Parliament passes Factoring Regulation (Amendment) Bill, 2021
Introduction:
In an important move to help and support MSMEs, the Government has brought amendment bill in respect of factoring which has already been placed before and passed by Lok Sabha.
Purpose of Amendment:
The Factoring laws are already prevailing in our country since long but a need was asserted to make changes in the laws so as to provide financial support to MSME sector of the country. In view of this objective and on basis of recommendation of U.K. Sinha Committee, the Factoring Regulation (Amendment) Bill, 2021 has been introduced before the Parliament. The Factoring Regulation (Amendment) Bill, 2021 seeks to widen the participation of the entities who can undertake factoring thus supporting MSMEs to cope the problem of delayed/ late payment of their receivables. The Bill is intended to enhance traction on the TReDS platform which was introduced by the RBI in the year 2014 for the entrepreneurs so that they can free their working capital locked due to unpaid receivables. TReDS platform is an electronic platform for facilitating financing of trade receivables of Micro, Small and Medium Enterprises.
Key amendment proposed by Factoring Regulation (Amendment) Bill
- Change in the definition of receivables: The Bill intends to amend the definition of “receivables” to as “Any money owed by a debtor to the assignor for toll or for the use of any facility or services.
- Change in the definition of assignment: The Bill intends to amend the definition to add that such a transfer can be in whole or in part (of the undivided interest in the receivables due)
- Change in the definition of factoring business: This Bill intends to amend the definition of factoring business as acquisition of receivables of an assignor by assignment for a consideration. The acquisition should be for the purpose of collection of the receivables or for financing against such assignment.
- Registration of factors: This is the most important amendment proposed by the Bill. Under the prevailing Act, Any company who intends to engage in factoring business is required to register with the RBI. In case of NBFC, it can engage in factoring business only if:
(a) Financial assets in the factoring business and
(b) Income from the factoring business
is more than 50% of the gross assets/ net income or more than a threshold as notified by the RBI.
This Bill has removed the above criteria for the NBFCs. Thus, this bill permits all the NBFCs to undertake factoring business and participate on TReDS platform for discounting the invoices of MSMEs. The MSMEs can sell their receivables to a NBFC which will make an immediate availability of funds and held the MSMEs to run their business smoothly.
- Registration of transactions: Under the Act, factors are required to register the details of every transaction of assignment of receivables in their favour. These details should be recorded with the Central Registry set up under the SARFAESI Act, 2002 within a period of 30 days.
If they fail to do so, the company and each officer failing to comply may be punished with a fine up to Rs. 5,000 per day till the default continues. The Bill removes the 30 days’ time limit. It states that the time period, manner of registration, and payment fee for late registration may be specified by the regulations.
- RBI to make regulations: The Bill empowers RBI to make regulations for:
(i) the manner in which registration shall be granted to a factor;
(ii) The manner in which details of transactions done through TReDS could be furnished to Central Registry;
(iii) Any other matter as may be required;
Conclusion:
This Bill is intended to widen the scope of entities who can engage in factoring business. It will help in increasing availability of working capital to MSMEs and will also help in boosting employment in the country. The amendments will also help MSMEs in getting easy credit facilities from NBFCs in form of Trade Receivables Discounting System.
