 |
| Factoring |
In the present
post, we shall talk about factoring. India has enacted a Factoring Regulation
Act, 2011 to this effect. This series will be divided into four posts. The
first post shall talk about the basics relating to factoring and its need in
India.
Basically, Factoring
is nothing but a financial transaction whereby a business entity sells its
receivables, i.e. invoices to a Factor at a discount.[1] Factoring
is also regulated by an UNCITRAL that shall be discussed later in this paper.[2] Although
a receivable is a property right and is transferable, there was a long felt
need for a statutory framework for Factoring. It is governed in India now by
the Factoring Regulation Act, 2011. Section 2 (j) of this act defines ‘factoring
business’ as:
“(j)
"factoring business" means the business of acquisition of receivables
of assignor by accepting assignment of such receivables or financing, whether
by way of making loans or advances or otherwise against the security interest
over any receivables but does not include—
(i) credit
facilities provided by a bank in its ordinary course of business against
security of receivables;
(ii) any
activity as commission agent or otherwise for sale of agricultural produce or
goods of any kind whatsoever or any activity relating to the production,
storage, supply, distribution, acquisition or control of such produce or goods
or provision of any services.”
This means that
the credit facilities provided by banks in the ordinary course of business
against security of receivables and any activity undertaken as a commission
agent or otherwise for sale of agricultural produce or goods of any kind whatsoever
and related activities are expressly excluded from the definition of Factoring
Business. The need for this law arises because of the problem of delayed
payments to micro and small business entities by large businesses for purchase
of goods and services.[3]
A special law
called as ‘Interest on Delayed Payments to Small Scale and Ancillary
Industrial Undertakings Act’ was enacted in 1993, which was later
incorporated into the Micro Small and Medium Enterprises Act, 2006. But
in practice, these legislations did not improve the position of MSEs because of
their dependence on large businesses for continued business.[4]
Factoring is one
of the most important sources of working capital to Small and Medium
Enterprises registered in India. However, the same is not being availed by
SME’s due to one reason or the other. In the developed countries, SME’s are
financed only through factoring companies for their working capital
requirements. In other words, large sized companies are allowed to borrow from
banks, financial institutions and other sources. Whereas in Asian countries
including India SME’s are generally borrows from banks and financial
institutions.[5]
Any company
planning to undertake factoring business will have to register itself as an
‘NBFC-Factor’ with the Reserve Bank of India (RBI) and should have a minimum
net owned fund of Rs.5 crores. Also, an NBFC-Factor must ensure that its
financial assets in the factoring business constitute at least 75 per cent of
its total assets and its income derived from factoring business is not less
than 75 per cent of its gross income.[6]
Recently, in
December 2014, the Union Cabinet gave its approval to establish a Credit
Guarantee Fund for Factoring for MSME units. The corpus of the Fund is
Rs.500 crore. Credit guarantee cover for a maximum of 50 percent of factored
debt will be provided under the Fund. To start with, only transactions covered
under the Factoring Regulation Act, 2011 are to be included. It has been said
that this step was taken by the government as there is no insurance available
for factors in India.[7]
We see that
factoring of receivables is an ideal financial instrument for new and emerging
firms which lack a strong financial backing as such and can leverage on the
financial strength of their customers as the Factor is exposed to the credit
risk of the customers instead of the assignor.[8]
In the next post, we shall talk about the important definitions relating to factoring that have been mentioned under the Act.
1. The Factoring Regulation Act, 2011 - An Introduction
2. Types of Factoring and Important Definitions under the Factoring Regulation Act, 2011
3. Disclosed Factoring and Principle of Debtor Protection in India
4. Registration of Factors and Receivables in India
[1]
Nidhi Bothra and Shampita Das, Factors Impending Factoring - Why is
factoring not picking up in India post enactment of the new Act?, available
at https://www.india-financing.com/Factors_impending_factoring_why_is_factoring_not_picking_up_in_India_post_enactment_of_the_new_act.pdf
[2]
Mara E. Trager, Towards a Predictable Law on International Receivables
Financing: The UNCITRAL Convention, 31 N.Y.U. J. Int'l L. & Pol. 611
[5]
Supra note 1.
[6]
'RBI narrows factoring window' on July 24, 2012 in Business Standard,
Mumbai Edition available at http://www.business-standard.com/article/finance/rbi-narrows-factoring-window-112072400027_1.html
[8]
Supra note 6.
No comments:
Post a Comment