Factoring Regulation (Amendment) Bill, 2020: The Lok Sabha will take up the Factoring Regulation (Amendment) Bill, 2020 on 23 July 2021.
- Finance Minister Nirmala Sitharaman is scheduled to move the bill to amend the Factoring Regulation Act, 2011.
- Food Processing Industries Minister Pashu Pati Kumar Paras is also scheduled to move the National Institutes of Food Technology, Entrepreneurship and Management Bill, 2021 in Lok Sabha for consideration and passing.
- 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 that can engage in the factoring business.
- Under the Factoring Regulation Act, 2011, a factoring business is a business where an entity (referred to as a factor) acquires the receivables of another entity (referred to as assignor) for an amount.
- Receivable is the total amount that is owed or yet to be paid by the customers (referred to 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: Credit facilities provided by a bank against the security of receivables are not considered 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 be contingent arising from the 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 the undivided interest of any assignor in any receivable due from the debtor, in favor 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:
- 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 the acquisition of receivables of an assignor by assignment for 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,
(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 the 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 the financing of trade receivables of Micro, Small and Medium Enterprises.
RBI to make regulations:
The Bill empowers RBI to make regulations for:
- The manner of granting registration certificates to a factor,
- The manner of filing of transaction details with the Central Registry for transactions done through the TReDS, and
- Any other matter as required.