June 02,2020
Pratish Kumar (Partner, Juris Corp) Karan Abichandani (Associate)
In response to the problems faced by Micro, Small and Medium Enterprises sellers (“MSME”) to obtain adequate finance, the Reserve Bank of India (“RBI”) had introduced the concept of TReDS in India in 2014. TReDS provide MSMEs a secure electronic platform and an institutional mechanism for facilitating the financing of trade receivables through multiple financiers. These receivables are due from corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs).
The RBI has granted “in-principle” approval to three platforms for such transactions: (i) Receivables Exchange of India Ltd. (RXIL); (ii) INVOICEMART; and (iii) M1XCHANGE.
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S. No. |
Frequently Asked Questions (FAQs) |
Reply |
| 1. | Who can participate on the TReDS platform? | There are three direct participants involved in the activities of TReDS: (a) Seller – MSME, (b) Buyer – Corporates, government departments, Public Sector Undertakings (PSUs) and any other entity, and (c) Financiers – banks, NBFC Factors and other financial institutions permitted by the RBI. |
| 2. | What are the applicable guidelines? | The TReDS are inter alia governed by: (a) the Guidelines for the Trade Receivables Discounting System (TReDS) issued by the RBI, updated as on 2nd July 2018; (b) the Factoring Regulation Act, 2011; and (c) the Rules and Regulations issued under the Factoring Regulation Act, 2011. |
| 3. | Nature of MSMEs that are eligible to participate on the TReDS platform? | All entities that can be classified as an MSME under Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) are eligible to participate on the TReDS platform. |
| 4. | Is any pre-registration of the eligible MSMEs required to be done with the platform? | The MSMEs have to complete a one-time process to register online by submitting the online application and other documents and create its account on any of the TReDS platforms. |
| 5. | Do MSMEs have to be registered under the MSMED Act? | Yes |
| 6. | Do MSMEs need to have banking limits?
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On the TReDS platform as the financier discounts invoices based on the buyers’ credit rating, the credit limit is defined only for the buyers. This is because an invoice is discounted by a financier without recourse to the seller. |
| 7. | How is “double-discounting” avoided or taken care of on the TReDS platform? | The TReDS platforms have implemented a common blockchain platform to eliminate instances of double financing, without sharing specific elements of any invoice or a client. |
| 8. |
Can reverse factoring take place on TReDS platform? |
Yes |
| 9. | Are there any restrictions on the nature of goods / services underlying the invoice? | All goods and services with which an MSME can deal with under the MSMED Act, 2006 or any other notification with regard to MSMEs can form part of the underlying invoice. |
| 10. | Can an advertising firm, a chartered accountant firm and even a law firm avail services on TReDS platform? | As long as a sole proprietorship, partnership firm, limited liability partnership firm, hindu undivided family, trust or a private/public company is registered under the MSMED Act and meets the eligibility criteria, there is no restriction as to whether an advertising firm, a chartered accountant firm or a law firm can avail the services provided on TReDS platform. |
| 11. | Are services on the TReDS platform available only for goods or even include services? | The services on the TReDS platforms are available for MSMEs involved in both – manufacturing and services sectors. |
| 12. | Is there a minimum or maximum limit on the value of goods / services? | As the standard format / features of the ‘factoring unit’ are required to be decided by the individual TReDS platform, following are the limits generally followed by the platforms:
(a) INVOICEMART: it allows discounting of bills / invoices in range of INR 5,000 – INR 1 Crore; (b) RXIL: it has no specific limit on the amount of the bill / invoice; and (c) M1XCHANGE: it allows discounting of bills / invoices with no minimum limit but with an upper limit of INR 1 Crore. |
| 13. | Is there a minimum or maximum limit on the credit period given on each bill / invoice? | The maximum credit period allowed by each platform for each bill / invoice is 180 days |
