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Trade Receivables Discounting System (TReDS)

TReDS

Introduction

The Trade Receivables Discounting System (TReDS) is an online electronic platform set up as per RBI guidelines issued on December 3, 2014. It provides a structured mechanism for financing or factoring trade receivables of MSME sellers against corporate buyers, government departments, and PSUs. RXIL, a joint venture between NSE and SIDBI, operates under RBI authorization to facilitate this process. Besides, RXIL, there are 3 more TReDS Platforms, the details of which are given later in the article. The primary objective is to resolve MSME liquidity challenges and address delayed payment issues.

Why TReDS Matters for Large Companies

  1. Regulatory Compliance: RBI and the Ministry of MSME has mandated all companies under the Companies Act, 2013 with an annual turnover exceeding INR 250 crore, and all Central Public Sector Enterprises to get themselves onboard on the TReDS platform by March 31, 2025. (Please refer to https://1-comply.com/2024/11/11/treds-onboarding-for-large-companies-by-march-2025/)
  2. Liquidity Management: Early payment to MSMEs through third-party financiers improves working capital management. Also, reduces the burden of maintaining high cash reserves.
  3. Supplier Relationship: Faster payments enhance supplier trust and reliability. Other than this, TReDS supports continuous business operations and supply chain efficiency.

Main Features of TReDS Platform:

  • Unified platform for sellers, buyers, and financiers
  • Complete paperless process
  • Easy and quick access to all the funds
  • End-to-end digital platform and payments
  • Competitive discount rates through an auction mechanism
  • Seamless data flow between participants and the platform
  • Standardized and regulated practices

Eligibility for TReDS Participation

  • Sellers: MSMEs as defined by the Micro, Small and Medium Enterprises Development Act, 2006.
  • Buyers: Corporates, government departments, PSUs, and other RBI-permitted entities.
  • Financiers: Banks, NBFC Factors, and other RBI-approved financial institutions.

List of TReDS Platforms:

Currently, there are four RBI-approved platforms: 

  • Receivables Exchange of India Ltd (RXIL)
  • A Treds Ltd (Invoicemart)
  • Mynd Solutions Pvt Ltd (M1xchange)
  • C2FO Factoring Solutions Private Limited

Registration and Onboarding Process (Eg RXIL)

  1. User ID Creation: Visit the TReDS platform (e.g., RXIL) and create a user ID by submitting basic details such as name, entity type, and contact information.
  2. Application Submission: Submit required documents, including:
      • Certificate of Incorporation
      • PAN and GST registration
      • KYC documents
      • Bank confirmation letter
      • Master Agreement
  3. Verification and Activation: RXIL verifies the information provided. Activation is initiated upon successful verification and fee payment.
  4. Fee Structure: One-time non-refundable registration fee and an annual maintenance fee. Transaction charges apply on factoring units.

Key Functionalities of TReDS

  • Factoring: Seller-initiated financing where the seller typically bears the financing cost.
  • Reverse Factoring: Buyer-initiated financing where cost-bearing is negotiable.
  • Factoring Unit (FU): Once an invoice is accepted, it becomes an FU and is eligible for auction.
  • Auction Process: Bids are accepted from financiers daily between 9:00 AM and 9:00 PM.
  • Maker-Checker Functionality: Ensures validation of transactions by segregating duties between users.

Recent Enhancements by RBI

  1. Insurance Participation: Insurance companies are allowed as a fourth participant to hedge default risks. Insurance premiums cannot be charged to MSME sellers.
  2. Expanded Financier Pool: Entities allowed under the Factoring Regulation Act, 2011, can participate. This increases liquidity availability for MSMEs.
  3. Secondary Market for Factoring Units (FUs): Allows trading of FUs within the same TReDS platform. Provides liquidity to financiers through resale.
  4. Settlement of All FUs: Even unfinanced FUs can now be settled on TReDS. Ensures reconciliation and convenience for MSMEs.
  5. Transparent Bidding: Bid details may be displayed to enhance competitiveness, but bidder names remain confidential.

Challenges and Solutions

 

Particulars

Challenge

Solution

System Integration

Integrating ERP systems with TReDS platforms.

Collaborating with support teams for API integration.

Internal Resistance

Resistance from finance teams to adopt new processes.

Collaborating with support teams for API integration.

Supplier Participation

MSMEs may be reluctant to join due to process complexity.

Provide onboarding assistance and demonstrate financial benefits.

Complaint Mechanism (Eg RXIL)

  1. Scope of Complaints: Covers issues related to RXIL TReDS platform operations. Excludes disputes between buyers and sellers.
  2. Filing a Complaint: Submit a written or email complaint with mandatory details, including:
      • Name of the complainant
      • Area of complaint
      • Specific grievance details
  3. Resolution Timeline: Auto-response with a unique ticket number is provided. Initial response within five working days; resolution within three weeks.
  4. Escalation: If unsatisfied, the complainant may escalate to the Chief Operating Officer (COO). COO resolves escalated complaints within five working days.

Conclusion

TReDS onboarding by March 2025 is a crucial compliance requirement for large companies. Beyond regulatory adherence, it offers significant benefits in liquidity management, supplier relationships, and financial inclusiveness for MSMEs. Overcoming integration and policy challenges will help build a robust and transparent supply chain ecosystem.

Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article. 

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