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TReDS Trade Receivable Discounting System
We can assist in registration with TReDS Platform RXIL, Invoicemart, M1Xchange. Email us at email@example.com
Once registered on one of the three TReDS platforms, here’s how the process flow works, supported by RBI data:
Information/ Documents Required for RXIL Platform Registration :-
Micro, Small and Medium Enterprises (MSMEs), despite the important role played by them in the economic fabric of the country, continue to face constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds. In order to address this pan-India issue through setting up of an institutional mechanism for financing trade receivables,the Reserve Bank of India had published a concept paper on “Micro, Small & Medium Enterprises (MSME) Factoring-Trade Receivables Exchange” in March 2014.
2. Based on the public comments received on the concept paper and interactions held with relevant stakeholders, the following guidelines are being proposed to be issued for setting up and operating the trade receivables system.
3. The scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate buyers through multiple financiers will be known as Trade Receivables Discounting System (TReDS).
4. The TReDS will facilitate the discounting of both invoices as well as bills of exchange. Further, as the underlying entities are the same (MSMEs and corporate buyers) the TReDS could deal with both receivables factoring as well as reverse factoring so that higher transaction volumes come into the system and facilitate in better pricing.
5. The transactions processed under TReDS will be “without recourse” to the MSMEs.
6. MSME sellers, corporate buyers and financiers – both banks and non-bank (NBFC factors) will be direct participants in the TReDS. The TReDS will provide the platform to bring these participants together for facilitating uploading, accepting, discounting, trading and settlement of the invoices / bills of MSMEs. The bankers of MSMEs and corporate buyers may be provided access to the system, where necessary, for obtaining information on the portfolio of discounted invoices / bills of respective clients. The TReDS may tie up with necessary technology providers, system integrators and entities providing dematerialisation services for providing its services.
Process flow and procedure
7. The objective of the TReDS is to facilitate financing of invoices / bills of MSMEs drawn on corporate buyers by way of discounting by financiers. To enable this, the TReDS has to put in place suitable mechanism whereby the invoice / bill is converted into “factoring units” as indicated in the Annex.
8. In the first phase, the TReDS would facilitate the discounting of these factoring units by the financiers resulting in flow of funds to the MSME with final payment of the factoring unit being made by the corporate buyer to the financier on due date. In the second phase, the TReDS would enable further discounting / re-discounting of the discounted factoring units by the financiers, thus resulting in assignment in favour of other financiers.
9. The process flow of the TReDS has to enable at the minimum the uploading of invoices/bills and creation of factoring units by the MSME sellers; its acceptance by the corporate buyers; discounting, rating and re-discounting of factoring units; sending of notifications at each to the relevant parties to the transaction; reporting and MIS requirements; and finally generation and submission of settlement of obligations. A brief outline of the minimum features required in the process flow is given in the Annex.
10. The TReDS may also introduce some random audits to ensure that there is no window dressing and that factoring units uploaded on the exchange are authentic & based on genuine transactions.
11. TReDS would put in place a standardized mechanism / process for on-boarding of buyers and sellers on the TReDS. This one-time on boarding process will require the entities to submit all KYC related documents to the TReDS, along with resolutions / documents specific to authorised personnel of the buyer corporate and the MSME seller who would be provided IDs / Passwords for TReDS authorisations (multi-level). Indemnity in favour of TReDS, if required, may also be given if it is made part of the standardized on-boarding process.
12. The KYC documentation/process, may be simplified as it requires confirmation of the banker of the MSME seller / buyer corporate as the case may be.
13. There would be a one-time agreement drawn up amongst the participants in the TReDS:
a) Master agreement between the financier and the TReDS, stating the terms and conditions of dealings between both the entities.
b) Master agreement between the buyer corporate and the TReDS, stating the terms and conditions of dealings between both the entities. This agreement should clearly capture the following aspects:
The buyer’s obligation to pay on the due date once the factoring unit is accepted online.
No recourse to disputes with respect to quality of goods or otherwise.
