UK Sinha Committee: The Reserve Bank had set up an eight-member expert committee under the leadership of the former chairman of Securities and Exchange Board of India (SEBI), UK Sinha to review the framework for the MSME sector, in 2019.It has made recommendations with regard to amendments in MSME Development Act, strengthening of financial delivery mechanism, improving marketing support, encouraging technology adoption and strengthening of cluster development support for MSMEs etc. Rajya Sabha has passed the Factoring Regulation (Amendment) Bill, 2021 to bring changes in the legislation aimed at helping the Micro, Small and Medium Enterprises (MSME) sector. It has incorporated many suggestions from the UK Sinha Committee.
Key Provisions of the Bill:
- Change in the Definitions It amends the definitions of “receivables”, “assignment”, and “factoring business” to bring them at par with international definitions.
- The bill seeks to amend the Factoring Regulation Act, 2011 to widen the scope of entities which can engage in factoring business.
- The current law which gave the Reserve Bank of India authority to allow non-bank finance companies to remain in factoring business only if it was their principal business. That is, more than half of assets were to be deployed and income earned from factoring business.
- The Bill removes this threshold and opens up the opportunity in this business to more non-bank lenders at a time small businesses are facing financial stress.
- TReDS to Register Charges: 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 MSME”
RBI to Regulate and the power:
- It empowers Reserve Bank of India (RBI) to make regulations for granting registration certificates to a factor, filing of transaction details with the Central Registry and all other matters.
- No time-bound Registration It removes the 30-day time period for the factors to register the details of every transaction entered by them. The registering authority for such transactions is the Central Registry setup under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
Significance for Stakeholders:
- Allowing non-NBFC factors and other entities to undertake factoring is expected to increase the supply of funds available to small businesses. This may result in bringing down the cost of funds and enable greater access to the credit-starved small businesses, ensuring timely payments against their receivables.
MSMEs will get the easier liquidity which will help in their operation. MSMEs are facing difficulty due to delay in receivables and this bill will help in ensuring smoother working capital cycle and healthier cash flow. It will liberalize 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.
Author: Sanjay Indulkar