for the year = Rs. 100 x 15% = Rs. 15
Closing WDV = Rs. 100 – Rs. 15 = Rs. 85
Opening WDV = Rs. 85
Depreciation for the year = Rs. 85 x 15% = Rs. 12.75
Closing WDV = Rs. 85 – Rs. 12.75 = Rs. 72.25
Opening WDV = Rs. 72.25
Depreciation for the year = Rs. 72.25x 15% = Rs. 10.84
Closing WDV = Rs. 72.25 – Rs. 10.84 = Rs. 61.41
As you can see that in the WDV method the depreciation amount reduces with time. In the above case, the depreciation amount reduced from Rs. 15 to Rs. 12.75 to Rs. 10.84.
3. Unit of Production Method
This method is used when the useful life of the asset is best reflected by the number of units it produces. For example, say one asset which can produce 100 units is purchased for Rs.100. Now the salvage value of the asset after producing 100 units is Rs. 10. Let us see the depreciation calculations using this method.
Depreciation per unit of production
= (Rs. 100 – Rs. 10 ) /100 units
= Rs. 0.9
Units producted = 10
Depreciation for the year = 10 x Rs. 0.9 = Rs. 9
End of year depreciated value of the asset = Rs. 100 – Rs. 9 = Rs. 91
Units producted = 12
Depreciation for the year = 12 x Rs. 0.9 = Rs. 10.8
End of year depreciated value of the asset = Rs. 91 – Rs. 10.8 = Rs. 80.2
Units producted = 8
Depreciation for the year = 8 x Rs. 0.9 = Rs. 7.2
End of year depreciated value of the asset = Rs. 80.2 – Rs. 7.2 = Rs. 73
In the last post (link below), we talked about the valuation of real estate assets and some terms used in direct real estate investing. But, we can get exposure to the real estate asset class.
Real Estate as an asset class can provide high yield and diversification to the stock market. The primary benefit is the hedge against inflation as the property prices increase with the inflation (actually at a faster rate). For example, the RBI House Price Index reached to 266.7 in Q2 2018-19 from its base of 100 in Q4 2008-09 i.e. a more than 10% annualised increase which is a couple of percentages higher than the average CPI in this period.
This means directly buying an asset. The first issue is that you need to invest a lot of money at once to get into such an investment. The second issue is that direct real estate investment requires some specific skills in choosing the asset and understanding the contract terms. Another issue is that once you get into such investment, liquidating the asset may become challenging. Lack of diversification is also a big challenge. As these investments are large, an average investor may not have the funds to create a diversified portfolio.
The major risk factor in real estate investments apart from the liquidity risk is interest rate risk as to the increase in real interest rates not only increases the mortgage payments but also can decrease the demand of assets resulting in lower prices.
REAL ESTATE COMPANIES
One way to get exposure in real estate assets is simply invested in the securities of the companies who develop and manage real estate assets such as DLF and Godrej Properties Limited.
Investing in securities solves the illiquidity issue and offers professional management, investors should be aware of the increases risk exposures they are taking by investing in such companies. Apart from the industry-specific risks linked to interest rates, the investor is taking exposure to the risk associated with the capital structure of the company (credit risk) and the risk of bad management.
REAL ESTATE MUTUAL FUNDS (REMF)
SEBI allowed the creation of such mutual funds in the year 2008. Some of the characteristics of these funds are as follows:
1. These Mutual Funds need to be closed-ended and need to be listed on a recognised stock exchange.
2. At least 35% of the net assets need to be in direct real-estate investments.
3. These funds cannot get involved in lending or housing finance activities.
4. At least 75% of the net assets need to be in real estate assets, mortgage-backed securities and equity shares or debentures of companies engaged in dealing in real estate assets or in undertaking real estate development projects.
5. These funds are valued every three months.
Because REMFs are closed-ended funds, they can be somewhat illiquid compared to investing in securities of the companies of the real estate companies. The benefit is the low ticket size, higher liquidity than direct investment and professional management.
REAL ESTATE INVESTMENT TRUSTS
A REIT in India means a trust registered under the SEBI (Real Estate Investment Trusts) Regulations, 2014 and allowed to invest in Real-Estate assets by pooling funds from many investors.
