Citizens' Issues
2G Scam: Dr Swamy to appeal to High Court against trial court's decision

In a little reprieve to Home Minister, the special court dismissed the plea of Dr Swamy to make Mr Chidambaram co-accused in the 2G spectrum allocation scam

Dr Subramaian Swamy, president, Janata Party said he will file an appeal in the High Court and place more evidence on record after his plea to make Home Minister P Chidambaram co-accused in the 2G scam was dismissed by the trial court.

Justice OP Saini of the Special Court while delivering his verdict said, "....prayer of Swamy to make Chidambaram an accused is dismissed".

Speaking with reporters outside the Court, Dr Swamy said, "I am surprised by the verdict. This order deserves to be reversed. I will not give up and will approach the High Court within three months".

Dr Swamy had moved the Court seeking to make Mr Chidambaram as co-accused in the 2G spectrum scam. The Janata Party president alleged that Mr Chidambaram, the then finance minister, is as culpable as former Telecom Minister A Raja in determining the prices of the spectrum and in allowing the dilution of shares by telecom companies post allocation.

Earlier this week, the Supreme Court referred the matter on probing Home Minister P Chidambaram's role in the 2G scam to the Central Bureau of Investigation (CBI) Special Court.

On Thursday, the apex court cancelled all licences given to 11 telecom companies issued after January 2008. The Court observed that 85 out of the 122 licences granted by the UPA government on or after 8 January 2008 were outside the eligibility criteria for allocation of the 2G spectrum. "The 122 licences for 2G spectrum were granted in arbitrary and unconstitutional manner," the Court said.

In another important judgement, the Supreme Court refused to sanction a Special Investigation Team (SIT) to over-see the CBI inquiry in the 2G spectrum allocation scam. Instead, the apex court said, the Central Vigilance Commission (CVC) should monitor the investigation and the CBI should submit its status reports in sealed envelopes to the Commission.

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Factoring Bill: Blow to receivables financing

No one would perhaps know what was the urgency for the Factoring Bill – it is not as if factoring business was a mushrooming business which needed regulation

The Parliament recently passed the Factoring Regulation Bill 2011 (‘Factoring Bill’ or ‘Bill’) . Given the fact that several other important bills have taken years to ascend into the statute book, the Factoring Bill has really been commendably quick to progress. No one would perhaps know what was the urgency for the Bill – it is not as if factoring business was a mushrooming business which needed regulation. On the contrary, factoring is an idea that the RBI has been meaning to promote over decades, and there has not been any substantial pick up in factoring volumes over the years.  If at all factoring business needed anything – it was support and promotion. But the tone of the Bill is far from promotion – it is full of a regulatory slant. This is exactly the model that RBI used when passing the Securitisation Act – with the idea to promote securitisation, and it ended up in regulating securitisation to the extent that no securitisation transaction has ever happened so far under the Act.

The regulatory tone of the Bill apart, the Bill seeks to enact the provisions of the UNCITRAL model law on assignment of trade receivables , which itself, 11 years after its proposition, has been affirmed only by 4 countries in the world.

Factoring: a slow starter
The government’s efforts at promoting factoring date back to 1988 when the RBI appointed the Kalyansundaram Committee. Subsequently, the RBI allowed banks to enter factoring by a notification in 1991. Some banks did respond by starting dedicated factoring companies – SBI Factors, Canbank Factors etc were started.

However, factoring has obviously not been something to attract the fascination of either the banks or the NBFCs. The factoring volumes in India have not been significant enough, and unlike other facets of NBFC activity, factoring business has not drawn foreign players to any appreciable extent, except recently when some foreign banks seem to have begun factoring services.

Receivables financing:
While factoring might have picked up much, receivables financing has continued to grow with the growth of the NBFC sector. The NBFC sector today views receivables as much as a part of asset-based financing as other tangible assets. And lot of investments in happening today in the infrastructure as well as IT sector where the basis of investment is receivables. To give instances – a PSU/ government department goes for a massive system upgradation where equipment and services are provided by an aggregator, who in turn finances himself based on the receivables committed by the client. Receivables discounting is also common as a mode of sales-aid financing –several software and hardware vendors provide the facility of instalment or deferred payments to their clients and in turn sell the receivables to finance companies.

None of this is factoring  in the real sense, because none of the so-called receivables financiers are going anywhere beyond pure financing.  
Besides receivables financing, strands of activity are also going in the field of export receivables factoring.

The Factoring Bill: bringing receivables financing into regulatory ambit..

First of all, was there a case at all that a factoring company was not covered by the regulatory ambit prior to the enactment of the new law?  If the factoring activity was being carried out as a true acquisition of receivables by the factor, it is possible to argue that what is a purchase of receivables cannot be a financing transaction, and hence, a factor is not a non-banking finance company under existing definition in the RBI Act. However, most factors actually carry out full recourse factoring – with features that hardly imply an intent of purchase of receivables – hence, such activities nothing but lending on the security of receivables, and hence, would still amount to a “financial business” for being regulated as an NBFC.