No set offs to be allowed.
c) Master agreement between the MSME sellers and the TReDS, stating the terms and conditions of dealings between both the entities. The agreement should also have a declaration / undertaking by the MSME seller that any finance availed through the TReDS would not be part of existing charge / hypothecation of its Working Capital bankers. An NOC may also be required from the working capital bankers to avoid possibility of double financing.
d) In case of financing on the basis of invoices, an assignment agreement would need to be executed between the MSME seller and the financier. Alternatively, this aspect may be incorporated in the agreement between the MSME seller and the financier, to the effect that any financing transaction on TReDS will tantamount to an assignment of receivables in favour of whoever is the financier.
e) The TReDS will be in custody of all the agreements.
14. TReDS will also review the need for CERSAI registration for the assignments as indicated above, and put in place a suitable mechanism for the same (preferably driven automatically through the TReDS).
15. Critical to the operations of the TReDS is the mechanism that ensures timely settlement of funds between the financiers and the MSME sellers (when the factoring unit is financed) and the subsequent settlement of funds between the corporate buyers and the respective financiers on due date of the factoring unit. In order to ensure a smooth process of such payments, the TReDS would be required to:
a) Trigger settlement between financier and MSME for accepted bids - In respect of all factoring units financed on a given day, the TReDS will generate the payment obligations of all financiers on T+2 basis and send the file for settlement in any of the existing payment system as agreed among the system participants. The TReDS would have a separate recourse mechanism to handle settlement failures in respective payment systems.
b) Trigger settlement between corporate buyer and ultimate financier on due date - The TReDS would generate the payment obligations file and send the same for settlement on due date to the relevant payment system.
16. The TReDS will generate the settlement files and send the same to existing payment systems for actual payment of funds. This would ensure that the inter-bank settlement (between the bankers representing MSMEs, corporate buyers and the financiers) will take place and defaults, if any, by the corporate buyers will be handled by the buyer’s bank and will not be the responsibility of the TReDS. Hence, the settlement process ensures payments to relevant recipients on due date, thus, facilitating the smooth operations on the TReDS, it would not entail a guaranteed settlement by the TReDS.
17. The TReDS would be required to put in place adequate arbitration and grievances redressal mechanism.
Regulatory framework for TReDS
18. The TReDS would be governed by the regulatory framework put in place by the Reserve Bank of India under the Payment and settlement Systems Act 2007. The activities of the TReDS as well as those of the participants in the TReDS would be governed by the relevant legal and regulatory provisions. As such the processes and procedures of the TReDS should be compliant with such legal and regulatory provisions which may be issued and amended from time to time by respective authorities.
Eligibility criteria to set up and operate the TReDS
19. Entities desirous of setting up and operating the TReDS should fulfil the following criteria.
(a) Financial Criteria
Since the TReDS will not be allowed to assume any credit risk, its minimum paid up voting equity capital shall be Rs. 100 crore Any additional voting equity capital to be brought in will depend on the business plan of the promoters. Further, the TReDS should have a net worth of Rs100 crore at all times.
The promoter’s minimum initial contribution to the paid up voting equity capital of TReDS shall be at least 40 per cent which shall be locked in for a period of five years from the date of commencement of business of the TReDS. Shareholding by promoters in TReDS in excess of 40 per cent shall be brought down to 40 per cent within three years from the date of commencement of business of TReDS. Further, the promoter’s stake should be brought down to 30 per cent of the paid-up voting equity capital of TReDS within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of business of TReDS. Proposals having diversified shareholding and a time frame for listing will be preferred.
The foreign shareholding in the TReDS would be as per the extant FDI policy.
Entities other than the promoters will not be permitted to have shareholding in excess of 10 per cent of the voting equity capital of the TReDS.
(b) Due diligence of promoters
The entities and their promoters/promoter groups as defined in the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 should be ‘fit and proper’ in order to be eligible to operate as TReDS. RBI would assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and track record of at least 5 years in running their businesses. RBI may, inter alia, seek feedback on the applicants on these or any other relevant aspects from other regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, SEBI etc. as deemed appropriate.
(c) Technological capability
The TReDS should have sound technological basis to support its operations. As such, the TReDS should, at the minimum, fulfil the following technological requirements.
TReDS shall be able to provide electronic platform for all the participants
Information about bills/ invoices, discounting and quotes shall be disseminated by the TReDS in real time basis, supported by a robust MIS system.
The TReDS shall have a suitable Business Continuity Plan (BCP) including a disaster recovery site.
The TReDS shall have an online surveillance capability which monitors positions, prices and volumes in real time so as to check system manipulation
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