REITs issue units in a public or a follow on offering. The issue is that a minimum of two lakh rupees needed to be subscribed as per the regulations. Also, non-traded REITs can create a liquidity challenge for the investor.
India’s first REIT was launched by Embassy Office Parks last month (i.e. March 2019) backed by Blackstone Group LP.
UNITS USED FOR VALUATION
Let us start by discussing the different units used in real estate valuation.
1. Carpet area
According to Real Estate (Regulation and Development) Act 2016 (the Act), carpet area is defined as “ the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.”
2. Built-Up area
Build-Up area is the carpet area plus the thickness of the outer and inner walls and the balcony or verandah area.
3. Common Areas
According to the Act, common areas are defined as
(i) the entire land for the real estate project or where the project is developed in phases and registration under this Act is sought for a phase, the entire land for that phase;
(ii) the staircases, lifts, staircase and lift lobbies, fire escapes, and common entrances and exits of buildings;
(iii) the common basements, terraces, parks, play areas, open parking areas and common storage spaces;
(iv) the premises for the lodging of persons employed for the management of the property including accommodation for watch and ward staffs or for the lodging of community service personnel;
(v) installations of central services such as electricity, gas, water and sanitation, air-conditioning and incinerating, system for water conservation and renewable energy;
(vi) the water tanks, sumps, motors, fans, compressors, ducts and all apparatus connected with installations for common use;
(vii) all community and commercial facilities as provided in the real estate project;
(viii) all other portion of the project necessary or convenient for its maintenance, safety, etc., and in common use;
4. Super Built-Up area
Super built-up area is derived by adding built-up are and the common area.
Note: Real Estate (Regulation and Development) Act 2016 makes it necessary for developers to specify carpet area and not the built-up or super built-up area. Valuations based on a super-built area can lead to unreasonable prices.
Now, let us get into valuations.
Before we get into valuation factors and methods used for the valuation of real estate properties, we should be clear about the difference between the Value and Price which are not synonymous.
“Price is what you pay. Value is what you get.”
- Warren Buffett
Price paid is decided by negotiation and the value is decided by calculations with consideration of the factors affecting the value of the asset. A smart investor will base her purchase decision after considering the value using various methods and comparing the values thus calculated with the price she is going to pay.
Appraisal of a real estate property may be done for various purposes – purchasing decision is one then for tax purposes, also insurance purposes. The value arrived for tax or insurance purposes by the relevant authorities can be very different from value relevant for purchasing decision.
BASIS OF VALUE
1. Market Value
As per International Valuation Standards, Market Value is defined as “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
We can summarise it as – the amount a willing and prudent buyer pays to a willing seller with complete knowledge about the property as well as the alternatives, on the valuation date.
2. Investment Value or Worth
AS per International Valuation Standards, Investment Value is the “is the value of an asset to a particular owner or prospective owner for individual investment or operational objectives.”
This value varies from owner to owner and based on the financial benefits gained by the owner because of the possession of the asset.
3. Value for Tax Purposes
The appraisal for property tax purposes may vary significantly by location.
4. Insurable Value
This the appraisal of the value of the property for insurance purposes.
5. Liquidation Value
Liquidation value is the amount that the property can fetch when sold in a period less than the period required to get a market value. In liquidation, the owner may lack the negotiating power because of urgency.
1. Market Approach or Sales Comparison
This approach utilises the information about the sale of similar properties to arrive at the value of the property. For this approach to work abundant transactional information about similar properties should be available. This approach is vulnerable to market speculations.
2. Income Approach
This approach bases the value of the property based on the income generating capability or cost savings. This approach calculates the value as the net present value of the future cash flows generated by the property.
This value is useful in making a buy or rent decision for residential properties.
3. Cost Approach
This approach basically calculates the replacement or reproduction cost for the property and then deductions are made for physical deterioration etc.
This approach can be used when there are no substantial regulatory or legal restrictions to build a similar property and the buyer has the capability to do so.
