Unit 4: Factoring & the depository system
Financial Markets and Services notes · PTU syllabus (BBA 522-18)
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Unit summary
Businesses need fast cash from receivables and investors need safe, paperless holding of securities. This unit covers factoring and how it differs from bills discounting, credit insurance and forfaiting, and the depository system — dematerialisation, rematerialisation, NSDL, CDSL and depository participants.
After this unit you can
- Explain factoring and compare it with bills discounting
- Explain credit insurance and forfaiting
- Explain the depository system, dematerialisation and rematerialisation
- Describe NSDL, CDSL and the role of depository participants
PTU syllabus topics
- Factoring concept vs. bills discounting
- credit insurance and forfeiting
- depository meaning
- dematerialisation and rematerialisation process
- NSDL and CDSL
- depository participants and SEBI guidelines
- 1Investor opens a demat account
With a depository participant
- 2Submits share certificates
With a demat request form
- 3DP sends request to the company's registrar
- 4Registrar verifies
And cancels the certificates
- 5Depository credits shares
NSDL or CDSL
Topic 1
Factoring
Factoring is a financial service in which a business sells its trade receivables to a factor, which advances most of their value, collects the debts and may bear the credit risk. Types: recourse (client bears bad debts) and non-recourse (factor bears them); domestic and export factoring; disclosed and undisclosed.
Nature
Sale of receivables plus services
A loan against a bill
Services
Collection, sales ledger, credit protection
Finance only
Instrument
Invoices (book debts)
Bills of exchange
Statute
Factoring Regulation Act, 2011
Negotiable Instruments Act
Topic 2
Credit insurance and forfaiting
- Credit insurance protects a business against non-payment by customers (insolvency or default). In India, ECGC insures exporters against commercial and political risks.
- Forfaiting is the purchase of an exporter's medium-term receivables (usually backed by bills or promissory notes and a bank guarantee) by a forfaiter, without recourse — the exporter gets cash immediately and is free of risk.
Topic 3
The depository system
A depository holds securities in electronic (dematerialised) form and transfers them by book entry. India has two: NSDL (National Securities Depository Ltd, 1996) and CDSL (Central Depository Services Ltd, 1999). Depository participants (DPs) — banks and brokers registered with SEBI — act as agents through which investors open demat accounts.
- 1Open a demat account with a DP
- 2Submit share certificates with a demat request form
- 3DP sends the request to the company's registrar (RTA)
- 4RTA verifies and cancels the certificates
- 5Depository credits the shares to the demat account
Rematerialisation is the reverse: converting electronic holdings back into physical certificates on request. (SEBI now requires listed securities to be transferred only in demat form.) Benefits: no risk of loss, theft or forgery; quick transfer; lower costs; no stamp duty on transfers of demat shares; easy pledging.
Key terms
- Factoring
- Selling receivables to a factor for cash and services
- Forfaiting
- Non-recourse purchase of export receivables
- Depository
- An institution holding securities electronically
- Dematerialisation
- Converting physical certificates into electronic form
- Depository participant
- An agent of the depository serving investors
Quick revision
- Factoring = finance + collection + credit protection.
- Forfaiting: medium-term export receivables, without recourse.
- NSDL (1996) and CDSL (1999); DPs serve investors.
- Demat: DP → RTA → depository credit.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define factoring.
- Q2.Differentiate between recourse and non-recourse factoring.
- Q3.What is forfaiting?
- Q4.Name India's two depositories.
- Q5.What is rematerialisation?
Long-answer questions
- Q1.Explain factoring and compare it with bills discounting.
- Q2.Explain forfaiting and credit insurance.
- Q3.Explain the depository system and the process of dematerialisation.
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