Legal Entity Identifier (LEI): Purpose, Applicability and Compliances

Legal Entity Identifier (LEI): Purpose, Applicability and Compliances

30 August 2022 • Apoorwa & Manju

RBI has made mandatory LEI registration for all cross border transactions such as capital or current account transactions of INR 50 crore and above, w.e.f  1^st October, 2022. Previously, LEI registration was made compulsory for all RTGS and NEFT transactions of INR 50 crore and above, w. e. f. 1^st April 2021. RBI intends to broaden the horizon and implement LEI registrations in phases to include entities and transactions with much lower threshold, details provided in subsequent paras.

The concept of Legal Entity Identifier dates back to global financial crisis times of 2008, when the regulators worldwide acknowledged their inability to identify parties to transactions across markets, products, and regions. Subsequent to such events, the need for greater adoption of a publicly available, global directory was felt.

The data casted with the Legal Entity Identifier (in common parlance, termed as, LEI) aims to fulfil such requirements and hence can be regarded as a global directory to enhance greater transparency in the global marketplace.

In India, regulatory momentum pertaining to LEI issuance, continues to grow with the Reserve Bank of India (RBI) as an early supporter followed by the Securities Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority of India (IRDAI) also recognising the opportunity to benefit from the LEI.

Meaning

A LEI is a 20-character alpha numeric unique code recognised globally, allotted to any legal entity or structure that is party to a financial transaction, who may act so, in the capacity of a borrower, lender, market participant, financial and market regulator or a mutual fund / Alternative Investment Fund (AIF) and its schemes, etc. in any jurisdiction across the globe. The LEI connects key reference information for clear and unique identification of legal entities within the global financial system.

Purpose

Since, LEI is accepted worldwide, it facilitates identification and tracking of the flow of financial transaction right from the investment stage to its end use. It aims to identify and evaluate systemic and emerging risk, identify trends and take corrective steps in the global financial scenario.

As an LEI contains information about an entity’s ownership structure including parent company, the banks/public authorities can track all financial transactions against one LEI. Also, some international public authorities rely on the LEI to evaluate risk, take corrective steps and, if required, minimize market abuse and improve the accuracy of financial data.

In other words, LEI is the linchpin that connects the dots across the universe of entity identification of the digital era.

Notifications/circulars necessitating LEI registration

By RBI

• During the year 2017-18, the RBI introduced a phase-wise implementation of the LEI for Over-the-Counter (OTC) markets including Rupee Interest Rate derivatives, foreign currency derivatives, credit derivatives and Non-derivative markets, including the Government securities markets, money markets, and non-derivative forex markets.
• In a major breakthrough move, LEI registration was made compulsory for all Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) transactions of INR 50 crore and above, w. e. f. 1^st April 2021.
• To further enlarge the scope, RBI made mandatory registration of LEI for all cross border transactions such as capital or current account transactions of INR 50 crore and above, w.e.f 1^st October, 2022.
• To design the way ahead, RBI has introduced phase wise implementation of the LEI for borrowers as per the below timeline-

By SEBI

• SEBI vide Circular dated November, 2019 has recommended LEI code for Eligible Foreign Entities (EFEs) in the commodity derivatives market of recognized stock exchanges for hedging their exposure.

By IRDAI 

• IRDAI vide Circular dated June, 2020, in compliance with the aforementioned RBI circulars has introduced compulsory LEI registration for all insurers prior to engaging in any grant of credit facilities. The corporate borrowers of such insurers, with total exposure of INR 50 Crores and above, are also mandated to obtain LEI in such case.

Process of obtaining LEI

Any person can obtain LEI for any specified transaction either directly or through an intermediary. In case of direct application, such person needs to self- register in the online portal and designate an Authorised Signatory for correspondences and availing of the LEI in India. The subsequent steps involved in this process includes, payments of the prescribed fee and submission of the requisite documents. Approval of the LEI application is usually processed within 3 to 4 working days. To know more, please refer to the User Manual for New Registration.

Compliances

• Updation in case of change: An LEI code also needs to be updated in the event of any changes to the information submitted at the time of registration or as appearing on the MCA records or like governing authority.
• Mandatory Renewal: An LEI code is valid for a period of 1 year from the date of registration and has to be renewed for subsequent years. If not, the LEI status is set to ‘Lapsed’.

You may also like to read:

• • Liberalisation of Forex Flows