REAL ESTATE INDUSTRY IN INDIA
According to a survey by KPMG in association with Naredco and APREA, Indian Real Estate market size is expected to reach USD $1 trillion by 2030 from 120 billion in 2017. In the meantime Real Estate Investment also shoring. According to an IBEF report, FDI in the Indian Real Estate sector stood at US$ 38.92 billion from April 2000 to December 2018. According to a report by JLL, Institutional Investment in the sector in 2018 was estimated at $5.5 billion which is the highest in the last decade. A major push towards the growth of the sector is expected due to the Government of India’s Housing for All initiative which is expected to bring US$ 1.3 trillion investments in the residential sector.
1. Affordable Housing or Pradhan Mantri Awas Yojana
The goal of this scheme is to provide housing for all Indians by 2022. Estimated 20 million houses to be built under this scheme. This scheme offers a “Credit-Linked Subsidy Scheme” or interest subsidy on purchase/ construction/ extension/ improvement of a house is provided to customers belonging to Economical Weaker Section (EWS)/Lower Income Group (LIG)/Middle Income Group (MIG).
2. Student Housing
Student housing is an emerging sub-sector in the Indian real estate Industry. Ficci report “Future of Indian Real Estate” mentions that according to 2011 census estimated 8 million students migrate for education and often face problems finding accommodation near their institution. Given the education sector is generally recession-proof, student housing assets can provide diversification to real estate portfolios.
Another emerging sub-sector in the real estate industry is co-realty which comprises of co-living and co-working. According to estimates in an HDFC report, the co-working space addition by 2020 may reach 30 million sq.ft.
1. The Real Estate (Regulation and Development) Act, 2016
This act was introduced to provide a structure and safeguard the interests of the home buyers in otherwise unregulated real estate industry. Under this act, each state needed to set up a Real Estate Regulatory Authority (RERA). Real estate developers and agents need to register with the respective RERA. This acts also provides guidance on approval of projects, collection and utilisation of funds, delay in completion of projects, valuation (based on carpet area) etc.
2. Benami Transactions (Prohibition) Amended Act, 2016
This amended act is the amendment of a 1988 act which was not operational. This act defines benami (anonymous) transactions in the real estate industry and targets to curb parking of black money in the real estate industry.
WHAT IS ESCROW?
Let us understand the concept of escrow from the most relatable example. Most people purchase goods through e-commerce websites nowadays. Now, if you are not paying Cash On Delivery (COD), you make the payment to the e-commerce company at the time of placing the order. The e-commerce company holds your payment on behalf of the seller. Depending on the contract between the seller and the e-commerce company, the seller gets paid after certain conditions are met such as satisfactory fulfilment of the order and no refund request from the buyer.
The e-commerce company here acts as an escrow agent who holds the payments in trust for third parties (buyers and sellers) until the contractual requirements of a transaction are fulfilled. This is the basic concept of escrow – a reliable third party managing funds for buyers and sellers.
An Escrow account is a third party account which holds money on behalf of others and the money is released upon fulfilment of contractual obligations.
BENEFITS OF AN ESCROW ACCOUNT
Some contracts may involve a significant investment of funds and time for the seller. For example, a real-estate developer invests a lot before the properties are handed over to the buyers after the buyer and the developer gets into a contract. It is possible that after the properties are developed, the buyer refuses or unable to abide by the contract i.e. pay for and procure the properties. This introduces a considerable 'payment risk' for the seller. Now, the seller may demand advance from the buyer. Giving advance before the development of the property introduces 'delivery risk' for the buyer.
An escrow account manages the 'payment risk' for the seller and the 'delivery risk' for the buyer. As the money is parked at the escrow account, the seller gets the assurance that he will be paid at the fulfilment of the contractual obligations. The buyer, on the hand, gets the assurance that if delivery is not made, his money is safe in the hands of a trusted third party and will be returned.
USE OF ESCROW ACCOUNT
Conceptually an escrow account can be used for any transaction which involves payment and delivery risk i.e. there is a waiting period after the terms of the contract are decided and the actual delivery. The cost and time of opening an escrow account though may not be justified for small transactions.
An escrow account is primarily used in the real estate transactions, Merger and Acquisition deals and some capital market transactions such as Foreign Direct Investments (FDIs).
In the last three posts, we discussed the basics of Insolvency and Bankruptcy Code 2016 (hereafter the Code) and the two processes- Fresh Start and Insolvency Resolution process.
