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A consolidated legal framework for ‘factoring' business is on the anvil, with the Centre on Thursday introducing a Bill in the Lok Sabha for this purpose. The Bill was introduced by the Minister of State for Finance, Mr Namo Narain Meena.
An enactment of this law would be a significant move for the furtherance of the factoring business in India and may also lead to mushrooming of factoring companies in the Indian market. The proposed legislation would, for the first time, regulate the factoring business in India, besides enabling the factoring companies to obtain legal remedy and claim their rights on the Bills (invoices) factored by them in a more efficient manner.
In the absence of a consolidated legal framework, there was little understanding among the judiciary on how this business worked, often leading to delays in providing relief to factoring companies, industry insiders said.
Factoring is a financial transaction where a business sells its accounts receivable to a third-party called a ‘factor', which finances the receivables and handles the administration and collection of debt.
The Bill titled Regulation of Factor (Assignment of Receivables) Bill, 2011, provides for a mechanism for assignment of receivables of the industry to a ‘factor' and the payment of consideration by the ‘factor' to the industrial unit. There has been a growing realisation that factoring can be a solution for receivables management of the micro, small and medium enterprises sector.
The proposed law provides for compulsory registration by the ‘factor' of every transaction of assignment of receivable with the Central Registry to be set up under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) within a period of 30 days.
Under factoring, an assignor (owner of any receivable) would transfer, by agreement, the undivided interest in any receivable due from a debtor in favour of the ‘factor' (assignee). In essence, there would be a transfer of legal right and entitlement to the ‘factor', legal experts said. But the assignor would remain the trustee of the assignee for any payment received, which is due on an assigned receivable.
The Bill also provides that the debtor will have the right of notice of assignment and till the notice is given, the assignee will not be entitled to demand payment of the receivable from the debtor. Also, the liability of the debtor will not be discharged, unless he makes the payment due on an assigned receivable to the assignee.
This proposed law is expected to particularly help address the liquidity problems faced by the micro and small enterprises, although the proposed legislation applies to all enterprises.
Seeing the business potential, many State-owned and public sector banks such as State Bank of India (SBI) and Punjab National Bank (PNB) have already forayed into factoring business.
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