Trade Receivable Discounting System (TReDS)

• Accounting & Bookkeeping
• ||
• January 28, 2025

Overview

MSMEs contribute to 37% approx. of the total GDP of the nation and play a vital role to uplift the Indian economy. Despite of being the backbone of the Economy, MSMEs often struggle in garnering optimal working capital and smooth cashflows, one of the big reason being the slow paying invoices. The government introduced the concept of TReDS (Trade Receivables Discounting System) to facilitate hassle-free payment processing for MSMEs by enabling them to discount their trade receivables and access funds quickly.
The Trade Receivable Discounting System is the next wave of an innovative, electronic platform designed to facilitate accessing the acceleratory funding for MSMEs by monetizing their trade receivables. It was launched in India on 3 December 2014, as the Reserve Bank of India (RBI) issued guidelines to solve the liquidity crunches faced by the MSMEs arising out of delayed payments by corporate buyers and/or government entities.

The TReDS is such a marketplace where the MSMEs discount their receivables with financiers at a discounted rate, thereby immediately providing MSMEs with working capital and further improving their financial health.

Key Features of TReDS

The basic features of TReDS that enable the seamless operation of the platform are as follows:

1. Platform Structure: TReDS is a secure and transparent online platform where MSME sellers can sell their trade receivables to financiers. The discounting of receivables is at an agreed rate, which is essentially the financing cost. This helps MSMEs to get access to quick liquidity.
2. Regulated Platform: The Reserve Bank of India (RBI) oversees TReDS, guaranteeing that transactions are carried out in a transparent and safe environment.
3. Digital Transactions: All steps of the receivable discounting process are carried out online, including accepting funds, negotiating terms, and uploading invoices. This increases transaction efficiency and transparency.
4. Increased Liquidity for MSMEs: By allowing MSMEs to sell their receivables to banks or other financial institutions, TReDS improves their cash flow and cuts down on payment delays, giving them instant access to liquidity.
5. Credit Risk Mitigation: To lower the risk of defaults, financial institutions assess the buyer’s (debtor’s) creditworthiness prior to accepting the receivable for discounting.
6. Discounting of Invoices and Bills of Exchange: The spectrum of trade receivables that qualify for financing is expanded because receivables under TReDS may take the form of invoices or bills of exchange.
7. Transparent Auctioning Process: To ensure pricing transparency, the discounting process uses an auction model in which financiers bid on the receivables.
8. Access to Competitive Rates: The TReDS platform’s competitive nature allows MSMEs to obtain better financing rates than those offered by conventional lending channels.
9. Better Buyer-Supplier Relations: Buyers gain an advantage by helping their suppliers secure operating cash without requiring them to prolong payment terms. Suppliers also gain instant access to finances.
   

Participants
TReDS comprises five major participants:

1. MSME Sellers: Small and medium businesses provide goods or services to large corporate buyers, government departments, or even PSUs.
2. Corporate Buyers/Government Entities: Big purchasing firms that provide MSME sellers with dues for supplying them goods or services. Corporate buyers could be big companies, PSUs, or government entities.
3. Financiers (Banks and Financial Institutions): These are entities that finance the business by acquiring the trade receivables of MSME at a discount. Such financiers could be Banks / NBFCs or any other such Financial Institutions.
4. TReDS Platform Operators: The entire receivables discounting process is facilitated by TReDS platform operators. They manage the technology infrastructure, ensuring regulatory compliance and smooth platform working. Examples of platform operators include RXIL (Receivables Exchange of India Ltd.), M1xchange, and Invoicemart.
5. RBI-Regulators: The Reserve Bank of India (RBI) is the primary regulator for TReDS. It ensures that the platform adheres to legal and financial regulations, that all participants follow proper procedures, and that the platform operates in a secure environment.

TReDS Platform and Its Implications
As per the Gazette notification (S.O.- 4845E) dated November 7, 2024, the Ministry of Micro, Small and Medium Enterprises (MSMEs) mandates that all the companies registered under the Companies Act, 2013, with a turnover exceeding Rs. 250 crore, along with all Central Public Sector Enterprises (CPSEs), must onboard themselves on the Trade Receivables Discounting System (TReDS) platforms. This new directive replaces the earlier notification issued on November 2, 2018, which had established the turnover threshold for registration on TReDS at INR 500 crore. These platforms, which are designed as per the guidelines set by the Reserve Bank of India (RBI), aim to facilitate the financing via discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs). The said companies and CPSEs must complete their onboarding on the TReDS platforms by March 31, 2025.
Non-compliance of TReDS may lead to regulatory scrutiny, penalties, and damage to reputation. Delays or defaults in registering on the TReDS Platform could also result in penalties or legal consequences under Section 450 of the Companies Act, 2013. Such penalties and punishment apply to the company, any officer in default, or any other responsible person. The penalty which may extend to ten thousand rupees, with a further fine of one thousand rupees for each day of continued non-compliance, subject to a maximum of two lakh rupees for the company, and fifty thousand rupees for the officer in default or any other person at fault.

