The Parliament has passed the Factoring Regulation (Amendment) Bill, 2021 to bring changes in the legislation aimed at helping the MSME sector.

The Bill, that will help the micro, small and medium enterprises (MSME) sector in the availability of working capital, was passed in the Rajya Sabha on July 29. It was passed by the Lok Sabha on July 26.

Significance of the Bill

• The Factoring Regulation Act, 2011 was enacted to provide for regulating the assignment of receivables to factors, registration of factors carrying on factoring business and the rights and obligations of parties to the contract for assignment of receivables.

• Factoring is a transaction where a business entity sells its receivables from a customer to a third party which is a ‘factor’ for immediate realisation of funds either in part or in full.

• It may include invoice discounting, recourse factoring, non-recourse factoring, collections and reverse factoring.

• International factoring includes export factoring, import factoring, export invoice discounting and reverse factoring.

• The Factoring Regulation (Amendment) Bill, 2020, was introduced in the Lok Sabha on September 24, 2020, with a view to liberalise the restrictive provisions in the Act and at the same time ensure that a strong regulatory/oversight mechanism is put in place through the RBI. 

• After that, the Bill was brought in September 2020 and then referred to a Standing Committee of the House.

• The Bill seeks to widen the scope of entities which can engage in factoring business.

• The Bill has incorporated many suggestions from the U.K. Sinha Committee. 

• After a detailed examination, the standing committee came up with a report on February 3 containing one legislative suggestion and eight non-legislative suggestions. All of those have been accepted by the government.

• “Increase in the availability of working capital may lead to growth in the business of the MSME sector and also boost employment in the country,” according to the Statement of Objects and Reasons of the Bill.

• The Bill aims to provide relief to the MSME sector and help them in ensuring a smoother capital cycle and healthier cash flow.

• The amendments are expected to help MSMEs significantly by providing added avenues for getting credit facility, especially through Trade Receivables Discounting System.

MSME sector

• The Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades.

• It contributes significantly in the economic and social development of the country by fostering entrepreneurship and generating large employment opportunities at comparatively lower capital cost, next only to agriculture. 

• MSMEs are complementary to large industries as ancillary units and this sector contributes significantly in the inclusive industrial development of the country. 

• They are widening their domain across sectors of the economy, producing a diverse range of products and services to meet demands of domestic as well as global markets. 

• The MSMEs in India are playing a crucial role by providing large employment opportunities at comparatively lower capital cost than large industries as well as through industrialisation of rural and backward areas,  reducing regional imbalances, assuring more equitable distribution of national income and wealth.

• Nearly 30 per cent of the GDP in Indian economy is contributed by the MSME sector.

• As per the National Sample Survey (NSS) 73rd round, conducted by National Sample Survey Office during the period 2015-16, there were 633.88 lakh unincorporated non-agriculture MSMEs in the country engaged in different economic activities.

• Micro sector with 630.52 lakh estimated enterprises accounts for more than 99 per cent of total estimated number of MSMEs. Small sector with 3.31 lakh and medium sector with 0.05 lakh estimated MSMEs accounted for 0.52 per cent and 0.01 per cent of total estimated MSMEs, respectively. 

• Out of 633.88 estimated number of MSMEs, 324.88 lakh MSMEs (51.25 per cent) are in rural areas and 309 lakh MSMEs (48.75 per cent) are in urban areas.

• As per the survey, MSME sector has been creating 11.10 crore jobs (360.41 lakh in manufacturing, 0.07 lakh in non-captive electricity generation and transmission, 387.18 lakh in trade and 362.82 lakh in other services) in the rural and the urban areas across the country.

• Uttar Pradesh has the largest number of estimated MSMEs with a share of 14.20 per cent of MSMEs in the country. It is followed by West Bengal and Tamil Nadu, says the survey.

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