The new law is expected to improve the availability of credit to micro, small and medium enterprises as more non-banking financial companies will now be eligible to offer factoring services to MSMEs.
What is factoring?
Factoring is a transaction where an entity (like MSMEs) ‘sells’ its receivables ( dues from a customer) to a third party ( a ‘factor’ like a bank or NBFC) for immediate funds (partial or full).
- Currently, seven non-bank finance companies called NBFC factors do the majority of the factoring through the principal business condition.
- Under the Factoring Regulation Act, 2011, factoring business is a business where an entity (referred as factor) acquires the receivables of another entity (referred as assignor) for an amount. Receivables is the total amount that is owed or yet to be paid by the customers (referred as the debtors) to the assignor for the use of any goods, services or facility. Factor can be a bank, a registered non-banking financial company or any company registered under the Companies Act. Note that credit facilities provided by a bank against the security of receivables are not considered as factoring business.
- Change in the definition of receivables:The Act defines receivables as (all or part of or undivided interest in) the monetary sum which is the right of a person under a contract. This right may be existing, arise in the future, or contingent arising from use of any service, facility or otherwise. The Bill amends the definition of receivables to mean 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 Act defines assignment to mean transfer (by agreement) of undivided interest of any assignor in any receivable due from the debtor, in favour of the factor. The Bill amends the definition to add that such a transfer can be in whole or in part (of the undivided interest in the receivable dues).
- Change in the definition of factoring business:The Act defines a factoring business to mean the business of: (i) acquisition of receivables of an assignor by accepting assignment of such receivables, or (ii) financing against the security interests of any receivables through loans or advances. The Bill amends this to define 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:Under the Act, no company can engage in factoring business without registering with the Reserve Bank of India (RBI). For a non-banking financial company (NBFC) to engage in a factoring business, its: (i) financial assets in the factoring business, and (ii) income from the factoring business should both be more than 50% (of the gross assets/net income) or more than a threshold as notified by the RBI. The Bill removes this threshold for NBFCs to engage in factoring business.
- 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 setup under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (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 of up to five thousand rupees per day till the default continues. The Bill removes the 30 day time period. It states that the time period, manner of registration, and payment fee for late registration may be specified by the regulations.
- Further, the Bill states that where trade receivables are financed through Trade Receivables Discounting System (TReDS), the details regarding transactions should be filed with the Central Registry by the concerned TReDS, on behalf of the factor. Note that TReDS is an electronic platform for facilitating financing of trade receivables of Micro, Small and Medium Enterprises.
- RBI to make regulations:The Bill empowers RBI to make regulations for: (i) the manner of granting registration certificates to a factor, (ii) the manner of filing of transaction details with the Central Registry for transactions done through the TReDS, and (iii) any other matter as required.