Factoring Regulation (Amendment) Bill, 2021

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Recently, Lok Sabha passed the Factoring Regulation (Amendment) Bill, 2021. 

About

• The Factoring Regulation (Amendment) Bill, 2021 – aimed at helping MSMEs tide over problems of delayed payments as it seeks to broaden the participation of entities undertaking factoring. 
• The bill will also enhance traction on the TReDS platform which was introduced by the Reserve Bank of India in the year 2014 for the entrepreneurs so that they can unlock working capital which is tied to their unpaid invoices.
  • TReDS platform is an electronic platform for facilitating financing of trade receivables of Micro, Small and Medium Enterprises. 
• The Bill seeks to amend the Factoring Regulation Act, 2011 to widen the scope of entities which can engage in factoring business.
• The amendments to the factoring law are based on the recommendations of the U K Sinha Committee.

Key Provisions of Factoring Regulation (Amendment) Bill, 2020

• Change in the definition of receivables:   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 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 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.   

• 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. 
• 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.    

Significance

• The Bill will liberalise the restrictive provisions in the Act and at the same time ensure that a strong regulatory/oversight mechanism is put in place through the RBI.
• It will widen the scope of entities which can engage in factoring business.
• With increase in the availability of working capital may lead to growth in the business of the micro, small and medium enterprises sector and also boost employment in the country.
• The amendments are expected to help micro, small and medium enterprises (MSMEs) significantly by providing added avenues for getting credit facility, especially through Trade Receivables Discounting System.
• Thus, the changes in the legislation are aimed at helping the MSME sector.

Source: FE