Act to bring regulation to business of factoring

Factoring is the assignment of certain debts owed (receivables), for a price, by a person (assignor) to whom the receivables are owed, in favour of a third party (assignee). A much favoured means of financing, for small and medium-sized enterprises to raise and manage their liquidity requirements, factoring is now to be regulated in India with the passage of the Factoring Regulation Bill, 2011, which is awaiting presidential assent after being passed by both the houses of the parliament.

Applicability & registration

The bill provides that the business of acquisition of receivables or financing against the security of such receivables (factoring business) can be carried on by assignees that are registered as factors with the Reserve Bank of India (RBI).

The eligibility criteria for registration as a factor are the same as those applicable to a non-banking financial company (NBFC) under the Reserve Bank of India Act, 1934. NBFCs, banks and bodies corporate (established under statute) can apply to the RBI for registration as factors.

Megha Gupta (Megha.Gupta@trilegal.com) and Abhijeet Das (Abhijeet.Das@trilegal.com) are associates at Trilegal in Mumbai. Trilegal is a full-service law firm with offices in Delhi Mumbai, Bangalore and Hyderabad and has over 140 lawyers.