FinTechHow To Set Up a TReDS Platform

INTRODUCTION

As discussed in our previous blogs, Trade Receivables Discounting System or TReDS is a digital platform for conducting the financing/discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through several financers. This process of invoice discounting on TReDS typically involves three participants: MSME Suppliers, Corporate Buyers and Financier.

Moving forward, in this blog, we shall discuss about the setting up of a TReDS platform in India.

COMPANIES ACT, 2013

To get started, it needs to be registered as a Private Limited Company or as a Joint Venture under the Companies Act, 2013 (“the Act”). A Private Limited Company is a company privately held for small businesses. This type of business entity limits the owner’s liability to their shareholdings, the number of shareholders to 200, and restricts shareholders from publicly trading shares. In the case of a Joint Venture, two or more parties come together to achieve a specific target.

The incorporation as per the Companies Act, 2013 can be done in four steps as mentioned below –

1. Attainment of Digital Signature Certificate (DSC)

According to Rule 8 of the Companies (Registration Offices & Fees) Rules, 2014, the first move is to receive the DSCs of the members participating in the corporation of the private company. The DSCs are required to fill e-forms on MCA’s online portal as issued in the MCA’s order for the business to be incorporated and other applications to be registered online.

Once the e-form is filed on MCA’s online portal, the certifying authority shall grant a DSC in token form, which shall have tenure for 1 to 2 years. The members engaged in the preparation of businesses in India are subscribers and representatives of the company and the clients are considered to be the potential shareholder of the company.

The shareholders have to file e-Memorandum of Association (MOA) and e-Articles of Association (AOA) by appending DSCs, while the proposed directors are required to submit a DIN by rendering a request online in the next phase.

Documents required for Digital Signature Certificate (DSC)

• Applicant’s Passport size Photograph
• Self-attested address proof of applicant
• Self-attested Pan card of applicant

2. Attainment of Director Identification Number (DIN)

According to Section 153 of the Act, the MCA assigns a unique number to an individual who applies for the allotment of Director Identification Number (DIN). Unless the DIN is not surrendered or withdrawn, the MCA allocates such special numbers for a lifetime.

The directors of the firm shall receive and associate DIN when the company is incorporated as Private Limited. It is, therefore, necessary to have DIN to be appointed as director of any organization. The DIN obtained may also be used for appointment to some other organization and for appointment as Designated partner in the LLP.

Documents required for obtaining DIN

• Passport size photograph of applicant
• Self-attested address proof of applicant
• Self-attested PAN card of applicant

3. Reservation of Name

According to Section 4 of the Act, the name of the proposed firm shall be reserved until applying for the incorporation and registration of Private Limited Company in India. Requirements for the reservation of the title of Private Limited Company shall be rendered in e-Form INC–1 through the payment of the necessary fees.

In one form, you can list six names in the preferential order along with the context of the requirement for the proposed name(s). Before filling out the form, the professional appointed shall create a check for the existence of the name such that the claimant may make an application for the names accordingly. The Registrar has a 100% right to authorize a name query.

Provisions laid down by the Act must be considered while applying for approval. To apply for the name, following conditions must be complied with –

• The name should be easy to spell and remember
• The name shall be able to provide a distinct identity to the company
• It should be short and simple
• The name should not contain any word as opposed to public policy or prohibited
• It should not infringe any Trademark registered nor shall be similar or identical to any company/ LLP registered

When the application has been accepted, the Registrar shall retain the same name for a term of 60 days. The applicants, in consultation with the expert, shall file an application for incorporation of a business within a specified time of 60 days, failing to which the name reserved shall expire and, thus, for a further duration of 60 days, a fresh application for the reservation of the name shall be made.

4. Certificate of Incorporation

According to Section 3 of the Act, the requirement for the issuance of the Certificate of Incorporation shall be rendered after the reservation of the name of the proposed organization by sending the INC-1 form. The application for business registration will also be made through online submission of the simplified proforma for incorporating business.

MoA and AoA, both are the charter documents of a Private Limited Company. The Memorandum of Association of the Company describes the nature of the organization’s activity by specifying the key purpose and tasks of the business. Whereas the Articles of Association account for the form, in which the activities and the administration are to be carried out. All records of critical value shall be drawn up quite carefully in consulting with Expert.