Therefore, if the law is based on the premise that factors were not regulated so far, and the idea is to regulate them, the basis is misplaced.

As regards receivables financing  -  admittedly, this is a financing activity and hence, the business is a “financial business”, bringing the business under RBI supervision.

However, the key feature of the existing NBFC regulation is that financial business needs to be the “principal” business to bring an entity into NBFC domain. If a non-banking, non-financial entity carries financial business, it may still retain its status as a non-financial business as long as the business remains “non-principal”. The RBI has been using a percentage of assets and income as the criteria for determining principality.

.. even if it is not the principal business
If the idea of the Bill is to bring entities engaged in factoring business into the regulatory ambit, let us examine to what extent does the law go in meeting this objective.

First of all, the Bill defines “factoring business” to include both acquisition of receivables as well as receivables financing. That is to say, any financial transaction where receivables are accepted as a security. Clearly, the definition is thoughtlessly inserted and can be stretched to completely unintended extent. For example, if someone gives a loan against a machine, and accepts receivables as a collateral security, it is certainly not a transaction of financing of receivables, but looking the way the definition is worded, the transaction will amount to “factoring business”.

The biggest problem lies in the language of sec. 3 which says – no factor shall commence or carry on the business of factoring without RBI registration. The word “factor” is defined in sec. 2 (i) as a non-banking financial company, a body corporate, or any other company. Sec 3 (2) and its proviso pertain to an NBFC presently carrying out, as its principal business, on the date of commencement of the Act. However, sec 3 (1) nowhere says that the provision will be applicable only where the factor carries on factoring as its principal business. That is to say, if the language of sec. 3 is taken as it is, every company carrying on factoring business, whether as a principal business or not, needs to apply for RBI registration.

The only exception to this will be banks, and statutory corporations, in term of sec 5 of the Bill.

This brings a completely over-stretched arm of the Bill which requires mandatory registration, and RBI supervision, in case of non-financial companies which may be engaged in acquisition or security interest over receivables as a non-principal activity. Several manufacturing/trading companies do so. Several IT companies may also be doing the same.

There is an exception specifically made in case of securitisation transaction, further reinforcing the assumption that whether or not the business of factoring is the main business, registration under the Bill becomes mandatory.

Thus, NBFCs will need registration under the law only if their principal business in factoring, but other companies, excluding banks, will come under the registration requirements irrespective of whether factoring business is principal business or not. If it is a business, it will come under the law.

Substantive provisions:
The substantive provisions of the law inclusively pertain to giving effect to an assignment agreement. Section 7 provides that an assignment shall be effective between assignor and assignee on the execution of the agreement, and section 8 provides that no right shall exist against the debtor unless the debtor has been served with the notice of assignment. This is exactly the common law position understood through more than a century. Sec 130 of the Transfer of Property Act provides for the same thing and common law jurisdictions all over the world work on the same principle. This was the law before; this remains the law after the Bill.

To put the point in perspective, several assignment of receivables are “silent” assignments – meaning, the fact of the assignment is not notified to the debtor. This is the universal practice in case of securitisation transactions. In case of financing transactions also, the lender typically does not need to, and hence does not, notify the obligor.

However, section 17 of the Bill makes silent assignments completely fragile and almost impossible. This section says that in case of silent transfers, the assignee will be bound by any such modification of the original contract that the assignor may make with the debtor. It is only after the notification of the assignment that such modifications become ineffective. That is to say, unless the assignee gives immediate notice of the assignment to the debtor, the assignee is virtually at the mercy of the assignor. This provision is borrowed from UNCITRAL model law on international assignment of trade receivables, but will certainly give major jolt, particularly those who lend money against receivables. By way of saving grace, the provisions of the Bill have been excluded in case of securitisation transactions, but what is a securitisation transaction itself will remain queer.

Registration provisions
The Bill mandates registration of all assignment transactions, and also satisfaction of claims of the assignee. Non-registration does not affect the validity of the assignment; registration does not amount to a notice to the debtor. However, non-registration is punishable with a fine upto Rs 5000  per day.

The registry office is the Central Registry under the SARFAESI Act, currently being run by NHB.

The way the language of the law is, filing notice of satisfaction or realisation of a debt may, in case of instalment or partial payments, notifying innumerable events. In case of trade receivables, factoring transactions involve revolving lines of credit, with numerous receivables getting assigned in succession. Hence, the mandatory registration requirement, with no advantage as to validity or deemed notice to the obligor, only impose an added administrative burden.

