All about Legal Entity Identifier (LEI) Number

Inter-country transactions have increased drastically and entities across the countries are dealing with each other. In such a case, every country has its own method of identification of any entity such as India having PAN and CIN. However, when it comes to global transactions, the international regulatory bodies are facing the issue of identification of entities in absence of any unique identification number. 

Post financial crisis of 2007-08, regulators realised the requirement to have a unique identification number to identify the entities at international level independent of every country. Therefore, concept of LEI was introduced to provide a unique identification number to every entities in accordance with global standard.

This article carry out a detailed discussion of LEI:

1. Background

• In 2007-08, when the world was facing a financial crisis, regulators realised that a single identification code unique to each financial institution was not available worldwide. Each country was using its different code to recognize the legal entities.
• During the investigation proceedings of Lehman Brothers, relevant bodies were not able to assess the exposure of market participants as parties to the transactions could not be traced.
• Therefore, it was impossible to identify the transaction details of individual corporations and calculate the total risk amount. 
• Therefore, the Financial Crisis of 2008 highlighted the need of having a unified framework that helps regulators and central banks to track international financial transactions accurately. 
• Ultimately, in 2011 the G20 leaders called upon the Financial Stability Board (FSB) to lay the groundwork for the creation of a framework which supported LEIs, as well as a relevant regulatory body to oversee the provision of LEIs. 
• The FSB’s recommendations were subsequently endorsed by the G20 leaders in mid-2012 and the first LEIs were issued just a few months later, in December 2012.

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2. What is a Legal Entity Identifier (LEI) Number

• Legal Entity Identifier (LEI) Number is a unique 20 Character alphanumeric code which is assigned to a legal entity engaged in a financial transaction worldwide.
• The Legal Entity Identifier (LEI) is based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). Therefore, this number is used on international level to identify any legal entity
• LEI maintains the key information about an entity such as Name, address, ownership structure etc. which enables the clear and unique identification of legal entities participating in financial transactions. 
• The purpose of LEI codes is to make it easier to identify a counterparty in financial transactions. 
• The issuance of codes is regulated by the global umbrella organisation GLEIF (Global Legal Entity Identifier Foundation). LEI is issued by a GLEIF accredited Local Operating Unit (LOU). 

3. Organisation which Issued LEI

• An LOU is an organisation that is accredited by GLEIF and has rights to issue LEIs. 
• LOU’s are required to gather and verify data and to generate LEIs according to the Protocol.
• LOU’s must request all of the relevant information from companies which are required to issue LRI and must confirm this data with the National Business Registry. 
• Globally there are around 30 LOU’s and, of this number, only a few of them are able to issue LEI numbers for Indian companies.
• Legal Entity Identifier India Limited, A Wholly Owned Subsidiary of The Clearing Corporation of India Ltd., acts as a Local Operating Unit (LOU) for issuing globally compatible Legal Entity Identifiers (LEIs) in India.

4. Structure of LEI Code

An LEI number is a unique identification number which is issued to companies which operate in the global financial system. LEIs are based on ISO standard 17442:2012. An LEI is issued only once for each company and consists of 20 characters wherein:

1. First 4 character represents the Local Operation Units (Unit) which has issued the LEI to the entity.
2. 5th and 6th Character are same for each Company;
3. Following 12 characters consist of alphabets and numbers and they are unique for each company.
4. The final 2 characters are known as the checking characters.

Red Also: Requirement of obtaining PAN and filing of ITR of Foreign Companies

5. Who is required to obtain LEI number

Requirement to obtain LEI is specified by various regulatory bodies in various circumstances based on nature of the entity, net worth of the entity or volumn of transaction. LEI is required to obtain in following cases:

a. Entities participating in Over the counter Market

• The Reserve Bank of India (RBI) has mandated the implementation of the LEI system for all participants in the Over-the-Counter (OTC) markets for Rupee Interest Rate derivatives, foreign currency derivatives and credit derivatives in India, in a phased manner. 
• Entities without an LEI code would not be eligible to participate in the OTC derivative markets, after the date specified in the schedule. 

b. LEI for large corporate borrowed:

• As per RBI/2017-18/82 DBR.No.BP.BC.92/21.04.048/2017-18 dated 2nd November, 2017, it has been decided that the banks shall advise their existing large corporate borrowers,  having total exposures of ₹ 50 crore and above, to obtain LEI.
• Borrowers who fail to obtain LEI will not be granted or renewed enhancement of credit facilities. 
• Banks should encourage large borrowers to obtain LEI for their parent entity as well as all subsidiaries and associates.
• After obtaining LEI code, banks shall also ensure that borrowers renew the codes as per GLEIF guidelines.
• Banks with total exposure of upto INR 50 crores are required to have LEI by 31st December, 2019.
• Through Circular No. RBI/2022-23/34 DOR.CRE.REC.28/21.04.048/2022-23 dated 21st April, 2022, the RBI advised that non-individual borrowers enjoying aggregate exposure of ₹5 crore and above from banks or financial institutions, shall required to obtain LEI codes by following timelines:

c. LEI based on Value of transaction:

• As per Frequently Asked Questions (FAQs) issued by Reserve Bank of India (RBI), All single payment transactions of ₹50 crore and above undertaken by non-individual entities should include remitter and beneficiary LEI information. This is applicable to transactions undertaken through the NEFT and RTGS payment systems.

6. Entities exempted from obtaining LEI

Following are the entities which are not required to obtain LEI Number:

1. Government Department and Ministries are not required to obtain LEI or required to mention LEI number for payment transactions in NEFT and RTGS. However, entities or Undertakings owned by government, whether fully or partially, are required to obtain LEI Number.
2. Requirement to obtain LEI is applicable to legal entities. As per RBI, LEI is not required for customer transactions where both remitter and beneficiary are individuals. However, where either of the parties to the transaction are non-individual/s, LEI will be required.