4.Issues Discussed
4.1 The following points were discussed during the interaction of the Committee
•with the nodal Ministry, i.e De partment of Financial Services and various other
•stakeholders like RBI SIDBI, IFCI Factors Ltd. And IDBI :-
(I)Trade Receivables Discounting System (TReDS)
4.2 The Committee enquired from the representatives of the nodal Ministry
•(Department of Financial Services)about the rationale for defining TReDS as a
•‘payment system’, as with the proposed amendments, the number of players will
•drastically shoot up and the T ReDS platform will be like a marketplace model and
•would be taking on a role similar to an exchange. The Committee further enquired
•about making Reserve Bank of India the regulator of this marketplace instead of
•Securities Exchange Board of India (SEBI), which is the capital markets regulator.
4.3 The Ministry in their post evidence replies submitted the following with regard
•to defining TReDS as a payment system:
•“The TReDS platform, on which factoring is done electronically can be termed as
•an auction pla tform. It brings MSME sellers (holders of invoices) and financiers
•(Banks / NBFCs, etc .) together by allowing financiers to extend upfront payment
•for the invoices to the sellers. It is not an exchange in the traditional sense a
•stock exchange is understoo d to operate since once an invoice is financed, it
•gets extinguished unlike a share or a debt instruments which can be traded...
•….In other words, in exchanges, the same asset (like shares / commodities /
•forex) can change hands repeatedly by buyers and se llers constantly bidding and
•re-bidding for it. Whereas the TReDS platform allows a one -time financing of an
•invoice through auction, i.e., it is a single transaction, after which the asset
•(invoice) does not exchange hands again”.
4.4 And with regard to t he regulator, the Ministry in their post evidence replies
•submitted as follows:-
•“Since the core function of the TReDS platform is to enable finance (payment) to
•be availed upfront and to seamlessly enable such payment to be settled
•electronically among al l parties, TReDS entities are licensed under the Payment
•and Settlement Systems Act, 2007. As per the Act, RBI is the regulator for
•entities registered under the Payment and Settlement Systems Act, 2007.
•Further, regulations / guidelines are also issued by RBI for such entities. It may
•also be noted that activities of those financiers namely CERSAI, Banks and
•NBFCs, etc. participating in TReDS are also regulated by RBI.”
4.5 The Committee understands the rationale for defining TReDS as a
•payment system or a n auction platform and recognise s its role in helping
•MSMEs improve their working capital, reducing their interest servicing costs
•and expanding businesses. TReDS is a purely voluntary platform and the
•Committee desires that it should be made more attracti ve and seamless and
•thus recommends the integration of TReDS platform with GSTN e -invoicing
•portal leading to automatic uploading of all GST invoices onto the TReDS
•platform to enable real time sharing of data that will allow buyers and sellers to
•have a s ingle window access to invoices . The Committee believe that the
•availability of e-invoices, vetted through GSTN, will provide an added layer of
•authenticity, which will make the platform more attractive and give more
•comfort tothe financiers, thereby encou raging enterprises to make a shift to
•TReDS platform, and creating an efficient working capital cycle for MSMEs.
4.6 Therefore, the language of Section 19 (1A) may be modified thus:
•(1A) All invoices uploaded on the GST Network above the threshold notified
•by regulations shall automatically be uploaded on all Trade Receivables
•Discounting Systems. When any invoice is then financed by the factor,
•the particulars specified in sub -section (1) and sub -section (3) shall be
•filed with the Central Registry on beha lf of the factor by the Trade
•Receivables Discounting System concerned, in such a manner as may
•be specified by regulations.
4.7 The Committee would like to further recommend that receivables
•coming from the Central and state governments should compulsoril y be
•brought under the ambit of TReDS through this legislation so that payments
•pending from governments which have already been approved for various
•MSMEs are made available to them on a timely basis. Government entities can
•use the TReDS platform to demo nstrate that they are good at paying their bills
•and thus get more bidders for their projects.
4.8 The Committee believes that making GSTN invoices available for
•factoring will generate tremendous volumes of receivables that can be
•financed and grow the factoring business manifold. It will increase competition
•and ensure a liquid market thereby reducing the price paid for factoring. The
•Committee’s opinion is that the compulsory listing of all GSTN invoices on the
•TReDS and the consequent tracking of when these payments are made,
•provides excellent economic data on the state of the economy. It will also
•provide valuable credit information to enable credit scoring of various
•companies and government entities.
