Factoring Regulation Act, 2011
Act No. 12 of 2012
[22nd January, 2012]
An Act to provide for and regulate assignment of receivables by making provision for registration therefor and rights and obligations of parties to contract for assignment of receivables and for matters connected therewith or incidental thereto.
Be it enacted by Parliament in the Sixty-second Year of the Republic of India as follows—
Statement of Objects and Reasons.—Inadequate working capital in a small scale or an ancillary industrial undertaking caused serious and endemic problems affecting the health of such undertaking. It was, therefore, felt that prompt payments of money by buyers should be statutorily ensured and mandatory provisions for payment of interest on the outstanding money, in case of default, should be made. With a view to provide for and regulate the payment of interest on delayed payments to small scale and ancillary industrial undertakings and for matters connected therewith or incidental thereto, a legislation titled as “The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act” was enacted in 1993. The provisions of the said Act made it mandatory for the buyer to pay to the Small Scale Industry promptly, failing which he is required to pay interest to the supplier.
2. However, the aforesaid Act did not improve the situation of delayed payments and the same was repealed by the Micro, Small and Medium Enterprises Development Act, 2006 which provided for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto. This Act made provision for liability for buyer to make payment to the supplier, being a micro or small enterprise and the National Small Industries Corporation, the Small Industries Development Corporation of a State or Union territory and any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises referred to in clause (n) of Section 2 of the said Act (hereinafter referred to as micro or small enterprises).
3. The Central Government received complaints regarding delay in payment to the micro or small industries. However, the enactment of the Micro, Small and Medium Enterprises Development Act, 2006 also did not improve the situation of delayed payments to small scale industries. The Reserve Bank constituted a Study Group in January, 1998 under the Chairmanship of Shri C.S. Kalyansundaram, former Managing Director, State Bank of India for examining the feasibility and mechanics of starting factoring organisations in the country and making recommendations regarding its theory, constitution, organisational set-up, scope of activities and other related matters. The Committee had noted that inadequacy of working capital finance with its attendant liquidity problem has been one of the major stumbling blocks in the viable running of small scale industry units and recommended that factoring for small scale industries could be mutually beneficial to both factors and small scale industry units. Besides, the said Committee, various other Committees set-up for alleviating the problems of small scale industry units, by the Government and the Reserve Bank during the last decade [including the Prime Minister’s Task Force on Micro, Small and Medium Enterprises (2010)] have also recommended development of factoring services for small scale industries through policy and legislative prescriptions to address the problem of liquidity for the micro or small industries.
4. In view of the above, the Central Government decided to enact a legislation relating to factoring services and introduce a Bill titled as “The Regulation of Factor (Assignment of Receivables) Bill, 2011”, to provide for and regulate the assignment of receivables by making provision for registration therefor and rights and obligations of parties to contract for assignment of receivables and for matters connected therewith or incidental thereto. Factoring service is one of the important mechanisms to address the issue of resources management for the Micro, Small and Medium Enterprises Sector. The 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.
5. The Regulation of Factor (Assignment of Receivables) Bill, 2011, inter alia, provides,—
(a) for the process of assignment of receivables due and payable to any assignor [being any enterprise or medium enterprise, micro enterprise or small enterprise as defined in clauses (e), (g), (h) and (m) of Section 2 of the Micro, Small and Medium Enterprises Development Act, 2006, respectively engaged in any business activity] by any debtor, to any factor, being the assignee, by an agreement;
(b) that the debtor shall have the right to notice of assignment and till the notice is given, the assignee shall not be entitled to demand payment of the receivable from the debtor;
(c) that the liability of the debtor shall not be discharged unless he makes the payment due on an assigned receivable to the assignee;
(d) that the assignor would be the trustee of assignee for any payment received which is due on an assigned receivable;
(e) that if the assignor of receivables is a micro or small enterprise, the liability of the debtor to make payment on assigned receivables shall be subject to the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 with regard to delayed payments of receivables;
(f) for regulation of the factoring business;
(g) for empowering the Reserve Bank to issue directions, call for information from the factor and prohibit the financial institutions from undertaking factoring business, if the factor fails to comply with the direction given by the Reserve Bank;
(h) that the rights and obligations of the debtor cannot be changed without the express consent of the debtor;
(i) that any breach of contract with the debtor by the assignor shall not entitle the debtor to recover from the assignee any sum paid by the debtor to the assignor or the assignee;
(f) provides for compulsory registration by the factor of every transaction of assignment of receivable with the Central Registry to be set-up under Section 20 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 within a period of thirty days from such assignment or from the date of establishment of such Registry, as the case may be, subject to payment of such fee as may be prescribed and provides that the particulars of transaction would be entered into the Central Register kept at the Head Office of the Central Registry;
(k) for penal provisions in cases of certain default or contravention of the provisions of the proposed legislation.
6. It is expected that the enactment of the proposed legislation would address the delay in payment and liquidity problems faced by the micro or small enterprises, though the proposed legislation applies to all enterprises including micro or small enterprises.
7. The Notes on Clauses explain in detail the various provisions contained in the proposed legislation.
8. The Bill seeks to achieve the above objects.
Chapter I
PRELIMINARY
1. Short title, extent and commencement.
1. Short title, extent and commencement.—(1) This Act may be called the Factoring Regulation Act, 2011.
(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:
Provided that different dates may be appointed for different provisions of this Act, and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force to that provision.
