Factoring Regulation (Amendment) Act, 2021

I.About the Factoring Regulation (Amendment) Act, 2021

Under the Factoring Regulation Act, 2011, factoring business is where an entity (factor) acquires the receivables of another entity (assignor) for an amount.  Receivables is the total amount that is owed or yet to be paid by the buyer (debtors) to the assignor for the use of any goods, services or facility. Factor can be a bank, a registered non-banking financial company (NBFC) or any company registered under the Companies Act.  The following changes were made in the Factoring Regulation (Amendment) Act, 2021:

Change in the definition of receivables: Definition of the term ‘Receivables’ has been substituted. According to the new definition, receivables mean-

• The money owned by the debtor; and
• Which is not yet paid to the assignor of goods/ services.

Change in the definition of assignment: The Act has amended the definition of assignment to include the transfer of the undivided Interest, whether whole or part, in the receivables.

Change in the definition of factoring business: The Act has amended the definition of factoring business to 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: The Act removed the threshold for NBFCs to engage in factoring business.

Registration of transactions: Prior to amendment, details of every transaction of an assignment of receivables were to be submitted within a period of 30 days from the date of assignment/ establishment of registry. Post amendment, now, the details are to be submitted within such time and in such manner as may be prescribed.
Further, the Act 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.

RBI to make regulations: The Act 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.

Benefits of Factoring Regulation (Amendment) Act, 2021

• Widen the scope of entities which can engage in factoring business.
• Smoother working capital cycle and improved cash flow for MSMEs