Circulars

Circulars

Cir No. 38 / F-11 / 2021

TO ALL MEMBERS OF THE ASSOCIATION:

Dear Member,

The Parliament recently passed the Factoring Regulation (Amendment) Bill, 2021 to assist MSME cash-flow Management on 27^th July 2021.

The Factoring Regulation (Amendment) Bill, 2020 was introduced in Lok Sabha on September 14, 2020. The Bill seeks to amend the Factoring Regulation Act, 2011 to widen the scope of entities which can engage in factoring business.

This will provide relief to the MSME sector by and help them in ensuring a smoother capital cycle and healthier cash flow.

Please find below Key Provisions of Factoring Regulations (Amendment) Bill, 2021

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 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 Bill defines 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 : 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 whereby now 9,000 NBFCs can reach MSME units for factoring.

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.

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.

Significance of the Factoring Regulation (Amendment) Bill, 2021

• 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.
• Thus, the changes in the legislation are aimed at helping the MSME sector.

This is for your information.

Thanking you,

Yours truly,

P Chandrasekharan
Secretary