In this article we are going to discuss what is a Legal Identifier and why one is important for your business.
The Legal Entity Identifier can be thought of as a code assigned to every entity, quite like the Aadhar card for individuals, on a global scale. When we think of the international financial world, it becomes very difficult for a company located across the ocean, on another continent to ascertain the fiscal liabilities and obligations of a trading partner. Many companies have been found concealing details of potential payouts while being embroiled in legal controversies. Some companies, in order to raise money from investors at a higher valuation, may conceal details of initial investments and debt in the company. This is the problem that the Legal Entity Identifier, abbreviated as LEI, aims to solve. Lets see Why Does Your Business Need LEI
What is the Legal Entity Identifier Code?
The identifier is formatted as a 20-character, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). It connects to key reference information about a party that enables clear and unique identification of legal entities participating in financial transactions.
Each LEI contains information about an entity’s ownership structure and thus answers the questions of ‘who is who’ and ‘who owns whom’, thereby bringing greater clarity in international transactions. This publicly available LEI data pool can be regarded as a global directory of participants in the financial market.
Mandatory LEI Direction By The Reserve Bank Of India
In the year 2017, RBI exercising its powers under Section 35 of the Banking Regulation Act advised banks to compulsorily ask their large borrowers having fund exposures upwards of Rs 5 crores to Rs 50 crores to obtain an LEI. It also said that banks should encourage large borrowers to obtain Legal Entity Identifier for their parent entity as well as all subsidiaries and associates. Thus, LEI has been implemented in a phased manner for participants (other than individuals) in the over-the-counter markets for rupee interest rate derivatives, foreign currency derivatives and credit derivatives in India.
In a notification released in November 2018, the central bank of our country, the Reserve Bank of India has made it compulsory for all market participants, other than individuals, to obtain an LEI. Thus, any legal entity such as a corporate form of business, partnership, an association of persons dealing in financial transactions would have to obtain an LEI number.
Eligible Entities For LEI
The list of entities eligible to apply for LEI codes are
- Sole Proprietorships
- Limited Liability Partnerships
- Partnership Firms
- Trusts
- Private Limited Companies
- Public Limited Companies
- Government Companies
- One Person Company
- Insurance Companies
- Housing Finance Companies
- Non-Banking Finance Companies
- Non-profit companies
- Special Purpose Vehicles – Trusts, Special Purpose Vehicles – Companies, SPV – Partnership Firms, SPV – Co-operative Societies or Multistate Co-operative Societies Mutual Fund
- Mutual Funds-Sub Scheme
- Pension Fund
- Pension Fund Sub-Scheme
- Alternative Investment Fund (AIF), AIF- Sub Scheme, Nationalised Banks, Scheduled Urban Cooperative Bank, RRBs, Payment Banks, Banking Companies – Others, Stand Alone Primary Dealers, Public Financial Institutions, Unlimited Companies, Cooperative Societies or Multi State Cooperative Societies, Government Organizations, Companies Limited by Guarantee, Provident/Superannuation/Gratuity/Insurance Fund etc. Other entities may be specified from time to time.
Thus, 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) codes.
Only those entities that obtain the code in a timely manner shall be able to undertake transactions in these financial markets after the due date, either as an issuer or as an investor or as a seller/buyer. Transactions undertaken in recognised stock exchanges are outside the purview of the LEI requirement.
Thresholds limits for LEI number
The schedule of Non-derivative markets to obtain LEI is as follows:
- Phase 1: Net Worth of Entities above Rs.10000 million – December 31, 2019.
- Phase 2: Net Worth of Entities between Rs.2000 million and Rs 10000 million– December 31, 2019
- Phase 3: Net Worth of Entities up to Rs.2000 million– March 31, 2020
The schedule of large borrowings to obtain LEI is as follows:
- Phase 1: Total exposure to SCBs of 1000 Cr and above – March 31, 2018
- Phase 2: Total exposure to SCBs of 500 Cr and 1000 Cr– June 30, 2018
- Phase 3: Total exposure to SCBs of 100 Cr and 500 Cr – March 31, 2019
- Phase 4: Total exposure to SCBs of 100 Cr and 50 Cr – Dec 31, 2019
Who issues the Legal Entity Identifier?
The LEI is issued by the Global Legal Entity Identifier Foundation, which is a not for profit organisation established by the Financial Stability Board in 2014. It includes a regulatory oversight committee that is represented by public authorities from many countries, and it also publishes the Global LEI Index.
In India, entities can obtain LEI by doing self-registration, with any of the Local Operating Units accredited by the Global Legal Entity Identifier Foundation (GLEIF). Details of the procedure can be accessed at https://www.ccilindia-lei.co.in/Documents/User%20Manual.pdf, which takes 2-5 days for the generation of the LEI after submission of documents.
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