Who is Eligible as an MSME?

A Micro, Small and Medium Enterprises is an entity that engaged in the manufacturing of goods or providing provision of services. To qualify as an MSME, the entity must meet the following conditions:

• Micro: The investment in plant and machinery or equipment should not exceed Rs. 2.5 crore, and the annual turnover should not exceed Rs. 10 crore.
• Small: The investment in plant and machinery or equipment should not exceed Rs. 25 crore, and the annual turnover should not exceed Rs. 100 crore.
• Medium:The investment in plant and machinery or equipment should not exceed Rs. 125 crore, and the annual turnover should not exceed Rs. 500 crore.

Objective
The main objective of TReDS is to enhance the liquidation of MSMEs and reduce the Dependency of the MSME on traditional bank credit; the system ensures timely recovery of payments even if the buyers delay the payment.

Process Flow
The process involves the following important steps:

1. MSMEs are required to register on the platform.
2. MSME sellers upload their trade receivables on the TReDS platform.
3. Corporate buyers/government entities authenticate the receivables and confirm their genuineness.
4. Financiers buy such receivables at a discount, providing an immediate funding facility to MSMEs.
5. Buyers are required to settle invoices raised by MSMEs seller within 45 days from the date of acceptance or deemed acceptance of goods or services, as per the Micro, Small, and Medium Enterprises Development Act, 2006.

Security Features
The platform is designed to be highly secure, with features like electronic signatures, digital authentication, and encrypted transactions. These features ensure that all transactions are transparent, secure, and free from tampering.

How Does TReDS Work?

TReDS is designed to make the receivables financing process more efficient and accessible. The functioning of TReDS can be summarized in the following steps:

1. Registration:
   MSME Sellers: MSMEs with outstanding receivables can register on the TReDS platform.
   Corporate Buyers: The buyers (for example, large companies or government entities) who owe money to MSMEs also need to register on the platform to authenticate the receivables.
   Financiers: Banks and financial institutions register as financiers on the platform.
2. Uploading Receivables:
   • Once onboarded, MSME vendors upload their invoices or trade receivables onto the platform. These receivables indicate payments receivable from corporate buyers or even the government.
   • The receivables will have information such as invoice value, due date, payment terms, etc.
3. Authenticating Receivables:
   • Corporate buyers/government agencies authenticate the receipts. The process will, therefore, enter legitimate receipts only in the system and
   • The buyer verifies that he indeed owes and that payment of a particular receipt is due with the MSME seller.
4. Receivable Discounting:
   • Once the receivables are authenticated, financiers review the receivables and offer to purchase them at a discounted rate.
   • The discounted rate is determined based on factors such as the buyer’s creditworthiness, the risk involved, and the interest rate.
   • The MSME seller can either accept or reject the financier’s offer.
5. Acceptance by MSME:
   If the MSME seller accepts the financier’s proposal, the financier pays off the discounted amount, less than the original invoice, to the MSME seller.
   This gives the MSME seller instant liquidity, enabling it to pay operational costs and improve its working capital.
6. Payment through Corporate Buyer/Government Unit:
   • The corporate buyer/ government unit will eventually pay on the due date determined by the financier and reimburse the financier for the invoiced amount.
   • The discounted amount is received by the MSME seller, and the financier collects the invoice amount from the buyer.
   • Once full payment is made by a corporate buyer or a government agency, the transaction gets settled.
   • The financier gets the full invoice amount, and the upfront discounted amount has already been received by the MSME seller.

How to Register on TReDS?

To get registered on the TReDS platform, each participant must meet certain eligibility criteria and submit relevant documents:

1. For MSME Sellers:
   • Eligibility Criteria: The applicant must be registered as an MSME under the MSMED Act, 2006, and must have valid trade receivables from corporate buyers, government departments, or PSUs.
   • Documents Needed:
     • Incorporation Certificate (COI) or any equivalent document.
     • MSME Certificate.
     • GST Registration (if applicable)
     • KYC Documents such as PAN card and address proof.
   • Registration Process: MSMEs can register on permitted TReDS platforms, such as RXIL, M1xchange, or Invoice Mart. These platforms verify documents and authenticate receivables.
     

