Everything we need to know about TReDS

Today's article will cover all the provisions, compliances, procedures for registration etc. related to TREDS. We will compile ALL the stuffs related, so that we don't need to go anywhere for looking on this topic.

Introduction

As we know in today's world funding for businesses is a life-blood, without this a business can't even think about their existence. On the other hand, small businesses always remains in situations of urgent cash and their growth is also constrained by the lack of liquid funds. MSME sector, in India, is mainly dependent on corporate buyers, including government departments and undertakings, for payments and eventually they face the problem of delayed payment. Further, this sector also faces constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds.

If  we look at some stats, The total credit exposure in India, amounts to Rs. 101 Lakh Crores as of June 2018, but the MSMEs accounts credited only for Rs. 22.8 Lakh Crores (here it includes credit to MSME entities and credit to individuals for business purposes both). Percentage-wise the MSME credit exposure is 35% of the overall exposure to businesses. 

Further, MSME-NPA rates have remained stable and range bound.

The government has taken various efforts to boost the MSME sector, some of the initiatives are like providing a web-service Udaymitra.com to the MSME’s where they can state about their business & projects and financier companies can come forward to finance them. Another initiative, the government has promoted a (GEM) Government E-Marketplace where the procurement of the goods and services of the MSME’s are done by the government ministries/offices/departments. TReDS also belong to the initiatives of the government to help MSME sector.

What is TReDS Platform?

RBI has introduced TReDS, It is an institutional framework devised for facilitation of receivables of MSME Bills, which could electronically accept and auction against the large companies, to make the payment to MSMEs more prompt. RBI envisaged as necessary to address concerns relating to financing of this sector and introduced Trade Receivables e-Discounting System (TReDS). 

The TReDS platform enables discounting of invoices of MSME sellers against large corporates, including government departments and public sector undertakings, through an auction mechanism to ensure prompt realisation of trade receivables at competitive market rates. Multiple financiers participate in the auction. 

The Ministry of Micro, Small and Medium Enterprises, issued a Notification dated November 02, 2018. The Notification mandates all companies with a turnover more than Rs. 500 crore and all Central Public Sector Enterprises, to get themselves onboarded on the TReDS platform. This measure is expected to enable MSME entrepreneurs to access credit from banks.

In the aforesaid Notification, the Ministry has not provided any time line for compliance of the same. It has authorised the Registrar of Companies of each state to monitor the compliance of these regulations by the companies. However, the Ministry has not issued any notification for the same and it is still a question that how will the regulator monitor the effectiveness of the same.

RBI had released Guidelines for setting up of and operating TReDS on December 3, 2014. The Guidelines outline the requirements and the basic tenets of operating as a TReDS platform and also prescribes the eligibility criteria for entities desirous of setting up and operating such a system.

MSMEs supplying to top-notch corporates can get their invoices discounted at or close to banks’ benchmark lending rates if they get on to the TReDS. This is so because financiers, such as banks and non-banking finance companies (who are into factoring business), discount suppliers’ invoices on the TReDS platform based on the strength of the corporate buyers’ credit rating. In other words, MSME suppliers can get their invoices discounted at lower interest rates on TReDS if their corporate buyers’ credit rating is strong. The aforesaid amendment is expected to facilitate two markets- the primary market segment (in which invoices first undergo a reverse factoring process to enable the first level of financing to the MSMEs) as well as a secondary market segment (where the financiers of the primary segment get an opportunity to trade these invoices).

Who are required to register themselves? 

Partici- pants	Eligibility	Whether registration mandatory or not?
Buyer	Corporates including companies and other buyers including Government  Departments and Public Sector  Undertakings and such other entities  as may be permitted by the RBI.	Mandatory for all companies  with a turnover more than Rs. 500 crore and all Central Public Sector Enterprises as per the Notification dated Nov. 02, 2018.
Seller	MSME entities as per the definition  of MSMED act	Optional
Financier	Banks, Financial  Institutions, NBFC Factors,  and such other Institutions as permitted by the RBI.	Optional

What are the eligibility criteria for the MSMEs to join the TReDS Platform?

The basis of classifying MSMEs is proposed to change from ‘investment in plant and machinery/equipment’ to ‘annual turnover'

The existing definition of MSMEs is as follows:

	Manufacturing Sector	Service Sector
	Investment in plant & machinery	Investment in equipment
Micro	Upto Rs. 25 lakhs	Upto Rs. 10 lakhs
Small	Rs. 25 lakhs to 5 Crore	Rs. 10 lakhs to  2 Crore
Medium	Rs. 5 Crore to  10 Crore	Rs. 2 Crore to  5 Crore

The revised definition of MSMEs shall be as follows (it is still only a proposal, not came into force yet):

Micro : A unit where annual turnover does not exceed Rs. 5 crore;

Small : A unit where annual turnover is more than Rs. 5 crores but does not exceed Rs. 75 crores;

Medium : A unit where annual turnover is more than Rs. 75 crores but does not exceed Rs. 250 crores.

How many TReDS platforms are there currently?

Currently, the following three platforms are registered with RBI for operating as a TReDS platform.

• Receivables Exchange of India Ltd (RXIL) 
• A.TREDS Ltd (Known as Invoicemart)
• Mynd Solutions (Known as M1 exchange)