An Overview of Legal Entity Identifier
The Legal Entity Identifier (LEI) is a unique code based on the ISO 17442 standard developed by the ISO (International Standard Organisation). It simply connects to critical reference information that enables clear & unique identification of legal entities participating in financial transactions. Legal Entity Identifier acts as a global directory that provides that much-required transparency for the benefit, providing details of the ownership structure and relevant information of the parties involved.
The LEI is a way of recognising market participants on a single, standardised database. This provides correct & accurate data of a company that is accessible and free of charge. A company's LEI record will comprise public data such as its address, full name, where they are registered & whether they are a branch/owned by another parent company.
The FSB or Financial Stability Boardhas restated that international Legal Entity Identifier adoption supports multiple financial stability objectives like improved risk management in firms and better assessment of micro & macro-prudential risks. As an outcome, it promotes market integrity while containing market abuse & financial fraud.
Significance of the LEI System
Earlier, it was very complicated to find a counterparty if they had no digital or online presence, which became problematic in the international financial crisis a decade ago. The lack of transparency put financial institutions in a susceptible position as vast numbers of entities & funds were unidentifiable. Also, this created complications regarding risk assessment & openness.
In 2011, the G20 launched the LEI System to ensure that this would not happen again. The primary purpose is to create a digital database of all legal entities which was easily accessible, accurate & up-to-date. One centralised source of information that contains huge amounts of high-quality data.
What is the Structure of the LEI code?
The Legal Entity Identifier code is not possessed any embedded intelligence or country codes that would create confusion and complexity for the users.
It is simply based on 4 simple principles:
- It’s a global standard;
- It is available publicly and frees to all users;
- Every legal entity is assigned a single unique identifier;
- A good level of data quality supports it.
The LEI code consists of 20 unique characters and the following Structure:
Benefits of Having an LEI
Who Requires a Legal Entity Identifier?
LEIs are required by any legal entity that is engaged with financial transactions or operating within today's global financial ecosystem. There are a number of mandates presently in existence that state no LEI, no trade meaning both reporting parties & traders need an LEI. The RBI (Reserve Bank of India) has also made LEI compulsory for companies & organisations having aggregate fund-based & non-fund based exposure of credit over Rs. 50 crores.
Procedure to Obtain a Legal Entity Identifier
Following is the procedure to obtain a Legal Entity Identifier:
Step 1: Documentation: First, you need to arrange all the vital documents and their specific formats vital for submission. The checklist for documents and their formats are based on the entity's legal structure.
Step 2: Self-Registration: An individual must be appointed as the certified person to look over & carry out the process of attaining the LEI Code. An individual may be appointed as a legal person or individual by way of a resolution, Power of Attorney, as the cay may be. Only this authorised user has the permission to create an account, providing their email id and proceeding to fill up the online form. An authorised person includes:
Step 3: Company Information Page: All the basic information about the company must be entered on this page.
Step 4: Holding Company Page: Information about the Parent Company (Holding Company) are to be filed on this page.
Step 5: Parent Page: On this page, where a company is a step-down subsidiary along with the parent company's information, the ultimate parent's details are also to be provided.
Step 6: Payment: Then, you need to pay the fee for the application form.
Step 7: Upload: The vital documents are uploaded in this step. Once the form is filed, the payment page provides the option to either make the payment digitally immediately/to choose the option of a DD.
Step 8: Submission of the Documents: The applicant entity will have to upload all the vital documents, and the total size of the uploaded documents should be 40 MB.
Step 9: Verification: Once the documents are submitted, then they will be verified by the LEIL along with the application form. If required, the LEIL may ask you for further documentation as well. The applicant may also be directed to make alterations in the form online by the LEIL.
Step 10: Issuance of LEI Code: The Legal Entity Identifier code will be issued on the successful verification of the form and documents. This LEI code will be sent to the registered email id and this code must be provided to the banks.
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Renewal of the Legal Entity Identifier Code
This code is usually valid for 1 year and if the entity wants to continue to use the code, it must be renewed via an application; the renewal and this can be found on the online website. In the form, once you enter the code, all the details appear automatically. Any changes to be made shall be made and the same process of form completion, payment & document submission is followed. Once the submission of all the above is successful, then the LEI Code is renewed and the confirmation of the same is received on your registered email.
LEI for Borrowers
In the latest RBI notification, it has been decided that the guidelines on LEI extended to Primary Urban Co-operative Banks (UCBs) and NBFCs (Non-Banking Financial Companies. Further, it is advised that non-individual borrowers enjoying aggregate exposure of Rs. 5 crores & above from banks & Financial Institutions shall be required to obtain LEI Codes. Exposure for this purpose shall comprise all funds based & non-fund based (credit and investment) exposure of banks or Financial Institutions to the borrower. Aggregate sanctioned limit or outstanding balance, whichever is higher, shall be calculated for the purpose. Lenders may determine the position of aggregate exposure based on details available either with them or the CRILC database or declaration obtained from the borrower.
Borrowers who fail to get Legal Entity Identifier codes from a certified Local Operating Unit shall not be sanctioned any new exposure, nor shall they be granted renewal or enhancement of any present exposure. However, Agencies or Departments of Central & State Government (not Public Sector Undertaking registered under the Companies Act/established as Corporation under the relevant statute) shall be exempted from this provision. These directions are issued under Section 21, 35A & 56 of the Banking Regulation Act, 1949 & Section 45JA and 45L of the RBI Act, 1934, Section 30A of the NHB Act, 1987 and Section 6 of the Factoring Regulation Act, 2011.