a. Corporate buyer sends purchase order to MSME seller
b. MSME seller delivers the goods along with an invoice. There may or may not be an accepted bill of exchange depending on the trade practice between the buyer and the seller.
c. Thereafter, on the basis of either an invoice or a bill of exchange, the MSME seller creates a ‘factoring unit’ on TReDS. Subsequently, the buyer also logs on to TReDS and flags this factoring unit as ‘accepted’.
d. The TReDS will standardise the time window available for corporate buyers to ‘accept’ the factoring units, which may vary based on the underlying document – an invoice or bill of exchange.
e. Supporting documents evidencing movement of goods etc. may also be hosted by the MSME seller on the TReDS.
f. The TReDS will have separate modules for transactions with invoices and transactions with Bills of Exchange.
g. Factoring units may be created in each module as required. Each such unit will have the same sanctity and enforceability as allowed for physical instruments under the “Factoring Regulation Act, 2011” or under the “Negotiable Instruments Act, 1881”
h. The standard format / features of the ‘factoring unit’ will be decided by the TReDS – it could be the entire bill/invoice amount or it could a pre-defined face value (say in multiples of 1,000 or 10,000 or 1,00,000). However, each factoring unit will represent a confirmed obligation of the buyer corporate, and will carry the following relevant details – details of the seller and the buyer, issue date (could be the date of acceptance), due date, tenor (due date – issue date), balance tenor (due date – current date), amount due, unique identification number generated by TReDS, account details of seller for financier’s reference (for credit at the time of financing), account details of buyer for financier’s reference (for debit on the due date), the underlying commodity (or service if enabled).
i. The TReDS should be able to facilitate filtering of factoring units (by financiers or respective MSMEs / corporate buyers) accordingly any of the above parameters. In view of the expected high volumes to be processed under TReDS, this would provide the necessary flexibility of operations to the stakeholders.
j. The buyer’s bank and account details form an integral feature of the factoring unit. The creation of a factoring unit on TReDS shall result in automatic generation of a notice / advice to the buyer’s bank informing them of such units. Similarly, financing by a financier should generate another notice /advice to the buyer’s bank to enable a direct debit to the buyer’s account on the due date in favour of the financier (based on the settlement obligations generated by the TReDS).
k. These factoring units will be available for financing by any of the financiers registered on the system. The all-in-cost quoted by the financier will be available on the TReDS. This price can only be viewed by the MSME seller and not available for other financiers.
l. There will be a window period provided for financiers to quote their bids against factoring units. Financiers will be free to determine the time-validity of their bid price. Once accepted by the MSME seller, there will be no option for financiers to revise their bids quoted online.
m. The MSME seller is free to accept any of the bids and the financier will receive the necessary intimation. Financiers will finance the balance tenor on the factoring unit.
n. Once a bid is accepted, the factoring unit will get tagged as “financed” and the funds will be credited to the seller’s account by the financier on T+2 basis (T being the date of bid acceptance). The actual settlement of such funds will be as outlined under the Settlement section.
o. On the due date, the financier will have to receive funds from the corporate buyer. The TReDS will send due notifications to corporate buyers and their banks advising them of payments due. The actual settlement of such funds will be as outlined under the Settlement section.
p. Non-payment by the buyer on the due date to their banker should tantamount to a default by the buyer and attract penal provisions and enable the banker to proceed against the corporate buyer. Any action initiated in this regard, will be strictly non-recourse with respect to the MSME sellers.
q. Once financed, these instruments will be rated by the TReDS on the basis of an external rating of the buyer corporate, the nature of the underlying instrument (invoice or bill of exchange), previous instances of delays or defaults by the buyer corporate w.r.t. transactions on TReDS etc.
r. The rated instruments may then be further transacted / discounted amongst the financiers in the secondary segment.
s. Similar to primary segment, any successful trade in the secondary segment will also automatically result in a direct debit authority being enabled by the buyer’s bank in favour of the financier (based on the settlement obligations generated by the TReDS). In parallel, it will also generate a ‘notice of assignment’ intimating the buyer to make the payment to the new financier (though the payment itself will be taken care of by virtue of the direct debit authority and settlement process of TReDS).
t. In the event that a factoring unit remains unfinanced, the buyer corporate will pay the MSME seller outside of the TReDS.
In order to meet the requirements of various stakeholders, the TReDS should ensure to provide various types of MIS reports including intimation of total receivables position, financed and unfinanced (to MSME sellers); intimation of outstanding position, financed and unfinanced with details of beneficiaries and beneficiary accounts to be credited (for corporate buyers); total financed position for financiers; etc. Similarly, data on unfinanced factoring units in the market should also be made available by the TReDS. The system should generate due date reminders to relevant parties, notifications to be issued to bankers when a factoring unit is financed, notifications to be issued to buyers once a factoring unit related to their transaction is traded in the secondary segment, etc.
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