FinTechTReDS Platform: Regulatory Compliances for MSMEs

Introduction

With the regular shifts in the rules that are taking place around us, a new definition of the Trade Receivables Electronic Discounting System, i.e., TReDS was launched by the Ministry of Corporate Affairs (MCA) vide Notification No. S.O. 5621(E) dated 02.11.2018, which allows all the businesses with a turnover of more than Rs. 500 Crore to register under the TReDS Registry.

TReDS paves a long way in preventing the blockage of funds in Micro, Small and Medium Enterprises (hereinafter referred to as “MSMEs”), and would aid a great deal in the continued availability of working capital.

The sequence of measures started in 2006 with the implementation of the MSME Development Act, 2006 (hereinafter referred to as “MSME Act, 2006”) in which MSMEs were specified in two categories. Firstly, in manufacture or production category under Section 7(1)(a) of the MSME Act, 2006, and second, in providing or rendering of services category under Section 7(1)(b) of the MSME Act, 2006.

It is a Reserve Bank of India (RBI) programme to ensure prompt payments to suppliers who qualify as MSMEs under the MSME Act, 2006, providing a digital forum for MSME Vendors to auction/discount their commercial receivables at reasonable rates by online bidding. It acts as a forum to put together partners and investors in the areas of discounting, trade receivables and invoice financing.

Further, on 02.11.2018, the MCA, vide a Notification announced that firms obtaining supplies from MSMEs and making default payments to them for more than 45 days shall send a half-yearly return notified through MCA on 22.01.2019, i.e., Type – 1 MSME. This is related to Section 9 of the MSME Act, 2006 which specifies the date of approval and, in the event of default, the action will be taken pursuant to Chapter V of the MSME Act, 2006.

The Reserve Bank of India and the Payment Settlements Systems Act, 2007

TReDS is a mechanism used to protect funds for micro, small and medium-sized businesses, sellers of small to medium-sized businesses, business customers, financial institutions, including banks. It was developed under the regulatory structure defined by RBI under the Payment and Settlement System Act, 2007.

RBI has authorized the National Payments Corporation of India (NPCI) for undertaking the settlement of TReDS. TReDS utility in National Automated Clearing House (NACH) caters to many transactions wherein the debit and credit legs of the transactions are tightly coupled with each other, i.e., the initiation of credit transactions will be dependent on the success of debit transactions linked to them and the failed transactions will be reversed through the subsequent credit session.

Interrelation between Micro, Small and Medium Enterprises Development Act, 2006 and:

1. The Company Secretaries Act, 1980

The MSME Department vide Notification No. S.O. 5621(E) dated 02.11.2018 has directed major corporates having turnover of more than Rs. 500 Crore and/or Central Public Sector Enterprises (CPSE) to join the TReDS Network. However, the Notification does not stipulate any timeline for compliance with the same.

In furtherance of the Notification, the Ministry of Corporate Affairs (MCA) has asked the Institute of Company Secretaries of India (ICSI) to obtain reports ensuring compliance with the Notification from the companysecretaries of major corporates. Accordingly, it is the duty of the company secretaries to, upon registration of the major corporates on the TReDS Website, report on compliance with the MSME Notification to the ICSI in the format specified by them.

2. The Companies Act, 2013

The MSME Ministry has appointed the Registrar of Companies (ROC) of each State to serve as the competent authority for monitoring the enforcement of the MSME Regulation by the major corporates and Central Public Sector Enterprises (CPSE) under its jurisdiction.

Recently, separate jurisdictional ROCs have issued certificates to various entities to confirm with the specifications set out in the MSME Regulations on the basis of the overall sales represented in their last audited financial report rather than turnover. Total profits are sometimes considered to be a synonym for turnover.

Since turnover is a qualifying criterion for compulsory registration on the TReDS portal by large corporates, companies whose turnover is below the threshold of Rs. 500 Crore and who have received a notice from the ROC for compliance with the MSME Notice on the basis of total revenue may approach their jurisdictional ROCs to explain the non-applicability of MSMEs.

AMLEGALS Remarks

Over the time, MSMEs have continued to face difficulties in the industry pertaining to financing. The TReDS platforms has eased out such challenges. TReDS can aid the MSMEs to unfold their working capital and to ensure efficiency in capital management.

With the evolving laws and rising FinTech industry, it is crucial to comply with the regulations prescribed by the MSME Department, the RBI, the MCA, the ROC and other regulatory bodies. A nascent but robust legal framework is set in place to regulate the process of invoice discounting for MSMEs, through the medium of TReDS Platform. Hence, it is crucial for large corporates having turnover of more than Rs. 500 Crore, and CPSEs to ensure that they get onboarded on the TReDS Platform, to ensure compliance with the prescribed regulatory framework.

With this blog, we conclude our series of blogs pertaining to TReDS Platforms.

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