Reverse Factoring

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KapBadola (Querist)
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02 December 2025 Hi, Let's say there is intercompany A which sells raw material to company B.Company B make payment to A on receipt of Invoice. Can company B bring company A under the reverse factoring program wherein bank will fund the invoice at certain interest cost and on due date company B makes payment to bank. it's standard practice for regular vendor but want to understand the possibility or regulation around this for Intercompany.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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03 December 2025 Yes, in principle an intercompany supplier (Company A) can be brought under a reverse factoring program with Company B, but regulatory and accounting treatment is more complex. RBI guidelines require reverse factoring to be routed through registered TReDS platforms, and intercompany arrangements raise questions of related-party transactions, transfer pricing, and disclosure. It is possible, but it must be structured carefully to comply with factoring regulations, RBI oversight, and accounting standards.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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03 December 2025 Intercompany Specific Considerations
- Related Party Transactions:
- Intercompany dealings fall under related-party transaction rules.
- Reverse factoring here is not a typical vendor arrangement; regulators may scrutinize whether it is being used to shift liquidity or costs artificially.
- Transfer Pricing & Tax:
- Interest cost borne by Company A (supplier) or Company B (buyer) must be aligned with arm’s length principles.
- Any benefit from early payment financing must be documented to avoid tax disputes.
- Accounting Treatment:
- Under IND AS/IFRS, reverse factoring changes the classification of liabilities.
- Instead of “trade payables,” Company B may need to show “borrowings” if the arrangement resembles financing rather than trade credit.
- Disclosure in notes to accounts is required.
- Regulatory Compliance:
- RBI permits factoring for any company receivables, but intercompany transactions may raise substance-over-form concerns.
- The bank must ensure the transaction is genuine and not a disguised intra-group loan.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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03 December 2025 If Company B wants to include Company A in reverse factoring:
- Route through TReDS for compliance.
- Prepare audit-defensible documentation (arm’s length pricing, related-party disclosures).
- Classify correctly in financial statements (likely borrowings).
- Seek advance clarity from tax advisors to avoid transfer pricing disputes.

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