A large number of MSMEs are ancillary units catering to the needs of large industries, both in the public and private sector. They often face the problem of delayed payments, affecting their cash flow and working capital availability. Most of the time, delay in realisation of such receivables increases their operating cycle and reduces their ability to procure new orders or fulfil the existing ones. Although Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 contains provisions related to penalty in case of delayed payments by the buyers, weak bargaining power and the fear of losing the business prevents MSMEs to invoke this provision.
To address the problem of getting delayed payments by MSMEs, the RBI has introduced the Trade Receivables Discounting System (TReDS) in 2014.
A. What is TReDS?
TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs). This is done through an auction-based mechanism.
B. Who are the eligible participants?
- SELLERS: MSMEs suppliers (For better understanding of MSMEs click on https://www.caclubindia.com/articles/msme-42359.asp)
- BUYERS: Corporates, Government Departments, PSUs and Other entities
- FINANCIERS: Banks, NBFCs, and other financial institutions as permitted by the Reserve Bank of India (RBI)
Note: Companies registered as per the Companies Act, 2013 with a turnover of more than Rs. 500 crore and all Central Public Sector Enterprises are required to get themselves onboarded on the Trade Receivables Discounting System Platform (TReDS).
C. What are the BENEFITS from TReDS?
- Widens the financing option due to multiple financiers participating in auctions and thereby results in easy availability of finances at best discount rates.
- Hassle-free and paperless documentation resulting in reduction of cost
- Adequate flow of cash and improved liquidity results in better growth of business
- It's a transparent platform for all the participants and helps in creating healthy relationship with each other
- Timely receipt of funds ensures productivity.
D. How does TReDS work?
Broadly, following steps take place during financing / discounting through TReDS:
i. Creation of a Factoring Unit (FU) – It is a standard nomenclature used in TReDS for invoices or bills of exchange – containing details of invoices / bills of exchange (evidencing sale of goods / services by the MSME sellers to the buyers) on TReDS platform by the MSME seller or the buyer;
ii. Acceptance of the FU by the counterparty - buyer or the seller, as the case may be;
iii. Bidding by financiers;
iv. Selection of best bid by the seller or the buyer, as the case may be;
v. Payment made by the financier (of the selected bid) to the MSME seller at the agreed rate of financing / discounting;
vi. Payment by the buyer to the financier on the due date.
E. How to Register for TReDS?
RXIL (RECEIVABLES EXCHANGE OF INDIA LTD) is one such platform which has got the license from RBI to facilitate TReDS.
On RXIL following one-time process is to be followed. Brief process is explained hereunder:
• Go to RXIL
• Click on Register and fill-up the following details for creation of USER ID
- Constitution Type
- PAN Number
- Registration As: Buyer/Seller/Financier
- Authorised Person's Name
- Authorised Person's PAN and any Address Proof issued by Central or State Govt.
- Mobile No. and Email ID
• Once the Details submitted, the USER is activated to fill the online application.
• The USER ID created is valid for 30 days.
• Online submission of Application and requisite documents
- Application Form
- Bank Confirmation Letter
- Mandate form for debiting the designated bank account (applicable for Financiers and Buyers)
- KYC documents of the applicant entity, promoters, administrator (Admin User), authorized signatories etc.
- Other applicable documents
• Execute Master Agreement
• Submit the printed signed application and self-attested / attested documents to RXIL.
• RXIL will verify the information provided in the application and documents and will confirm the same to the applicant.
• Pay the Non-Refundable Registration Fee at the time of registration. In addition to the Registration Fee, the participants will have to pay an Annual Fee.
• After satisfactory completion of the process RXIL to initiate activation process for the applicant to use the TReDS platform.
• The status can be tracked by visiting the status tracker page of the online registration module.
To widen the scope of TReDS and to incentivise more players to be part of this platform, banks' exposure through this platform were brought under priority sector lending in 2016. Presently, three entities [viz., Receivables Exchange of India Ltd. (RXIL), A. TReDS, and Mynd Solutions] licensed by the Reserve Bank are operating the platform. In coming years, competition in receivables discounting space is bound to increase with the entry of new players. This requires the corporates, both in the public and private sector, to join the TReDS platform and make the system more efficient.
The contents of this document are solely for informational purpose. It does not constitute any professional advice. While due care has been taken in preparing this document, the author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information nor any other action taken in reliance thereupon.
The author can also be reached at firstname.lastname@example.org.
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References: RBI, RXIL
Tags corporate law rbi msme