Documents required for submission 

• Utility bill and NOC from the owner for the registered office address of the company
• Rental Agreement with the owner of registered office &rent receipts, if premises is rented
• Consent to act as a Director of the company in form DIR – 2
• Affidavit and declaration by the first subscriber(s) and director(s) in form INC – 9
• A certified true copy of the self-attested Identity proof of the first subscriber(s) and director(s)

The application shall be submitted by paying the required Government fees and stamp duty as applicable in the case of the State concerned on the portal. The application and allocation of PAN and TAN shall also be processed with the same application.

Upon review and verification of the application for a certificate of incorporation in the SPICe form, the Registrar may grant the Certificate of Incorporation (COI) under its seal and signature in electronic form. The COI issued shall include the date of incorporation as well as the Company’s Permanent Account Number.

RBI GUIDELINES ON TReDS PLATFORMS 

Entities desirous of setting up and operating the TReDS should fulfill the following criteria:

1. Financial Criteria: 

• Since the TReDS will not be allowed to assume any credit risk, its minimum paid up equity capital shall be Rs. 25 crore.
• The foreign shareholding in the TReDS would be as per the extant foreign investment policy.
• Entities, other than the promoters, will not be permitted to have shareholding in excess of 10 per cent of the equity capital of the TReDS.
• The overall financial strength of the promoters/entity seeking to set up TReDS would be an important criterion of assessment/selection.

2. Due diligence of promoters: 

The entities and their promoters/promoter groups as defined in the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 should be ‘fit and proper’ in order to be eligible to operate as TReDS. RBI would assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and track record of at least 5 years in running their businesses. RBI may, inter alia, seek feedback on the applicants on these or any other relevant aspects from other regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, SEBI, etc. as deemed appropriate.

3. Technological capability: 

The TReDS should have sound technological basis to support its operations. As such, the TReDS should, at the minimum, fulfil the following technological requirements.

• TReDS shall be able to provide electronic platform for all the participants.
• Information about bills/ invoices, discounting and quotes shall be disseminated by the TReDS in a real-time basis, supported by a robust MIS system.
• The TReDS shall have a suitable Business Continuity Plan (BCP) including a disaster recovery site.

The TReDS shall have an online surveillance capability that monitors positions, prices, and volumes in real-time so as to check system manipulation.

PAYMENT SETTLEMENTS SYSTEMS ACT, 2007 

The Payment Settlements Systems Act, 2007 (PSS Act) provides for the general guidelines as well as the application format for any non-bank entity for operating a payment system. The PSS Act states that:

• Every non-banking entity desirous of commencing or carrying on a payment system shall submit an application under Section 5(1) of the PSS Act, 2007 in order to obtain authorization of the Reserve Bank under Section 7(1) of the PSS Act, 2007.
• The application shall be made in Form A addressed to the Chief General Manager of the Department of Payment and Settlement Systems at the Central office of the Bank at Mumbai, or to such other office or officer of the Bank as may be specified by it in this behalf.
• The application shall be accompanied by a non-refundable fee of Rs. 10,000/- in the form of cash or electronic funds transfer or cheque or payment order or demand draft drawn in favour of the Bank.

AMELGALS REMARKS 

TReDS is an end-to-end digitized platform for receivable factoring and must be adopted by all business units and financiers as a preferred mode of working capital finance. It is highly efficient in terms of cost savings for all stakeholders, the sellers, buyers, and financiers.

The platforms need to ensure that all the compliances and procedures are duly followed while setting up a TReDS platform in order to avoid potential inconvenience and confusion.

The Government of India has now made it mandatory for all Central Public Sector Enterprises (CPSEs) and all companies having a turnover of Rs. 500 crores and more to compulsorily register with TReDS platforms. Thus, we foresee TReDS as a game-changer in the near future for increasing factoring as a way of working capital financing option in India.

For any query or feedback, please feel free to connect with rohit.lalwani@amlegals.com or mridusha.guha@amlegals.com