•(II) Change of nomenclature from ‘factor’ to ‘company’
4.9 The Reserve Bank of India furnished the following suggestion in their
•submission to the Committee:-
•“It is necessary to replace 'factor’ by 'company' so as to enable all NBFCs to undertake
•factoring business even if it is not its principal business without obtaining Certificate of
•Registration (CoR) under ERA. CoR under Factoring Regulation Act (FRA) will be
•required only if factoring is its principal business.”
4.10 The Ministry furnished the following comments on the above suggestion:
•“The definition of “Factor” in Section 2 of the Factoring Regulation Act, 2011 clearly
•specifies the types of entities who can do factoring business, including inter alia NBFCs
•(registered under the RBI Act) and companies (registered under the Companies Act).
•Both NBFCs and companies require a Certificate of Registration from RBI before doing
•factoring business. The proposed amendments seek to permit all NBFCs to do factoring
•business, and not only those who do it as their principal business. However, permitting
•all NBFCs to do such business without obtaining Certificate of Registration (CoR) from
•RBI (and requiring only companies to obtain CoR) carries the risk of some NBFC entities
•without much experience/ capability of factoring business undertaking such business
•without proper risk appraisal and other regulatory checks. It also carries the risk of
•NBFCs choosing to do factoring business only as their non-principal business, for which
•no Certificate would be required. From the legislative prudence also word ‘’factor” need
•not be substituted by “company” as company is a sub-set of factor which is defined
•under section 2”.
4.11 The Committee desires that the afore-mentioned suggestion of RBI to replace
•the word ‘factor’ by ‘company’ with a view to expand the scope of business be
•explored by the Ministry. This might cut red-tape by reducing the number of
•registrations required and make it easier for NBFCs to participate on the TReDS
•platform, while making the process seamless for the existing NBFCs to undertake
•factoring business by removing the mandatory requirement of separate registration
•as factors.
•(III) RBI as Regulator
4.12 During their interaction with the representatives of RBI, the Committee
•enquired if they had the regulatory capacity, the systems, the processes and the
•people to be able to take on the onerous and complex task of supervising factoring
•activities, to which they replied as under:-
•“As far as the supervisory capacity of the RBI is concerned, we are confident that
•we have the wherewithal to train up the required manpower; we are in the
•process of planning for additional staff to come into the RBI; and we will be able
•to provide for the ad ditional staff which would be required. We are already in the
•planning stage of beefing up our supervisory cadre. So, I think, it would be
•possible for us to supervise this.”
4.13 Further, in their post evidence replies, the RBI submitted the following:
•“….However, considering that factoring business is more prone to frauds,
•additional resources may be required to check the internal control mechanisms.
•While this aspect is covered in regular onsite inspection, it would require specific
•focus from factoring business perspective, for which capacity development of
•supervisors will be required. Our assessment indicates that there may be a 5 to
7.5 percent increase in the supervisory resources currently allocated to the
•supervision of NBFCs. As already mentioned, at the time of unification of the
•supervisory function, the Reserve Bank has carried out an assessment on
•augmentation of supervisory requirements, which may cater to the above
•additional requirement also”
4.14 While taking note of RBI’s submission regarding their regulatory
•capacity, the Committee would like to point out that with the expansion in the
•number of players from the current seven NBFC -Factors to potentially
•thousands of factors, RBI will be undertaking a mammoth regulatory
responsibility.The Committee emphasises the need for RBI to build up
•sufficient regulatory staff /resources for efficient supervision of factoring
•activities so that the intent and purpose of the proposed amendments to
•address the lingering issues involving factoring industry, particularly the
•chronic delays in payment and liquidity crunch faced by enterprises is
•effectively addressed.
4.15 The Committee thus endorse s the proposed amendments in the
•Factoring Regulation (Amendment) Bill, 2020.
•New Delhi Shri Jayant Sinha
•12 January 2021 Chairperson
•22 Pausha, 1942 (Saka) Standing Committee on Finance
•Minutes of the First sitting of the Standing Committee on Finance (2020-21)
•The Committee sat on Thursday, the 05 November, 2020 f rom 1 500hrs. to
1630hrs.in Main Committee Room , Parliament House Annexe Extension, New
Delhi.
•PRESENT
•Shri Jayant Sinha - Chairperson
•MEMBERS
•LOK SABHA
