Explained: What is Factoring Regulation (Amendment) Bill, 2020?
New Delhi, July 20: The Factoring Regulation (Amendment) Bill, 2020, is among the two draft legislations to be moved in the Lok Sabha on the first day of the Monsoon Session on Monday.
Finance Minister Nirmala Sitharaman is likely to move the Bill to amend the Factoring Regulation Act, 2011, in the lower House for consideration and passage.
What is Factoring Regulation (Amendment) Bill, 2020?
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.
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.