Conclusion:
In conclusion, the Factoring Bill does not fill any legislative gap; does not take further the common law provisions which were any way flexible enough. It does not answer the needs of trade. It is not something that was urgent in terms of regulating something that was growing unwieldy. It was nobody’s need. And it fills nobody’s needs either.

  http://www.uncitral.org/uncitral/en/uncitral_texts/payments
/2001Convention_receivables.html


(Vinod Kothari is a CA, trainer and author with offices in Mumbai and Kolkata. He is an expert in securitisation, asset-based finance, credit derivatives, accounting for derivatives and microfinance. He authored "Securitisation, Asset Reconstruction and Enforcement of Security Interests". He can be contacted at vinodkothari.com.)

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COMMENTS

Suzy Frame

4 years ago

This is a great post! I have been looking into different http://www.jdfactors.com">receivables and how it can work! Can you tell me where to find more information like this? It really has been helpful!

namrata

5 years ago

Interesting views!
...but I do feel that we should look beyond the legalese' / language loop-holes...the Factoring Bill is well-meaning to regulate the business - as unless it's not regulated/registered, any non-payment issues cannot be taken to courts/arbitration; possibly that's the reason why non-recourse Factoring isn't still popular/practiced...the entire purpose of the bill is to improve supply-side infrastructure thus provide enough confidence to Factors to do business in India.
Also would like to add that a leading French Factoring company was intent on entering the Indian Factoring market;
however lack of this regulatory enabler prevented from doing so!
this is not in complete disregard of your views...as registration of each transaction will increase admin. burden - but then that'd be the necessary evil...the bigger benefits are the focus!
- Namrata Kothari

REPLY

Vinod Kothari

In Reply to namrata 5 years ago

In terms enabling, the Bill goes no further than common law - hence, the case that it was needed for factoring business in the country does not sound convincing. And it is full of regulatory overtone. Once again, there is no case that this part of the business was fast filling - hence, regulation was required.

Sandpoint Idaho real estate

6 years ago

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factoring

6 years ago

Each company would have a different level of industry experience, and find they have served their industry is the first step in the right direction. The best factoring company can even recommend several of his clients for reference checks.

Spyridon Bazinas

6 years ago

The article contains a number of inaccuracies, misrepresentations and misunderstandings about the United Nations Convention (not UNCITRAL Model Law) on the Assignment of Receivables in Internationa Trade. I asked Mr. Kothari to correct them. My main comment is that the Indian legislator borrows selectively a number of elements from the Convention and uses them to achieve his or her own objectives. Unless a State, ratifies and implements a Convention, the Convention is not to blamed for a law that merely borrows elements from the Convention.

REPLY

Vinod Kothari

In Reply to Spyridon Bazinas 6 years ago

Spyridon Bazinas has written me a mail pointing out several so-contended "inaccuracies" in my articles. In fact, my article is not at all intended to be a commentary on the United Nations Convention, but on the Indian law, which, as Spyridons says, Spyridon has not read as yet.

My article is solely focused on the regulatory tone of the Indian law, which, as I have contended, was not needed at all.

namrata

In Reply to Vinod Kothari 5 years ago

Interesting views!
...but I do feel that we should look beyond the legalese' / language loop-holes...the Factoring Bill is well-meaning to regulate the business - as unless it's not regulated/registered, any non-payment issues cannot be taken to courts/arbitration; possibly that's the reason why non-recourse Factoring isn't still popular/practiced...the entire purpose of the bill is to improve supply-side infrastructure thus provide enough confidence to Factors to do business in India.
Also would like to add that a leading French Factoring company was intent on entering the Indian Factoring market;
however lack of this regulatory enabler prevented from doing so!
this is not in complete disregard of your views...as registration of each transaction will increase admin. burden - but then that'd be the necessary evil...the bigger benefits are the focus!
- Namrata Kothari

Nagesh Kini FCA

6 years ago

Thanks Vinod for your valuable write-up on the Factoring Bill.
Working Capital financing, though a part and parcel of bank finance has not treated a niche for financing of receivables which after inventories does constitute a vital component of working capital of any trade or industry.
Its regulation is a must and this Bill if adequately framed can go a long way in addressing this concern. A worthwhile step when the Cos.and DTC are hanging fire for long.

Gujarat Consumer Forum fines ICICI Lombard Insurance and ICICI Bank

Think twice before you accept free mediclaim offer for being a valuable credit card holder. If you  bite the bait, you may end up not just paying for the mediclaim but also running around to get back your money

The Consumer Disputes Redressal Commission, Gujarat State, dismissed the appeal against the order of the Ahmedabad City Forum, holding Healthcops ICICI Lombard General Insurance Ltd and ICICI Bank liable for deficiency in service in a complaint filed by Consumer Education and Research Society (CERS), Ahmedabad, and Deepak Khatwani, a customer of ICICI Bank.  
 
