Factoring Regulation Act: No small change for India

Effective management of working capital is critical to any business enterprise. By receiving funds advanced against invoices, factoring enables a business to free up capital without the need to offer any collateral. Factors also provide other value-added services, such as managing collection of invoices and credit rating of customers, thereby enabling clients to focus on their core activity.

New dawn?

Factoring in India is still at a nascent stage as compared to global volumes. Although, in the past couple of decades, the government in tandem with the Reserve Bank of India (RBI) had sought to encourage this practice by giving it some degree of recognition under the existing statutory framework, the absence of a comprehensive law was still felt. The industry was beset with barriers to entry such as lack of requisite credit information, low profit margins and a high incidence of stamp duty for assignment of receivables.

The above lacunae were sought to be addressed by the Factoring Regulation Act, 2011, notified in late January 2012, in a bid to give an impetus to factoring activity, especially in the micro, small and medium-sized enterprises (MSME) sector.

Sawant Singh is a partner and Davis Kanjamala is an associate at the Mumbai office of Phoenix Legal.