Dipak Rao & Gunjan Gupta


1/04/2020

 

Trade Receivables Discounting System (TReDs) is a Reserve Bank of India initiative to ensure timely payments to the suppliers (MSME Suppliers) which qualify as micro, small and medium enterprises (MSMEs) under the Micro, Small and Medium Enterprises Development Act, 2006. It is a digital platform for MSME Suppliers to auction/discount their trade receivables at competitive rates through online bidding.

 

Presently, the following three platforms are registered with the Reserve Bank of India for operating as a TReDS Platform:

 

  • Receivables Exchange of India Ltd (RXIL)
  • TReDS Ltd (Known as Invoicemart)
  • Mynd Solutions (Known as M1 Xchange)

 

It brings together the MSME Suppliers, Buyers (i.e. Corporates, Government Departments and Public Sector Undertakings) and Financiers (i.e. Banks, NBFCs and Financial Institutions) for facilitating uploading, accepting, discounting, trading and settlement of invoices/bills of exchange of MSME Supplier. The process involves uploading a valid invoice by the MSME Supplier on the TReDs Platform, and validation and approval of the invoice by the Buyer. Upon approval, various Financiers start to bid on the invoice at discounted rates. The MSME Supplier can exercise its discretion while accepting the bid and, upon acceptance, the payment is processed, and the MSME Supplier’s account is credited with the discounted amount.

 

The Ministry of Micro, Small and Medium Enterprises (MSME Ministry) vide its Notification (MSME Notification) bearing S.O. 5621(E) dated November 02, 2018 has mandated all companies (Large Corporates) registered under the Companies Act, 2013 with a turnover of more than Rs. 500 Crore (Rupees Five Hundred Crore) as per the last available audited financial statements and all Central Public Sector Enterprises (CPSEs) to get themselves registered on the TReDs Platform to ensure cash liquidity for MSME Suppliers.

 

There is no timeline prescribed under the MSME Notification for the Large Corporates and/or CPSEs to get onboard on the TReDs Platform. However, the Ministry of Corporate Affairs (MCA) has requested the Institute of Company Secretaries of India (ICSI) to seek a report on compliance with the MSME Notification from the Company Secretaries of the Large Corporates. Accordingly, MCA has casted an obligation on the Company Secretaries, upon registration of the Large Corporates on TReDS Platform, to report the compliance to ICSI in the format prescribed by them.

 

MSME Ministry has designated the Registrar of Companies (ROC) in each State to act as the competent authority to monitor the compliance of the MSME Notification by the Large Corporates and CPSEs under its jurisdiction. Recently, different jurisdictional ROCs have issued notices to various companies to comply with the requirement prescribed under the MSME Notification, on the basis of total income reflected in their last audited financial statements rather than turnover.  Total income is often considered as a synonym for turnover. However, ‘Turnover’ is a defined term under the Companies Act, 2013 to mean the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.

 

As turnover is a qualifying criterion for mandatory registration on TReDs Platform by Large Corporates, the companies whose turnover is below the threshold limit of Rs. 500 Crore (Rupees Five Hundred Crore) and have received the notice from the ROC for compliance with the MSME Notification on the basis of total income, can approach their jurisdictional ROCs to clarify the non-applicability of MSME Notification by giving a reference to the definition of ‘Turnover’ provided under the Companies Act, 2013.