The Bankruptcy process will be invoked when the above mentioned Fresh Start and Insolvency Resolution Fails. The Bankruptcy process for individuals is covered under chapter IV and V of Part III of the Code.
WHEN AN APPLICATION FOR BANKRUPTCY CAN BE MADE?
The creditors separately or jointly with other creditors or the debtor can make application for bankruptcy on the basis of an order from the Debt Recovery Tribunal
(a) When the Debt Recovery Tribunal rejects the application for Insolvency Resolution Process on the basis of the report submitted by the resolution professional that the insolvency resolution application was made with the intention to defraud his creditors or the resolution professional.
(b) When the Debt Recovery Tribunal rejects the repayment plan created under the insolvency resolution process.
(c) When the Debt Recovery Tribunal passes a bankruptcy order based on the report from resolution professional that the repayment plan has not been completely implemented under the insolvency resolution process.
BANKRUPTCY APPLICATION BY DEBTOR
1. Records of insolvency resolution process undertaken under insolvency resolution process.
2. Statement of affairs of the debtor.
3. Copy of bankruptcy order passed by the Debt Recovery Tribunal.
The debtor may propose and an insolvency professional as the bankruptcy trustee in the application for bankruptcy.
BANKRUPTCY APPLICATION CREDITOR(S)
1. cords of insolvency resolution process undertaken under the insolvency resolution process.
2. Copy of the order passed by the Debt Recovery Tribunal permitting the creditor to apply for bankruptcy.
3. Details of the debts owed by the debtor to the creditor as on the date of the application for bankruptcy.
4. If the case of secured debt some more documents are required. The secured and unsecured parts of a dent are treated separately.
The creditor may propose an insolvency professional as the bankruptcy trustee in the application for bankruptcy.
From the date of application to the bankruptcy commencement date, an interim-moratorium will be in force. During this period all debt related legal processes will be stayed and no new legal action can be initiated.
If any bankruptcy trustee already proposed by the applicant, it will be evaluated whether there are any disciplinary proceedings against the resolution processional proposed to act as the bankruptcy trustee. If no bankruptcy trustee proposed, a trustee will be nominated.
The Debt Recovery Tribunal will pass a bankruptcy order based on which
1. Estate of the bankrupt shall vest in the bankruptcy trustee.
2. Estate of the bankrupt shall be divided among his creditors.
3. The creditors can initiate legal action with respect to the debts claimed.
The responsibilities of the bankruptcy trustee are
1. Investigate the affairs of the bankrupt.
2. Get completely understanding of the estate of the bankrupt.
3. Distribute the estate of the bankrupt.
The responsibilities of the bankrupt are
1. Giving to the bankruptcy trustee the information about her affairs.
2. Meeting the trustee as required.
3. Notifying the bankruptcy trustee on
a. acquisition of any property by the bankrupt;
b. devolution of any property upon the bankrupt;
c. increase in the income of the bankrupt.
d. doing all other things as may be prescribed.
4. handing over any property, books, papers or other records which bankruptcy trustee is required to take possession for the purposes of the bankruptcy process in possession of the bankrupt or her banker or any other person.
In the previous posts under this series, we discussed the basics of the Insolvency and Bankruptcy Code 2016 (hereafter the Code) and the Fresh Start Process under this Code. In this post, we will discuss the Insolvency Resolution Process under the Code.
WHAT IS INSOLVENCY RESOLUTION PROCESS?
Insolvency Resolution Process gives the debtor ability to create a repayment plan together with the creditors. The resolution process may be initiated by the debtor or by one or more creditors.
ELIGIBILITY FOR DEBTORS
1. The debtor is not an undischarged bankrupt i.e. the debtor is not a bankrupt who did not receive a discharge order.
2. The debtor is not going through a Fresh Start or Insolvency Resolution process.
3. The debtor is not going through a bankruptcy process.
4. The debtor did not make any application for the Insolvency Resolution process in the last 12 months.
Eligible debtors may apply personally or through resolution professional with relevant fees to the Debt Recovery Tribunal (DRT).
Creditors may apply alone or jointly with other creditors or through a resolution professional. The application should be accompanied by a list of debts from the debtor owned by the creditor(s) making the application and proof of non-payment of debt even 14 days after the service of the notice of demand.
