Import duty cut to hinder industry growth says Tata Motors

The Tata group company feels that the short-term policy shift of cutting imports dutu on cars from Europe will hinder growth of domestic automobile industry and investment in the country

New Delhi: Coming out against the proposal to cut imports duty on cars from Europe as envisaged under India-EU FTA, Tata Motors on Friday said such short-term policy shift will hinder growth of domestic automobile industry and investment in the country, reports PTI.

The company said India, with its open liberal policy, has been able to attract many global players that has resulted in helping growth of the industry and any such change in policy will create a un-level playing field.

"It will hinder the growth of the industry. It will also create a un-level playing filed and any short term policy shift is not advisable," Tata Motors' managing director (India Operations) PM Telang told PTI here.

Under the proposed free-trade agreement (FTA) officially dubbed as Bilateral Investment and Trade Agreement (BTIA), EU wants India to slash import duties on passenger cars.

India is seeking greater market access in services sector among other things. The talks for the comprehensive pact was started in June 2007.

Coming out against any specific reason being given the preference, he said if at all the import duty would reduce it should be for all the regions.

The company and the industry should work out a timeline together to bring down the import duty on cars, he said.

He also sounded cautioned that while taking such steps the government should be careful that investment in the country do not come down, Telang cited the example of Australia, where after the liberalisation policy on cars, the assembly operations in the country had gone down drastically.

When asked about benefits to Jaguar Land Rover (JLR), if at all import duty from Europe on car would be reduced, he said it is premature to be specific.

"We had been following the government policy. We have started assembling of JLR models in India. In future also, we will follow government policy." Mr Telang said.

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Disney buys Screwvala, Unilazer and Unilazer stake in UTV

Ronnie Screwvala also ceased to be the managing director of the UTV Software Communications but will continue to be a whole-time director of the company

New Delhi: Media and entertainment firm UTV Software Communications on Friday said Rohinton Screwvala, Unilazer Exports and Management Consultants Ltd and Unilazer Hong Kong Ltd (Unilazer HK) have sold all their shares in the company to the Walt Disney Company (South East Asia) Pte Ltd (TWDC SEA) for an undisclosed amount, reports PTI.

The shareholders' agreement between Rohinton Screwvala, Unilazer , Unilazer HK and TWDC SEA has been terminated with effect from February 2, 2012, UTV Software Communications said in a filing to BSE.

The firm yesterday said it has fixed the exit price for shareholders at Rs1,100 per share as part of its complete acquisition by US-based Walt Disney Company.

"The acquirer (The Walt Disney Company Southeast Asia Pte Limited) has accepted the discovered price of Rs1,100 per share and shall acquire all shares tendered through valid bids at or below the exit price," the earlier filing had said.

In July last year, UTV Software had announced that Walt Disney Co has offered to buy out stakes held by public shareholders and other promoters of the company in a deal valued around Rs 2,000 crore.

Subsequently, in December, 2011, the Cabinet Committee on Economic Affairs (CCEA) approved the deal.

As of 31 December 2011, the promoter and promoter group shareholding in UTV stood at 70.04%, including 50.28% owned by Walt Disney Company (South East Asia) Pte Ltd.

Rohinton Screwvala has also ceased to be the Manging Director of the company, but will continue to be a whole-time director of the company, UTV said.

UTV operates in five verticals— broadcasting, games, motion pictures, digital content and television content.

Shares of UTV Software Communications Ltd were being quoted at Rs 1,063 apiece in afternoon trade on the BSE today, down 0.38% from their previous close.

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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

4 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 4 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.

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factoring

5 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

5 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 5 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 4 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

5 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.

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