Understanding Factoring and NBFC-Factors in India: A Comprehensive Guide

Understanding Factoring and NBFC-Factors in India

What is Factoring?

According to the Factoring Act, 2011, 'Factoring Business' is defined as “the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether through loans, advances, or any other means against a security interest over any receivables.” It is important to note that this definition excludes credit facilities provided by banks against the security of receivables in the ordinary course of business and any activities conducted as a commission agent related to the sale of agricultural produce or goods of any kind. The Factoring Act establishes the foundational legal framework for factoring in India.

What is an NBFC-Factor?

An NBFC-Factor refers to a non-banking financial company that meets the principal business criteria—specifically, at least 75 percent of its financial assets must be derived from the factoring business. Furthermore, not less than 75 percent of its gross income should come from the factoring business. To qualify, the NBFC-Factor must possess net owned funds (NOF) of at least Rs. 5 crore and hold a registration certificate from the RBI under Section 3 of the Factoring Regulation Act, 2011.

Entry Point Norms for NBFC-Factor

Any company registered under Section 3 of the Companies Act, 1956, intending to register as an NBFC-Factor, must maintain a minimum Net Owned Fund (NOF) of Rs. 5 crore. Companies currently registered as NBFCs that wish to transition to an NBFC-Factor but do not meet the Rs. 5 crore NOF criterion may request an extension from the Bank to fulfill this requirement.

Implications for Existing NBFCs in Factoring

Existing companies registered with the RBI as NBFCs that conduct factoring businesses representing less than 75 percent of their total assets or income must inform the RBI of their intention. They can either pursue a transition to become an NBFC-Factor or completely unwind their factoring operations. A Certificate of Registration (CoR) as an NBFC-Factor will only be granted after the company meets the financial asset and income criteria. Failure to comply within the specified timeframe will result in the requirement to unwind the factoring business.

Registration Requirement for Conducting Factoring Business

It is mandatory for all entities to register with the RBI to engage in factoring business. Only those entities mentioned in Section 5 of the Act—such as banks, corporations established under an Act of Parliament or State Legislature, or Government Companies as defined in Section 617 of the Companies Act, 1956—are exempt from this requirement.

Factoring Activities Within Group Entities

A company that does not meet the principal business criteria for factoring and has no intention of registering as a Factor with the Bank is prohibited from continuing any factoring activities with its group entities. Section 3 of the Factoring Act, 2011, states that no Factor may commence or carry out the factoring business without a CoR from the Reserve Bank and meeting the principal business criteria.

Import and Export Factoring for NBFC-Factors

NBFC-Factors are permitted to engage in import and export factoring. However, they must secure the necessary authorization from the Foreign Exchange Department of the Bank under the Foreign Exchange Management Act (FEMA) 1999, as amended, and comply with relevant FEMA regulations.

Registration of Factoring Transactions

Under Section 19 of the Factoring Act, 2011, every Factor is obligated to file details of every assignment transaction of receivables to the Central Registry established under Section 20 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002). This must be completed within thirty days from the date of assignment or from the date the registry is established, whichever is applicable.

Compliance with Prudential Regulations

NBFC-Factors do not have to adhere to a distinct set of prudential regulations. They are governed by the Non-Banking Financial (Non-deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, or the Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, as applicable to a loan company.

Returns Submission for NBFC-Factors

The submission of returns to the Reserve Bank will follow the current requirements applicable to registered NBFCs.

This structured overview provides a clearer understanding of the factoring landscape and the specific responsibilities of NBFC-Factors in India.