Guidelines on Factoring and Forfaiting of Receivables

[Image omitted. See the official document.]

CIRCULAR

F. No 172/ IFSCA/Finance Company Regulations/2021-22/10

August 17, 2021

To,
All IFSC Banking Units /Finance Companies/Finance Units/Participants on ITFS platform in the International Financial Services Centre (IFSC)

Subject: Guidelines on Factoring and Forfaiting of Receivables

Reference is drawn to the International Financial Services Centres Authority (Finance Company) Regulations, 2021 (hereinafter referred to as ‘Finance Company Regulations’) which have been notified in the official gazette on March 25, 2021.

2. The International Financial Services Centres Authority (hereinafter referred to as “Authority”), in order to regulate the Factoring and Forfaiting activity as mentioned in regulation 5(1)(i)(b) of the Regulations by the Finance Company/ Finance Unit in the International Financial Services Centre (hereinafter referred to as “IFSC”) in India, directs the entities concerned to follow the Guidelines as specified below:

3. Applicability

3.1 These Guidelines shall be applicable to Finance Companies / Finance Units registered with the Authority under regulation 3 of the Regulations that are intending to undertake the activity of Factoring and Forfaiting of receivables.

3.2 Part I of these Guidelines shall be applicable to IFSC Banking Units (‘IBUs’) licensed by the Authority under IFSC (Banking) Regulations, 2020, to undertake permissible activities subject to such prudential regulations as may be applicable to them.

3.3 Part I of these Guidelines shall also be applicable to all participants registered on ‘ITFS Platform’ for undertaking permissible Factoring and Forfaiting transactions under the Framework for setting up of International Trade Financing Services Platform (‘ITFS’) for providing trade finance services at International Financial Services Centres (‘IFSCs’) dated July 9, 2021.

4. Definitions

For the purpose of implementation of these Guidelines the following definitions shall be referred to:

• (i) “Assignment” means transfer by agreement to a factor of an undivided interest, in whole or in part, in the receivables of an assignor due from a debtor;
• (ii) “Assignee” means a factor in whose favour the receivable is transferred;
• (iii) “Assignor” means any person who is the owner of any receivable;
• (iv) “Debtor” means any person liable to the assignor, whether under a contract or otherwise, to pay any receivable or discharge any obligation in respect of the receivable whether existing, accruing, future, conditional or contingent;
• (v) “Factor” means an entity engaged in the factoring business in the IFSC and includes a Financier under ITFS framework;
• (vi) “Factoring business” means the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making loans or advances or otherwise against the security interest over any receivables but does not include:
  • (a) credit facilities provided by an IBU or a Finance Company/Finance Unit in its ordinary course of business against security of receivables;
  • (b) any activity as commission agent or otherwise for sale of agricultural produce or goods of any kind whatsoever or any activity relating to the production, storage, supply, distribution, acquisition or control of such produce or goods or provision of any services.
• (vii) “Financial Contract” means any spot, forward, future, option or swap transaction involving interest rates, commodities, currencies, shares, bonds, debentures or any other financial instrument, any repurchase of securities and lending transaction or any other similar transaction or combination of such transactions entered into in the financial markets;
• (viii) “Forfaiter” means an entity engaged in the forfaiting business in the IFSC and includes Financiers under ITFS framework;
• (ix) “Forfaiting business” means sale and purchase of the receivables on a without recourse basis, as permitted under these Guidelines;
• (x) “netting agreement” means any agreement among the system participants for the purpose of determination by the system provider of the amount of money or securities due or payable or deliverable as a result of setting off or adjusting the payment obligations or delivery obligations among the system participants, including the claims and obligations arising out of the termination by the system provider, on the insolvency or dissolution or winding up of any system participant or such circumstances as the system provider, may specify in its rules or regulations or bye-laws (by whatever name called), of the transactions admitted for settlement at a future date so that only a net claim be demanded or a net obligation be owned;
• (xi) “Receivables” means the money owed by a debtor and not yet paid to the assignor for goods or services and includes payment of any sum (by whatever name called) required to be paid for the toll or for the use of any infrastructure facility or services.

All other words and expressions used but not defined in these Guidelines shall have the same meaning respectively assigned to them under IFSC (Banking) Regulations, 2020, ITFS Framework and Finance Company Regulations.

PART I

Guidelines on Factoring and Forfaiting transactions

A. Guidelines on Factoring of Receivables

5. Assignment of receivables

5.1 Any assignor may, by an agreement in writing, assign any receivable due and payable to him by any debtor, to any factor, being the assignee, for a consideration as may be agreed between the assignor and the assignee and the assignor shall at the time of such assignment, disclose to the assignee any defences and right of set off that may be available to the debtor.

5.2 On execution of agreement in writing for assignment of receivables, all the rights, remedies and any security interest created over any property exclusively to secure the due payment of receivable shall vest in the assignee and the assignee shall have an absolute right to recover such receivable and exercise all the rights and remedies of the assignor whether by way of damages or otherwise, or whether notice of assignment as provided in clause 6 below is given or not.

5.3 Where an assignment of receivables constituting security for repayment of any loan advanced by a creditor and where the assignor, with the written consent of such creditor, has given notice of such encumbrance to the assignee, on acceptance of such assignment, the assignee shall pay the consideration for such assignment to the creditor.

6. Notice to debtor and discharge of obligation of such debtor

An assignee of a receivable shall not be entitled to demand payment of the receivable from the debtor in respect of such receivables unless notice of such assignment is given to the debtor by the assignor or the assignee along with express authority in its favor granted by the assignor.

7. Discharge of liability of debtor on payment to assignee

Where a notice of assignment of receivable as stated in clause 6 above is given by the assignor or the assignee, as the case may be, the debtor on receipt of such notice, shall make payment to the assignee and payment made to such assignee in discharge of any obligation in relation to the receivables specified in the notice shall fully discharge the debtor making the payment, from corresponding liability in respect of such payment.

8. Payment made by debtor to assignor to be held in trust for benefit of assignee in certain cases

Where no notice of assignment of receivables as stated in clause 6 above is given by the assignor or under his authority by the assignee, any payment made by the debtor in respect of such receivables to the assignor shall be held in trust for the benefit of the assignee which shall be forthwith be paid over to such assignee or its agent duly authorized in this behalf.