2. Corporate Buyers:

• • Eligibility Criteria: Only corporate buyers who owe money to MSMEs for goods or services rendered are eligible.
  • Documents Required:
    • Certificate of Incorporation.
    • GST Registration (if applicable).
    • PAN and KYC documents of the corporate entity
  • Registration Process: Corporate buyers register with a TReDS platform and authenticate the receivables listed by MSMEs.

3. For Financiers (Banks/Financial Institutions):

• • Eligibility Criteria: Banks and NBFCs must be regulated entities under RBI guidelines and licensed to offer factoring services.
  • Documents Required:
    • Official documents showing the legal status of the institution.
    • KYC documentation.
  • Registration Process: Financial institutions must register on TReDS platforms and complete due diligence procedures.

Benefits of TReDS:

TReDS brings much-needed benefits to all participants in the system:

Key Developments

Previously, registration on TReDS was mandatory only for MSME sellers and financiers, but there was no such requirement for corporate buyers, who are the entities actually responsible for payments to MSMEs. Nevertheless, they were expected to validate and approve the receivables uploaded by MSME sellers; however, there was no overall compulsory requirement to register. A significant recent development pertains to the eligibility criteria for the registration of corporate buyers on TReDS. 

• Compulsory Registration for Corporate Buyers with amended Threshold:  The Ministry of MICRO, SMALL AND MEDIUM ENTERPRISES amended a major regulation of 2024 that made it mandatory for corporate buyers, such as large corporations and Public Sector Undertakings with a turnover exceeding INR 250 crores, to register on TReDS.
• Main Focus Areas of the Amendment Compulsory Registration of Corporate Buyers: Corporate buyers with a turnover of INR 250 crores or more are now required to register on any of the RBI-approved TReDS platforms. This mandate includes large corporations, public sector undertakings (PSUs), and government departments that have outstanding payments to MSMEs. The earlier mandate was for corporates having INR 500 crores or more.

Deadline for Registration:

Corporate buyers must get their registration completed on the TReDS platform by March 31, 2025.
Beyond this date, failure to register will likely lead to non-compliance with RBI guidelines.

Objective of the Directive:

• It aims to facilitate faster and more transparent payments to MSMEs.
• Through registration on the TReDS platform, corporate buyers will authenticate their trade receivables, making the process of financing MSMEs smoother and more efficient.
• It will help banks or financial institutions provide MSMEs with quicker liquidity by discounting their authenticated receivables.
• In order to ensure that MSMEs can prosper and contribute to India’s economic progress, the government wants to make the environment more inclusive, transparent, and efficient by requiring major enterprises with revenue above ₹250 crores to register on TReDS.

Corporate Buyer’s Actionable Next Steps:

The mandate covers corporate buyers. The said corporate buyers have to enroll on one or more of the approved TReDS platforms, such as RXIL, M1xchange, or Invoicemart. Upon successful enrollment, the authenticated uploaded receivables from MSMEs can be discounted by financiers to generate instant liquidity for MSMEs.

Why It Matters

• For Corporate Buyers: This is part of a more significant effort to ensure timely payments and better supply chain financing. This registration process helps improve the transparency of outstanding payment disputes.
• For MSMEs: This regulatory change will also make the process more predictable and faster for them to get financing since their receivables will be authenticated directly by the buyer, which helps financiers discount those receivables.
• For the Economy: The initiative would positively contribute to financial inclusion, enhance credit flows to MSMEs, and ensure the sector’s overall financial stability.

Conclusion:
TReDS is a game-changing platform that enhances the liquidity of Indian MSMEs by allowing them to discount their trade receivables. All participants involved enjoy a win-win situation. MSMEs receive quick payments, corporate buyers improve their cash flows and credibility, and financiers find money through the discounting process. In doing so, TReDS secures a safe and transparent marketplace for the MSME sector to overcome liquidity challenges and help stabilize India’s economy. With its growing adoption, TReDS has the potential to transform the way MSMEs access working capital and improve the overall financial health of small businesses.

At Mercurius, we provide comprehensive support for every aspect of the TReDS platform, including registration, transaction processing, and compliance. If you have any questions or need further assistance, please don’t hesitate to contact us.