An interim-moratorium will come into effect on the date of the application and end of the day of rejection or acceptance of the application. During this period, all legal actions and proceedings related to any debt of the debtor will automatically be stayed and no new legal action or proceeding related to such debt can be initiated.
If the application is made through a resolution professional, it will be evaluated whether there are any disciplinary proceedings against the resolution professional. In case of a direct application by the debtor or creditor(s), a resolution professional will be nominated. The creditors may apply for replacement of the resolution professionals.
The resolution professional will examine the application of the application and recommend acceptance or rejection to the Debt Recovery Tribunal (DRT). The resolution professional may recommend a Fresh Start process.
The Debt Recovery Tribunal (DRT) will pass an order either accepting or rejecting the recommendation of the resolution professional. In case of an accepted application, a moratorium shall commence for 180 days or at the issuance of the repayment plan. All the legal actions related to the debts will be stayed during this moratorium period. Also, the debtor will be restricted from transferring, alienating, encumbering or disposing of any of her assets or her legal rights or beneficial interests.
The DRT will issue a public notice inviting claims from creditors related to the debtor. The resolution professional will create a fresh list of claims based on information received because of the public notice.
The debtor will prepare a repayment plan which will contain justification for the repayment plan, justifications why creditors may agree to such plan and provision for payment of fees of the resolution professional.
The resolution professional will be responsible to make sure that the repayment plan is created in compliance with the law and organising meeting of the creditors.
The repayment plan needs to be accepted by at least 2/3 of the creditors at the creditors meeting. A report on the meeting has to be submitted to the DRT. The DRT may accept or reject such a repayment plan.
In case of an acceptable repayment plan, the resolution professional will be responsible to implement the plan.
In case the repayment plan gets rejected, the debtor and creditors may apply for bankruptcy under chapter IV of Part III of the Code.
In the last post in this series, we talked about the basics of Insolvency and Bankruptcy Code 2016 (hereafter the Code) as it will apply to individuals.
In this post, we will talk about the Fresh Start Process, one of the two processes covered under the Code.
WHAT IS FRESH START PROCESS?
This process gives the debtors get cleared off from the debt obligations. Obviously, the eligibility for the Fresh Start process is stringent. This involves an application to the Debt Recovery Tribunal (DRT).
ELIGIBILITY FOR FRESH START PROCESS (section 80 of the Code)
1. The gross annual income of the debtor is not more than Rs. 60,000.
2. The aggregate value of the assets held by the debtor is not more than Rs. 20,000.
3. The aggregate value of the qualifying debt is not more than Rs.35,000.
4. The debtor does not own a dwelling unit.
5. The debtor is not an undischarged bankrupt i.e. the debtor is not a bankrupt who did not receive a discharge order.
6 There is no other fresh start process, insolvency resolution process or bankruptcy process in force against the debtor.
7. No fresh start order made for the debtor in the last 12 months.
Eligible applicants will be able to make application for a fresh start with applicable fee directly or through a resolution professional. The application will have to contain a list of all debts owned by the debtor, list of interest payable and rates, list of securities held with respect to the debts, the financial history of the debtor and immediate family for up to two years, particulars of legal actions commenced against the debtor, etc.
An interim-moratorium will come into effect on the date of the application and end of the day of rejection or acceptance of the application. During this period, all legal actions and proceedings related to any debt of the debtor will automatically stay and no new legal action or proceeding related to such debt can be initiated. During this period the debtor cannot act as a director of a company or promote or manage any company. Also, during this period the debtor cannot dispose of any assets, have to mention that she is going through a fresh start process to her/his business partner, have to mention the status before entering any financial or commercial transaction and cannot leave the country without the permission of the Debt Recovery Tribunal.
If the application is made through a resolution professional, it will be evaluated whether there are any disciplinary proceedings against the resolution professional. In the case of direct application, a resolution professional will be nominated.
The resolution professional will examine the application of and recommend acceptance or rejection of the Debt Recovery Tribunal (DRT). The report shall contain the list of qualifying debts and the debts which are eligible to discharge as per the resolution professional.
The Debt Recovery Tribunal (DRT) will pass an order either accepting or rejecting the application of fresh start. An acceptance order will mention the amount of debt discharged.