WHAT IS A LEGAL ENTITY IDENTIFIER?
Since globalisation has spread a lot and every part of the world has become a part of this international market. However, still, we lack a common identifier to identify the parties in a financial transaction. LEI has the potential to act as the primary identifier for identifying international transactions and validating the parties to the transaction. The Legal Entity Identifier (LEI) is basically a 20-digit unique identification code that is to be mentioned in a financial transaction (e.g. a legal entity having a credit exposure of above 5 crores as per the timeline mentioned later in this article, is required to obtain LEI and mention it on financial transactions) and has been made applicable to Legal entities only i.e non-individuals hence the individuals are outside the preview of LEI requirement. Also, as LEI is obtained based on ownership documents of an entity and the details can be verified using the LEI number so it affirms the genuineness of parties in a financial transaction. In India, LEIs are regularized by RBI and are based on international standards and the current guidelines of the Regulatory Oversight Committee (ROC).
PURPOSE OF LEI
The Legal Entity Identifier(LEI) is a unique global identifier for legal entities participating in financial transactions and its basic purpose is to help identify legal entities on a globally accessible database. Legal entities are organizations such as companies or government entities that participate in financial transactions. Also, the identifier is used in regulatory reporting to financial regulators and so, all financial companies and funds are required to have an LEI.
The identifier connects to key information that enables a clear and unique identification of legal entities participating in financial transactions. Each LEI database entry contains information about an entity's ownership and thus answers the questions of 'who is who’ and ‘who owns whom’.
GLOBAL LEI SYSTEM
There are a number of LEI issuers around the world that issue and maintain the identifiers and thus contributes to the global directory of the LEI database, these are typically financial exchanges or financial data vendors. These are accredited by the Global Legal Entity Identifier Foundation (GLEIF) to issue LEI. GLEIF is a supra-national not-for-profit organization headquartered in Basel, Switzerland. GLEIF makes available the Global LEI Index; i.e. the only global online source that provides open, standardized and high-quality legal entity reference data. It has been established by the Financial Stability Board in June 2014 and is tasked to support the implementation and use of the Legal Entity Identifier (LEI). The foundation is backed and overseen by the Regulatory Oversight Committee, representing public authorities from around the globe that have come together to jointly drive forward transparency within the global financial markets.
LEI IN INDIA
The LEI has been mandated in India since 2017 in a bid to improve market transparency and prevent banking fraud. All borrowers of banks in India will require an LEI going forward and all entities trading internationally including those who are responsible for reporting OTC Derivative trading. Recognizing the benefits of LEI in financial transaction transparency, efforts have been made by RBI to ensure that legal entities adopt the LEI mechanism early, for that guidelines have been issued to banks to advise Legal entities meeting the respective threshold to get LEI numbers.
APPLICABILITY OF LEI IN INDIA
LEI registration is required for the following transactions:
LARGE VALUE TRANSACTIONS IN CENTRALIZED PAYMENT SYSTEMS.
(RBI notification dated 05.01.21)
All non-individual customers initiating and receiving transactions of 50 crores and above through RTGS and/or NEFT are required to mention the LEI number.
LARGE BORROWERS
(RBI notification dated 21.04.22)
All non-individuals borrowers having credit exposures from banks and financial institutions (FSI) shall be required to obtain LEI codes as per the timeline mentioned below:
TOTAL EXPOSURE* | LEI is to be obtained before |
Above 25 crore | April 30, 2023 |
Above 10 crores, up to 25 crore | April 30, 2024 |
5 crore and above up to 10 crore | April 30, 2025 |
*“Exposure” for this purpose shall include all fund-based and non-fund-based (credit as well as investment) exposure of banks/FIs to the borrower. Aggregate sanctioned limit or outstanding balance, whichever is higher, shall be reckoned for the purpose. Lenders may ascertain the position of aggregate exposure based on information available either with them or the CRILC (Central Repository of Information of Large Credits) database or declaration obtained from the borrower.
PARTICIPANTS IN THE NON-DERIVATIVES MARKET
(RBI Notification dated 29.11.2018)
All participants, other than individuals, undertaking transactions in the markets regulated by RBI viz., Government securities markets, money markets (markets for any instrument with a maturity of one year or less) and non-derivative forex markets (transactions that settle on or before the spot date) shall obtain Legal Entity Identifier (LEI) if they have a net worth of more than Rs.2000 million. Transactions undertaken on recognized stock exchanges are outside the purview of the LEI requirement.
In the case of non-derivative forex transactions, while all inter-bank transactions shall be subject to LEI requirement, client transactions shall require LEI code for transactions involving an amount equivalent to or exceeding USD one million or equivalent thereof in other currencies.
Non-resident entities undertaking financial transactions in the relevant markets also require the LEI code. Such entities that are not legal entities in their country of incorporation (e.g., funds operated by a non-resident parent/management company that are each registered as an FPI) should use the LEI code of the parent/management company.
Entities responsible for executing transactions, reporting or depository functions in these markets shall capture the LEI code of the transacting participants in their systems.
CROSS BORDER TRANSACTIONS
(RBI notification dated 10.12.21)
In order to further harness the benefits of LEI, it has been decided that AD Category I banks (Banks which has been authorized under section 10(1) of the FEMA Act to undertake capital and current account) shall obtain the LEI number from the resident entities (non-individuals) undertaking capital or current account transactions of 50 crores and above (per transaction) under FEMA 1999. As regards non-resident counterparts/overseas entities, in case of non-availability of LEI information, AD Category I banks may process the transactions to avoid disruptions. Once an entity has obtained an LEI number, it must be reported in all transactions of that entity, irrespective of transaction size.
