TReDS = A Gateway of Finance for MSMEs Seller
With the daily changes in the laws taking place around us, a new concept of Trade Receivables Electronic Discounting System i.e. TReDS has been introduced with the MCA notification dated 02.11.2018 which mandates all the companies with turnover of more than Rs 500/- crore to register on TReDS portal. This is a long step to avoid the blockage of funds in the Micro, Small and Medium Enterprises which will thereon help a lot in continuous working capital availability.
The series of steps began in year 2006 with the introduction of MSME Development Act, 2006 wherein Micro, Small and Medium Enterprises were defined in two categories. One in production, manufacturing u/s 7(1)(a) and other in service u/s 7(1)(b). On 02.11.2018 Ministry of Corporate Affairs by notification no. 5622 specified that the companies taking supplies from MSMEs and making default in payment to them in excess of 45 days need to submit half yearly return which was notified by MCA on 22.01.2019 i.e. MSME Form-1. This is linked with the Section-9 of the MSME Development Act, 2006 which defines the date of acceptance and in case there is default in such payments then action will be initiated under CH-V of the MSME Development Act, 2006.
Q 1. What is TReDS?
Ans: The portal set up as institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate and other buyers through multiple financiers is known as Trade Receivables Discounting System (TReDS). It is set up as per RBI Guidelines issued on 03.12.2014.
Q 2. Parties in the TReDS mechanism?
Ans: There are three parties:
Q 3. What is Factoring & Reverse Factoring?
Ans: Factoring means the process where seller initiates the process of financing of trade receivables.
Reverse Factoring means the process where buyer initiates the process of financing of trade receivables.
Q 4. What is Instruments under TReDS terminology?
Ans: It is the invoice details and scanned invoice uploaded either by seller or buyer. Invoice shall be a Tax invoice.
Q 5. Along with Instrument other documents are required to be filed?
Ans: No, there is no such condition to upload other document with the Instrument.
Q 6. Does Invoice need to be accepted by counterparty?
Ans: YES, As per RBI Guidelines it is mandatory that in case seller uploads invoice it needs to be accepted by the buyer, while in case of buyer uploading the invoice seller must accept the invoice for factoring.
Q 7. What is Buyer-Seller Link?
Ans: This link helps in establishing relation between Buyer & Sellers on portal. This link drives the entire processing of transaction on portal including counterparty approval.
Q 8. Who bears the Interest Cost?
Ans: Portal provides the flexibility to buyer or seller to bear the interest cost. The amount of interest will be calculated by the portal itself.
Q 9. What is the Cap Rate?
Ans: It is the maximum rate acceptable to the seller/buyer for financing of the trade receivables of MSME seller.
Q 10. What is Factoring Unit?
Ans: On acceptance of instrument by counterparty the instrument becomes factoring unit thereafter it goes into auction.
Q 11. Step by Step process of deployment on the Portal?
Ans: 1. First of all decide out of 3 which one to choose.
2. Thereafter have a preliminary meeting with its officials to have an overview of documentation part.
3. Make memorandum for Board meeting a long with specimen Board resolution.
4. Through board resolution decided the authorized official and Administrator.
5. Thereafter execute all necessary documents through these officials.
6. Execute master agreement, KYC of both above officials, KYC of entity (Co.), Stamp paper of proper value.
7. Then hand over the documents to officials for necessary actions i.e. deployment on TReDS portal.
Q12. How will be the payment mechanism on the portal?
Once the bid is accepted by Buyer/Seller whosoever bear the cost the financier bank will be auto debited. On Final date the Banker A/c of Buyer will be auto-debited.
1. Market timings of Auction are 9 a.m. to 9 p.m. every day.
2. Cut Off time is 4.00 p.m. if before it bid accepted then the settlement will be T+1 after the cut off time the settlement will be T+2 (Bid Acceptance Date + 2 working days).
3. If the factoring unit is not accepted by anyone on TReDS portal for auction then buyer will pay directly to seller outside the portal.
4. Costs involved in financing are
There are three portals on which registration can be made:
1. Receivables Exchange of India Ltd. (RXIL)= Mumbai based
2. TREDS Ltd. (Invoicemart)= Mumbai based
3. Mynd Solutions (M1 Exchange)= Gurgaon based