The Reserve Bank of India on 23 July 2014 issued draft guidelines for setting up and operating a Trade Receivables Discounting System in order to facilitate financing to micro, small and medium enterprises (MSMEs) and to help them convert trade receivables into liquid funds.
The draft guidelines issued were a follow up to a paper titled Micro, Small & Medium Enterprises (MSME) Factoring-Trade Receivables Exchange published by the RBI in March 2014. The paper highlighted that there was a need for addressing this pan-India issue through setting up of an institutional mechanism for financing trade receivables for MSMEs so as to enable the MSMEs have access to finance.
The Draft Guidelines
• The Trade Receivables Discounting System (TReDS) will provide the platform to bring these participants together for facilitating uploading, accepting, discounting, trading and settlement of the invoices or bills of MSMEs.
• 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.
• 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
• 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.
• TReDS will not be allowed to assume any credit risk and the minimum paid up voting equity capital shall be 100 crore rupees Further, the TReDS should have a net worth of 100 crore rupees 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.
• The foreign shareholding in the TReDS would be as per the extant FDI policy.
• The TReDS should have sound technological basis at the minimum to support its operations.
About the Trade Receivables Discounting System (TReDS)
Trade Receivables Discounting System (TReDS) is the scheme for setting up and operating an institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate buyers through multiple financiers.
The TReDS will facilitate the discounting of both invoices as well as bills of exchange.
The direct participants in the TReDS will be MSME sellers, corporate buyers and financiers, both banks and non-bank (NBFC factors).
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