OVER-THE-COUNTER DERIVATIVES
(RBI notification dated 01.06.2017)
LEI system is applicable to all participants in the Over-the-Counter (OTC) markets for Rupee Interest Rate derivatives, foreign currency derivatives and credit derivatives in India. Accordingly, all current and future participants should obtain the unique LEI code.
FUTURE OF LEI
Until today, every identity system had different ways of using identifiers or identifying customers. Some use many different identifiers, while others use few. There is no consensus.
LEIs have the potential at first, to simplify and globalise a method of validating organisations and mapping identifiers. That information can be used on a greater scale to understand organisation identity and hierarchy and potentially contribute to newer technological innovations like blockchain.
CONSEQUENCES OF NON-REGISTRATION OF LEIL
Entities dealing in OTC derivative markets will not be eligible to transact without a valid Legal Entity Identifier or LEI number. Borrowers who do not obtain the LEI code will not be granted renewal/enhancement of credit facilities.
Entities dealing in non-derivative markets transactions will not be able to undertake transactions in financial markets, either as an issuer or as an investor or as a seller/buyer.
Application for a Legal Entity Identifier
The application for a legal entity identifier is a simple three-step process.
Fill in all the blanks in the Legal Entity Identifier registration form given below.
Submit your LEI registration application and pay with Netbanking, Bank transfer, Credit card or Razorpay.
Your data will be processed and the legal entity identifier will be sent to you by e-mail.
CONCLUSION
Successful implementation of LEI is expected to help financial institutions administer financial transactions, improve transparency in financial transactions, and assist in curbing the increasing incidents of banking fraud.
FAQs on Legal Entity Identifier (LEI)
1. What is a Legal Entity Identifier (LEI)?
The Legal Entity Identifier (LEI) is a 20-digit unique identification code used to identify legal entities involved in financial transactions. It helps verify and validate the parties in transactions and ensures transparency in the financial system.
2. Who needs an LEI?
LEI is mandatory for non-individual entities (e.g., companies, organizations) engaged in certain financial transactions such as:
Borrowers with credit exposure above specified thresholds.
Participants in derivative and non-derivative markets.
Entities involved in cross-border capital or current account transactions exceeding certain limits.
3. Are individuals required to obtain an LEI?
No, LEI requirements apply only to legal entities and not to individuals.
4. What is the purpose of the LEI?
The primary purpose of the LEI is to:
Provide a globally unique identifier for legal entities.
Enhance transparency in financial transactions.
Help regulators monitor systemic risks.
Reduce fraud by validating the authenticity of transaction parties.
5. Who oversees the LEI system globally?
The Global Legal Entity Identifier Foundation (GLEIF), a not-for-profit organization based in Basel, Switzerland, oversees the LEI system. It manages the Global LEI Index, which is an open database of LEI information.
6. How is the LEI system regulated in India?
In India, the Reserve Bank of India (RBI) regulates the LEI system and mandates its use for certain financial transactions. Guidelines have been issued to ensure adoption by eligible entities.
7. What transactions require an LEI in India?
LEI is required for:
Large-value transactions (₹50 crore and above) in RTGS and NEFT systems.
Borrowers with credit exposure exceeding ₹5 crore.
Participants in government securities, money markets, and non-derivative forex markets with specific net worth thresholds.
Entities involved in cross-border transactions above ₹50 crore per transaction.
Participants in OTC derivative markets.
8. What are the deadlines for obtaining an LEI based on credit exposure?
Above ₹25 crore: By April 30, 2023.
Between ₹10 crore and ₹25 crore: By April 30, 2024.
Between ₹5 crore and ₹10 crore: By April 30, 2025.
9. What happens if an entity doesn’t register for an LEI?
Non-compliance may lead to the following consequences:
Inability to transact in OTC derivative and non-derivative markets.
Denial of credit facility renewals or enhancements.
Restrictions on participating in financial markets as an issuer, investor, or trader.
10. How do I apply for an LEI?
The LEI registration process involves three simple steps:
Fill out the LEI registration form with required details.
Submit the application and pay the applicable fee.
Receive the LEI via email after verification.
11. How does LEI contribute to financial transparency?
LEI provides a standardized way to identify legal entities, revealing ownership structures and answering “Who is who” and “Who owns whom.” This helps reduce fraud, ensures accurate reporting, and promotes trust in financial transactions.
12. Can non-resident entities obtain an LEI?
Yes, non-resident entities involved in financial transactions in India are required to obtain an LEI. If such entities are not legal entities in their country of incorporation, they can use the LEI of their parent or management company.
13. What is the role of GLEIF in the LEI system?
GLEIF accredits LEI issuers globally, maintains the Global LEI Index, and ensures adherence to international standards. It also promotes the use of LEI to improve transparency and integrity in global financial markets.
14. How does LEI facilitate technological advancements like blockchain?
LEI’s standardized identification framework can support innovations like blockchain by providing accurate and consistent entity identification, which is essential for decentralized financial systems.
15. Where can I verify an LEI?
You can verify an LEI and access related entity information on the Global LEI Index maintained by GLEIF.
16. Why is LEI important for large-value and cross-border transactions?
LEI helps mitigate risks in high-value and cross-border transactions by ensuring that all parties are verified and their ownership structures are transparent. This reduces fraud and enhances regulatory compliance.
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