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Other Contents of Factoring Regulation Act, 2011 |
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Sections 1 to 2 |
2. Definitions.
2. Definitions.—In this Act, unless the context otherwise requires,—
(a) “assignment” means transfer by agreement, of undivided interest of any assignor in any receivable due from any debtor in favour of a factor and includes an assignment where either the assignor or the debtor, are situated or established outside India.
Explanation.—For the purposes of this clause, undivided interest of any assignor in any receivable shall not include creation of rights in receivables as security for loans and advances or other obligations by a bank or a financial institution;
(b) “assignee” means a factor in whose favour the receivable is transferred;
(c) “assignor” means any person who is the owner of any receivable;
(d) “bank” means,—
(i) a banking company;
(ii) a corresponding new bank;
(iii) the State Bank of India;
(iv) a subsidiary bank;
(v) such other bank which the Central Government may by notification specify for the purposes of this Act on the recommendations of the Reserve Bank; or
(vi) a Multi-State Co-operative Society registered under the Multi-State Co-operative Societies Act, 2002 (39 of 2002) and licensed to undertake business of banking by the Reserve Bank under the provisions of the Banking Regulation Act, 1949 (10 of 1949).
(e) “banking company” shall have the meaning assigned to it in clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(f) “business enterprise” means any enterprise or medium enterprise, micro enterprise or small enterprise as defined in clauses (e), (g), (h) and (m) of Section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), respectively engaged in any business activity;
(g) “corresponding new bank” shall have the meaning assigned to it in clause (da) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(h) “debtor” means any person liable to the assignor, whether under a contract or otherwise, to pay any receivable or discharge any obligation in respect of the receivable whether existing, accruing, future, conditional or contingent;
(i) “factor” means a non-banking financial company as defined in clause (f) of Section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934) which has been granted a certificate of registration under sub-section (1) of Section 3 or any body corporate established under an Act of Parliament or any State Legislature or any Bank or any company registered under the Companies Act, 1956 (1 of 1956) engaged in the factoring business;
(j) “factoring business” means the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making loans or advances or otherwise against the security interest over any receivables but does not include—
(i) credit facilities provided by a bank in its ordinary course of business against security of receivables;
(ii) any activity as commission agent or otherwise for sale of agricultural produce or goods of any kind whatsoever or any activity relating to the production, storage, supply, distribution, acquisition or control of such produce or goods or provision of any services.
Explanation.—For the purposes of this clause—
(i) the expression “agricultural produce” shall have the meaning assigned to it under clause (a) of Section 2 of the Agricultural Produce (Grading and Marking) Act, 1937 (1 of 1937); and
(ii) the expressions “goods” and “commission agent” shall have the meanings assigned to them respectively under clause (d) and Explanation (ii) of clause (i) of Section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952);
(k) “financial contract” means any spot, forward, future, option or swap transaction involving interest rates, commodities, currencies, shares, bonds, debentures or any other financial instrument, any repurchase of securities and lending transaction or any other similar transaction or combination of such transactions entered into in the financial markets;
(l) “netting agreement” means any agreement among the system participants for the purpose of determination by the system provider of the amount of money or securities due or payable or deliverable as a result of setting off or adjusting the payment obligations or delivery obligations among the system participants, including the claims and obligations arising out of the termination by the system provider, on the insolvency or dissolution or winding up of any system participant or such circumstances as the system provider, may specify in its rules or regulations or bye-laws (by whatever name called), of the transactions admitted for settlement at a future date so that only a net claim be demanded or a net obligation be owned;
(m) “notification” means a notification published in the Official Gazette;
(n) “prescribed” means prescribed by rules made under this Act;
(o) “property” means,—
(i) the immovable property;
(ii) the movable property;
(iii) any debt or any right to receive payment of money, whether secured or unsecured;
(iv) the receivables;
(v) the intangible assets, being know-how, patent, copyright, design, trade mark, licence, franchise or any other business or commercial right of similar nature;
(p) “receivables” mean all or part of or undivided interest in any right of any person under a contract including an international contract where either the assignor or the debtor or the assignee is situated or established in a State outside India; to payment of a monetary sum whether such right is existing, future, accruing, conditional or contingent arising from and includes, any arrangement requiring payment of toll or any other sum, by whatever name called, for the use of any infrastructure facility or services;
(q) “Reserve Bank”, means the Reserve Bank of India constituted under Section 3 of the Reserve Bank of India Act, 1934 (2 of 1934);
(r) “State Bank of India” means the State Bank of India constituted under Section 3 of the State Bank of India Act, 1955 (23 of 1955);
(s) “Subsidiary Bank” shall have the meaning assigned to it in clause (k) of Section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
(t) words and expressions used and not defined in this Act but defined in the Reserve Bank of India Act, 1934 (2 of 1934), the Banking Regulation Act, 1949 (10 of 1949), the Companies Act, 1956 (1 of 1956), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), the Credit Information Companies (Regulation) Act, 2005 (30 of 2005), or the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall have the meanings respectively assigned to them in those Acts.
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