The Forum, by its award dated 30 December 2011, had directed ICICI Lombard General Insurance to credit to Mr Khatwani’s savings bank account Rs 19,049 within two months from the date of the order. The company should also pay him 7% interest on the amount from the date of its debit from his savings account to its credit to that account. The company shall also refund to him Rs2,210, illegally recovered from him, with 7% interest from the date of recovery until payment.
 
The Forum had also directed Healthcops ICICI Lombard General Insurance and ICICI Bank Credit Card Division, Ahmedabad, to pay Mr Khatwani Rs2,000 each for mental agony and Rs2,000 towards cost.
 
The complainants’ case was that ICICI Bank had issued a credit card to Mr Khatwani in February 2005. He used it occasionally, made regular payments and there had been no complaints up to February 2007.
 
On 16 February 2007, Mr Khatwani was telephonically informed that, he being “a valuable ICICI credit card holder, ICICI Lombard was offering him, through the bank, a healthcare policy free for two years, after which it would be chargeable. He accepted the offer and received a health policy from Healthcops ICICI Lombard. The policy mentioned, among other things, the sum insured as Rs3 lakh and the period of insurance from 22 February 2007 to 21 February 2008.
 
But, contrary to  the terms of the offer of two years’ free policy,  Mr Khatwani received an ICICI Credit Card statement dated 21 May 2007 from ICICI Bank  showing the total amount due as Rs2,728.55 and reflecting EMI interest, EMI principal, service tax and late payment fee.
 
Mr Khatwani wrote to Healthcops ICICI Lombard and ICICI Bank, requesting them to confirm that the policy was free for two years, clear his credit card bills or else cancel his health policy, and to clear his credit card dues. Subsequent to the request, the company cancelled the policy.
 
What followed this letter was a seemingly unending repetition of the opposite parties’ sending monthly statements and Mr Khatwani receiving and protesting them, as the “dues” mounted, inclusive of late payment fees, interest, etc.  
 
After a few months, Mr Khatwani started getting repeated phone calls, marked by an abusive, vulgar, uncultured language and threats of dire consequences and heavy penalty. Even an agent was sent to Mr Khatwani’s house in his absence and a female member in the house was made to pay Rs2210.
 
Mr Khatwani gave a legal notice to the opposite parties on 24 November 2007. Instead of replying to the notice, they issued monthly statements from November 2007 to February 2008, showing the total amount due as Rs17,117.40 (as per the February 2008 statement).
 
Mr Khatwani, then approached CERS which took up the matter with the opposite parties.
 
Meanwhile, ignoring Mr Khatwani’s legal notice, ICICI Bank slapped on him its notice on “unpaid outstanding dues of Rs17,117.40 in respect of his credit card. It called upon him to pay the amount within seven days. On failure to do so, the amount would be recovered from his savings account by exercising their right of banker’s lien.
 
Eventually, Mr Khatwani received a statement of transactions in his savings account for the period 1-30 April 2008, reflecting the withdrawal of Rs. 19,049.08 by debiting his savings account exercising the banker’s lien as threatened in the bank’s notice.
 
On 30 July 2008, CERS and Mr Khatwani had complained to the Forum.   
 
The Forum allowed the complainant on 30 December 2011 against which ICICI Lombard filed an appeal before the Consumer Disputes Redressal Commission, Ahmedabad. No such appeal was filed by Healthcops and ICICI Bank.

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COMMENTS

param

6 years ago

while i commend the person for fighting it out, i thought he would have better sense than to leave anything more than min balance in sb a/c in such a situation!

Nagesh Kini FCA

6 years ago

I have always been maintaining that Banks should not indulge in non-banking business like selling insurance policies both health or life or even mutual fund products of which they have only a smattering knowledge of. When it comes to service them like in the event of a claim or maturity in insurance or redemption of MF products they are not geared enough or the person who sold might not be there at all.
My friend and I had heavily once discounted Citibank-New India Mediclaim Policies. There were no renewal notices and the premia later shot up in leaps and bounds. In the pre-portability period we got out of Citibank but restricted to New India to maintain continuity.

Deepak R Khemani

6 years ago

Kudos to Mr Khatwani who fought for his rights and refused to budge and finally got what was rightfully his, the problem is that everyone is so tied up with his work and family that nobody really has the time to fight for issues like this, here it took Mr khatwani 5 years to finally get justice, he hasn't actually got his money, big banks companies and corporations are least bothered about the small customer knowing fully well that the complaint redressal system and justice system is skewed in favor of the biggies, see the post below wherein he asks will K V KAmath and or Chanda kochar ever care to comment on this issue, THEY WON'T.

pk

6 years ago

how to loose customers without trying!!classic case study.

in India copanies can get away literally with murder without any fear.

there will not be any commnets from the likes of K V kamath/ Chanda kochar on such issues.

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