Lok Sabha passes Factoring Regulation (Amendment) Bill, 2020

• The bill amends the Factoring Regulation Act 2011.
• The proposed amendments will help micro, small and medium enterprises (MSME) tide over their issue of delayed payments as it seeks to broaden the participation of entities undertaking factoring.
• It is also likely to enhance traction on the TReDS platform introduced by RBI in 2014 for entrepreneurs to unlock working capital tied in their unpaid invoices.

Factor Companies:

• Factor companies acquire the receivables of a company at a discount and realize it from entities that owe the money.
• A factoring company specializes in invoice factoring, or purchasing outstanding invoices from businesses that have slow paying customers and are looking to boost cash flow.
• This allows a business to access cash flow immediately after issuing an invoice, instead of waiting 30-90 days for the customer to pay.
• Once they purchase a business’s invoices, they collect directly from the business’s customers.

Important Provisions of Bill

Change in the definition of receivables:

• 2011 Act defines receivables as the monetary sum which is the right of a person under a contract.
• 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 factoring business:

• The Act defines a factoring business to mean the business of:

1. Acquisition of receivables of an assignor by accepting assignment of such receivables, or
2. 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 RBI.
• For a non-banking financial company (NBFC) to engage in a factoring business, its:

1. Financial assets in the factoring business, and
2. 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.
• 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:

1. The manner of granting registration certificates to a factor
2. The manner of filing of transaction details with the Central Registry for transactions done through the TReDS, and
3. Any other matter as required.