Further evolution required for ‘factoring’ to fulfil needs

Where businesses are clamouring for liquidity, especially manufacturing entities, “factoring” presents a viable option towards maintaining a steady cash flow by providing finance against the receivables due to such entities. Prior to the Factoring Regulation Act, 2011 (Factoring Act), coming into force, there was no regulatory structure for assignment of debt. This rendered the enforcement of rights under an assignment in a factoring arrangement rather difficult.

Further, an assignment deed for the purposes of factoring services was subject to high rates of duty under the provisions of the applicable stamp laws. In 1988, the Reserve Bank of India (RBI) set up the Kalyanasundaram Committee to examine the feasibility of factoring in India.

Features of the statute

Pursuant to the Kalyanasundaram Committee report and recommendations of various committees set up later, the Factoring Act came into force in February 2012. The Factoring Act for the first time has defined “factoring business” and identifies the rights and obligations of the assignor and assignee under factoring transactions. Further, to provide a much needed boost to factoring business in India, the schedule to the Factoring Act required the insertion of section 8D into the Indian Stamp Act, 1899, under which documents for assignment of receivables to a factor are exempted from payment of stamp duty.

Although the Factoring Act provides a much needed framework within which and clarity on how factoring can be conducted in India, and clearly identifies rights and obligations of parties to contracts for the assignment of receivables from one to another, a host of areas remain unregulated and ambiguous.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Okram Singha is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.