NSE to launch new exchange for MSMEs

The National Stock Exchange (NSE) is launching trade receivable and credit exchange, a trading platform for small and medium enterprises (SMEs) where their bills against large companies can be accepted electronically and auctioned so that these small enterprises are paid promptly.

"The new platform will be a joint venture (JV) of NSE and Small Industries Development Bank of India (SIDBI) and could be the first specialised exchange for micro SMEs," said a source with direct know. The platform would be known as 'Trades Exchange' and will be operational by the end of this calendar year, the souce added.

The move is in line with the Reserve Bank of India (RBI) concept to implement such a model for the benefit of a vast section of small businesses in the county, which are still facing the pressure on financial sustainability.

A senior official of SIDBI told Business Standard: "This will be a new pioneering venture which is getting place and providing unprecedented platform for SMEs. We have already got the approval from the bank regulator on this and will be signing the formal agreement very soon."

NSE declined to comment.

The new platform is based on the Trade Receivables Discounting System (TReDS), aimed to facilitate financing of MSME bills / invoices through the reverse factoring model. The financier could be banks or non- banks. The MSME supplier, buyer and financiers would have to sign agreements with the exchange, which will provide facility for electronically presenting and accepting bills. Besides providing the technical infrastructure the exchange, will also look into aspects such as registration and due diligence of MSMEs and respective corporate, on-boarding of financiers, technical requirements and business processes for dematerialisation of invoices, documentation requirements and legal formalities etc.

Internationally, such a platform has been in practice for quite some time. Like the Mexican development bank, which has created an electronic system where any small firm could present receivables on a number of large firms to it. The accepted receivables, now full-fledged claims on the large firms, were then auctioned off in the market, and the proceeds paid out to the small firms.

Business Standard explains you the model here with a simple example. Let us assume A is the corporate/buyer who send purchase order to B which is a MSME. B now delivers the goods as per the requirement along with bill to be paid by due date. Now A accepts the goods and based on instruction received from MSME, posts the accepted bill on the designated exchange. Receivables of B from A become available to the financiers for bidding and financiers submit their online bids to the exchange. Several bids options submitted by financiers become available to the B which it is supposed to evaluate and accepts. So, when B accepts the bid of a financier, an online intimation is sent by the exchange to all concerned parties about the discounting of bill. Hence, payment is made by the financier to B and exchange will be intimated about it. While on due date, A directly pays to the financier. If it does not exercise its option, the auction closes at the expiry of specified period.

Sources said that many PSU and private banks showed interest for partnership and are in talking terms with the NSE.

On the various occasions in past the bank regulator has raised concerns over the issue of delayed payments of MSMEs, because of their dependency on the corporate buyer and the inability to take up the issue through appropriate institutional setup created for the purpose.

The platform though, ensures sufficient liquidity for all stakeholders but at the same time it has also some risk factors which need to be addressed. This includes proper legal framework for supporting the model, discounting needs to be identified, provisions of registration requirements, default handing , settlement of funds etc.