Government Mandates Compulsory Onboarding of large companies and CPEs on TReDs

Update on TReDS Notification: Ministry of MSME Mandates Onboarding for Large Companies and CPSEs

The Ministry of MSME has issued a significant notification (Dated 7th November, 2024 being SO 4845(e) mandating all companies with a turnover exceeding INR 250 crores and all Central Public Sector Enterprises (CPSEs) to onboard the Trade Receivables Discounting System (TReDS) platform. This move is aimed at enhancing liquidity for MSMEs by streamlining their receivables management and providing them with faster access to working capital through a competitive and transparent bidding mechanism.

Background of TReDS: Transforming MSME Financing

TReDS was conceptualized as an electronic platform to address the challenges MSMEs face in managing delayed payments. Its origins can be traced back to NTREES, an online bill discounting platform operated by NSE and SIDBI since 2009. Drawing inspiration from the reverse factoring model of Mexico's NAFIN, the Reserve Bank of India (RBI) laid the groundwork for TReDS through its 2013 concept paper and issued formal guidelines in December 2014. In December 2015, NSE and SIDBI received in-principle approval to operate the platform, leading to the establishment of Receivables Exchange of India Ltd. (RXIL).

How TReDS Operates: TReDS facilitates the discounting of trade receivables by connecting MSME sellers, corporate buyers, and financiers (banks and NBFCs) on a single digital platform. Transactions are “without recourse” to the MSMEs, ensuring they are not held liable for buyer defaults. Key steps in the process include:

1. Creation of a Factoring Unit (FU) representing trade invoices or bills.
2. Acceptance of the FU by the buyer or seller.
3. Competitive bidding by financiers.
4. Selection of the best bid by the seller or buyer.
5. Disbursement of funds to MSMEs.
6. Repayment by the buyer to the financier on the due date.

Proud Contributions As someone who has been proudly associated with the TReDS initiative since its inception, I had the privilege of collaborating with SIDBI and NSE in formulating the rules and regulations for operation of the RXIL system of TReD, as well as drafting the foundational master agreements that underpin RXIL and other major platforms today. This pioneering effort has been instrumental in bringing transparency and efficiency to MSME financing, fostering their growth and sustainability.

Significance of the New Mandate By requiring large companies and CPSEs to join TReDS, the Ministry of MSME is strengthening the ecosystem that empowers MSMEs to manage their cash flows more effectively. This initiative ensures timely payments and aligns with the government’s vision of creating a robust and inclusive financial framework for MSMEs, which form the backbone of India’s economy.

As an advocate for MSME growth and having seen the transformative power of TReDS firsthand, I am excited to witness how this new mandate will further accelerate financial inclusion and foster a more resilient business environment.