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pay back the advance obtained from the factor if buyer of goods fails to pay and ‘without recourse’
factoring where factor bears the risk of default in case of non-payment by buyer of goods.

To solve the liquidity issues of MSMEs and lay down the basic legal framework for factoring in
India, the Factoring Regulation Act 2011 was enacted. As per the Factoring Act 2011, four types of
entities were allowed to engage in factoring business: Banks, Statutory Corporations (which were
exempted from registration under Section 5), NBFCs (which have to obtain registration from RBI)
and companies (which have to obtain specific registration from RBI under Section 3). As per the
Factoring Act 2011, RBI grants registration to only those NBFCs which do factoring as “principal
business”, i.e. whose financial assets in the factoring business constitute at least 50 per cent of its total
assets and income derived from factoring business is not less than 50 per cent of its gross income.
Under these provisions, only 7 NBFCs called ‘NBFC-Factors’ were in factoring business (due to
“principal business” condition) – Canbank Factors, India Factoring and Finance, SBI Global Factors,
Siemens Factoring, Bibby Financial Services, IFCI Factors and Pinnacle Capital Solutions. This
‘principal business’ restriction on NBFCs in the Act had limited the scope of factoring.

Meanwhile, RBI constituted an Expert Committee on MSMEs under the Chairmanship of Shri U.K.
Sinha in January 2019 to suggest long–term measures for the economic and financial sustainability of the
MSME Sector. Among various other suggestions related to the MSME sector as a whole, the committee
recommended that NBFCs other than those whose principal business is factoring should also be permitted
to carry out factoring business. Hence, the Factoring Regulation (Amendment) Act, 2021 was enacted with
the amendments in line with the recommendations of UK Sinha Committee. The key changes brought
about are:
• Removal of principal business criteria has significantly increased the number of eligible NBFCs
that can undertake factoring business.
• The time period for registration of invoice and satisfaction of charge upon it may be specified by
the Government by rules to streamline the process and prevent frauds through dual financing.
• At present, factoring is done either manually or on Trade Receivable Discounting System (TReDS) .
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Now, the amended Act and new Rules and Regulations allow the concerned TReDS platform to
register charge directly with Central Registry of Securitization Asset Reconstruction and Security
Interest (CERSAI) on behalf of the factors using the platform, so as to make the process operationally
efficient, promote the use of TReDS and reduce procedural burden on factors.
• Definitions of “assignment”, “factoring business” and “receivables” have been amended to bring
them in consonance with international definitions.
• Regulation making power was given to RBI for the manner of granting certificate of registration under
Section 3, and the manner of filing of particulars of transactions with the Central Registry by TReDS
entities on behalf of factors under Section 19. RBI has notified these Regulations in January 2022.
The amendments have liberalized the restrictive provisions in the Act and at the same time ensure that
a strong regulatory / oversight mechanism is in place under RBI. Overall, this change would lead to
widening of factoring ecosystem in the country and help MSMEs significantly, by providing added
avenues for availing credit facility.

It is an electronic exchange that allows transparent and online selling of receivables by MSMEs. In TReDS, the seller gets multiple financiers
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to choose from, option of various interest rates, and without any collateral helping the seller to get the best deal in transparent manner. Govern-
ment has taken measures to promote TReDS by mandating big corporates/CPSEs to register on TReDS.