Professional Documents
Culture Documents
New Microsoft Office Power Point Presentation
New Microsoft Office Power Point Presentation
New Microsoft Office Power Point Presentation
The Parliament recently passed the Factoring Regulation Bill 2011 (Factoring Bill or Bill) . Given the fact that several other important bills have taken years to ascend into the statute book, the Factoring Bill has really been commendably quick to progress. No one would perhaps know what was the urgency for the Bill it is not as if factoring business was a mushrooming business which needed regulation. On the contrary, factoring is an idea that the RBI has been meaning to promote over decades, and there has not been any substantial pick up in factoring volumes over the years. If at all factoring business needed anything it was support and promotion. But the tone of the Bill is far from promotion it is full of a regulatory slant. This is exactly the model that RBI used when passing the Securitisation Act with the idea to promote securitisation, and it ended up in regulating securitisation to the extent that no securitisation transaction has ever happened so far under the Act.
INTERNATIONAL POSITION
The regulatory tone of the Bill apart, the Bill seeks to enact the provisions of the UNCITRAL model law on assignment of trade receivables , which itself, 11 years after its proposition, has been affirmed only by 4 countries in the world.
RECEIVABLES FINANCING:
While factoring might have picked up much, receivables financing has continued to grow with the growth of the NBFC sector. The NBFC sector today views receivables as much as a part of assetbased financing as other tangible assets. And lot of investments in happening today in the infrastructure as well as IT sector where the basis of investment is receivables. To give instances a PSU/ government department goes for a massive system upgradation where equipment and services are provided by an aggregator, who in turn finances himself based on the receivables committed by the client. Receivables discounting is also common as a mode of salesaid financing several software and hardware vendors provide the facility of instalment or deferred payments to their clients and in turn sell the receivables to finance companies.
None of this is factoring in the real sense, because none of the so-called receivables financiers are going anywhere beyond pure financing. Besides receivables financing, strands of activity are also going in the field of export receivables factoring.
Cont..
As regards receivables financing - admittedly, this is a financing activity and hence, the business is a financial business, bringing the business under RBI supervision. However, the key feature of the existing NBFC regulation is that financial business needs to be the principal business to bring an entity into NBFC domain. If a non-banking, nonfinancial entity carries financial business, it may still retain its status as a non-financial business as long as the business remains non-principal. The RBI has been using a percentage of assets and income as the criteria for determining principality.
.. even if it is not the principal business If the idea of the Bill is to bring entities engaged in factoring business into the regulatory ambit, let us examine to what extent does the law go in meeting this objective. First of all, the Bill defines factoring business to include both acquisition of receivables as well as receivables financing. That is to say, any financial transaction where receivables are accepted as a security. Clearly, the definition is thoughtlessly inserted and can be stretched to completely unintended extent. For example, if someone gives a loan against a machine, and accepts receivables as a collateral security, it is certainly not a transaction of financing of receivables, but looking the way the definition is worded, the transaction will amount to factoring business.
Cont
There is an exception specifically made in case of securitisation transaction, further reinforcing the assumption that whether or not the business of factoring is the main business, registration under the Bill becomes mandatory. Thus, NBFCs will need registration under the law only if their principal business in factoring, but other companies, excluding banks, will come under the registration requirements irrespective of whether factoring business is principal business or not. If it is a business, it will come under the law.
Substantive provisions:
The substantive provisions of the law inclusively pertain to giving effect to an assignment agreement. Section 7 provides that an assignment shall be effective between assignor and assignee on the execution of the agreement, and section 8 provides that no right shall exist against the debtor unless the debtor has been served with the notice of assignment. This is exactly the common law position understood through more than a century. Sec 130 of the Transfer of Property Act provides for the same thing and common law jurisdictions all over the world work on the same principle. This was the law before; this remains the law after the Bill. To put the point in perspective, several assignment of receivables are silent assignments meaning, the fact of the assignment is not notified to the debtor. This is the universal practice in case of securitisation transactions. In case of financing transactions also, the lender typically does not need to, and hence does not, notify the obligor.
Cont.
However, section 17 of the Bill makes silent assignments completely fragile and almost impossible. This section says that in case of silent transfers, the assignee will be bound by any such modification of the original contract that the assignor may make with the debtor. It is only after the notification of the assignment that such modifications become ineffective. That is to say, unless the assignee gives immediate notice of the assignment to the debtor, the assignee is virtually at the mercy of the assignor. This provision is borrowed from UNCITRAL model law on international assignment of trade receivables, but will certainly give major jolt, particularly those who lend money against receivables. By way of saving grace, the provisions of the Bill have been excluded in case of securitisation transactions, but what is a securitisation transaction itself will remain queer.
Registration provisions
The Bill mandates registration of all assignment transactions, and also satisfaction of claims of the assignee. Non-registration does not affect the validity of the assignment; registration does not amount to a notice to the debtor. However, non-registration is punishable with a fine upto Rs 5000 per day. The registry office is the Central Registry under the SARFAESI Act, currently being run by NHB. The way the language of the law is, filing notice of satisfaction or realisation of a debt may, in case of instalment or partial payments, notifying innumerable events. In case of trade receivables, factoring transactions involve revolving lines of credit, with numerous receivables getting assigned in succession. Hence, the mandatory registration requirement, with no advantage as to validity or deemed notice to the obligor, only impose an added administrative burden.
CONCLUSION
In conclusion, the Factoring Bill does not fill any legislative gap; does not take further the common law provisions which were any way flexible enough. It does not answer the needs of trade. It is not something that was urgent in terms of regulating something that was growing unwieldy. It was nobodys need. And it fills nobodys needs either.