116 B, Mittal Towers, Nariman Point, Mumbai, India

The Parliament, on 26th July 2021, passed the Factoring Regulation (Amendment) Bill, 2021 to better accommodate and help the MSME sector by reducing the operational difficulties faced by them in receiving funds, ensuring liquidity, and maintaining a smooth working capital cycle and cash flow. The Bill amended the existing Factoring Regulation Act, 2011 (2011 Act) and improved its provisions by allowing for greater flexibility in operation.

Key Provisions

Title Description
Definitions There has been a change in the definition of 'Receivables', 'assignment', and 'factoring business.' Section 2(a) The definition of 'assignment' now includes transfer by agreement to a factor of an undivided interest either wholly or in part in the receivables of an assignor due from a debtor. It includes such transfer where either the assignor or the debtor issituated in India or outside India. Section 2(j) Factoring business means the business of acquisition by way of assignment of receivables of the assignor for consideration for collecting such receivables or for financing, whether by way of making loans or advances or otherwise, against such assignment. The amendment has also inserted credit facilities given by non-banking financial institutions and banks as an exclusion from the definition of 'factoring business'. Section 2(p) "Receivables" mean any sum owed by a debtor which is not yet paid to the assignor for the use of any goods, services, toll or infrastructure facilities and services. Section 2 (sa) Definition of "Trade Receivables Discounting System" has been added to mean a payment system authorised by the Reserve Bank under section 7 of the Payment and Settlement Systems Act, 2007 to facilitate the financing of trade receivables.
Registration of factors Section 3(2) Explanation has been removed , which specified the threshold for non-banking financial institutions to be treated as a principal business in dealing with a factoring business. Section 3(4) In sub-section (iv), RBI has been granted the power to award certificate of registration to any non-banking financial institutions as may be specified by regulations.
Registration of assignments Section 19(1) Section 19(1) prescribes that every factor must mandatorily register every transaction of assignment of receivables as per Section 20 of the Securitisation and Reconstruction of Financial Assets and enforcement of Security Interest (SARFAESI) Act, 2002, within the prescribed period, that is, 30 days. This was inserted to avoid the concept of dual financing Section 19(1A) Insertion of new sub-section providing that any financing of trade receivables done through the Trade Receivables Discounting System must be registered with the Central Registry on behalf of the factor by the Trade Receivable Discounting System in question.
Miscellaneous Section 31A An additional Section 31A has been added after the original Section 31 of the Factoring Regulation Act to empower the RBI to make regulations related to factoring business. It has the following sub-clauses:
  • Sub-clause (i) accredits the RBI to make regulations under this Act to achieve the objectives of this Act
  • Sub-clause (ii) specifies the matters for which RBI can make regulations, namely:
S. No. Matter
a. How certificate of registration is granted
b. How details are to be filled with the Central Registry for transactions on behalf of factors
c. Any other matter which is required or specified by the regulations
  • Sub-clause (iii) states that every regulation made by the RBI must mandatorily be forwarded to the Central Government, who in turn will make it available for both the houses of Parliament for 30 days and will decide to modify it if needed.
Section 32(2)(a) In Section 32(2)(a), the words "the time within which" have been added before "the form and manner in which the transactions of assignment of receivables in favour of a factor shall be filed and the fee for filing such transaction under sub-section (1) of section 19."

Important Takeaways

  • As per the Finance Minister Nirmala Sitharaman, the Factoring Regulation (Amendment) Bill, 2021, has been passed after including the recommendations of the UK Sinha Committee to give an impetus to the Indian Economy by overcoming the shortcomings of the 2011 Act and provide an efficient and smooth working capital cycle and cash flow to MSMEs.
  • The 2011 Act, has been amended to widen the scope of bodies that can indulge in the factoring business and reduce specific operational difficulties that MSMEs face in this regard.
  • The amendment provides for
  • A change in the definition of 'receivables', 'assignment', and 'factoring business'.
  • Changes in the process of registration of factors and assignments
  • Awarding RBI with regulation-making power for certain matters
  • Bring more than 9,000 non-banking financial institutions within reach of MSMEs as against the seven which were there previously to provide factoring benefits.
  • Oversight mechanism of regulations made by the RBI by the Parliament. As per the oversight mechanism, the Parliament may choose to modify the regulations made by the RBI if it deems fit to do so.

Hence, the amendment seeks to fix the loopholes in 2011 Act and help MSMEs stand on their ground, especially after the disruptions caused by the COVID-19 pandemic. It seeks to liberalise the existing provisions, facilitate the growth of the MSMEs and provide more employment opportunities.