Legal Entity Identifier (“LEI”) for Cross-Border Transactions

Legal Entity Identifier (“LEI”) is a concept that has been implemented at the global level. The concept of the Global Legal Entity Identifier System (“GLEIS”) has been set up by Global regulatory authorities to address the global financial crises. The LEI is designed so that parties to a Financial transaction can be easily identified and counterparty risk can be minimized. Under LEI, a global reference data system is created that uniquely identifies every legal entity that is a party to a financial transaction in any jurisdiction.

1. What is a Legal Entity Identifier

• The Legal Entity Identifier (LEI) is a 20-digit global reference number that uniquely identifies every legal entity or structure that is a party to a financial transaction, in any jurisdiction.
• LEI is assigned to any legal entities including all intermediary institutions, banks, mutual funds, partnership companies, trusts, holdings, special purpose vehicles, asset management companies and all other institutions being parties to financial transactions.
• LEI will serve as a proof of identity for a financial entity and facilitates reporting of transactions to Trade repositories.
• LEI is a 20 Digit number wherein:
  • First 4 digit represents the Local Operating Unit (“LOU”) Identification number. Such as 3358 is LOU for Legal Entity Identifier India Limited, i.e., the company authorized for issuing globally compatible LEIs.
  • Next 2 Digits are reserved digits set as Zero.
  • Next 12 Digits are random Alphanumeric identification numbers generated and assigned to an entity by the LOU according to transparent and sound allocation policies
  • Last 2 are calculated check digits under ISO 17442. 

2. Implementation of LEI in India

The concept of LEI has been introduced by RBI in India in a phased manner. Initially, LEI was introduced for all the participants in the Over-the-Counter (“OTC”) market for Rupee Interest Rate derivatives, foreign currency derivatives etc. Entities without LEI were not permitted to participate in OTC Derivative market. Gradually, LEI was mandated for the following entities:

1. RBI mandated LEI for all borrowers of banks in India. Entities without an LEI code are not to be granted renewal/enhancement of credit facilities;
2. RBI mandated LEI for the non-derivative market including government security markets, money market and non-derivative forex market;
3. SEBI mandated LEI for Eligible FOreign entities in Commodity derivative market;
4. IRDAI mandated LEI for all insurers and their corporate borrowers
5. RBI mandated the LEI for all payment transactions of INR 50 crore and above undertaken by entities (non-individuals) for Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).
6. Now, RBI has extended LEI to for cross-border transactions such as capital or current account transactions of ₹50 crore and above. The timeline to obtain LEI Number is October 1, 2022.

In this article, a detailed discussion has been carried out on the applicability of LEI on Cross Border transactions.

3. What are Cross-Border Transactions

Cross-border payments are transactions where the payee and the transaction recipient are based in separate countries. The transactions can be between individuals, companies or banking institutions who are looking to transfer funds across territories.

4. Introduction of Legal Entity Identifier for Cross-Border Transactions

• Legal Entity Identifier has been implemented by RBi on Cross Border Transactions vide Notification No. RBI/2021-22/137 A.P. (DIR Series) Circular No. 20 dated 10th December 2021.

• As per instructions of RBI, AD Category, I banks shall obtain the LEI number from resident entities (non-individuals) undertaking capital or current account transactions of ₹50 crore and above (per transaction) under FEMA, 1999 with effect from October 1, 2022.

• In case of non-availability of LEI Information, Considering non-resident counterparts/ overseas entities, AD Category I banks may process the transactions to avoid disruptions. 

• AD Category I banks may also encourage concerned entities to voluntarily furnish LEI while undertaking transactions even before October 1, 2022. 

• Once an entity has obtained an LEI number, it must report such LEI number in all transactions of that entity, irrespective of transaction size.

• AD Category-I banks shall make sure that LEI information is captured for all the applicable transactions correctly and ensure that any LEI captured is validated against the global LEI database available on the website of the Global Legal Entity Identifier Foundation (GLEIF).

• AD banks may inform their constituents concerned about applicability of this circular and may advise entities, which undertake large value transactions (₹50 crores and above) under FEMA, to obtain LEI in time, if they do not already have one issued.

5. How to obtain LEI

• Legal Entity Identifiers are issued by Local Operating units accredited by Global Legal Entity Identifier Foundation (GLEIF). GLEIF is a body tasked to support the implementation and use of LEI.
• In India, Legal Entity Identifier India Limited (“LEIL”) acts as a Local Operating unit authorized for issuing LEI.
• Any entity liable to obtain LEI may obtain the same by visiting https://www.ccilindia-lei.co.in/.
• “Rules, FAQs & Docs” on the website provides the User Manual and FAQs for applying for an LEI.

6. What to do after obtaining a Legal Entity Identifier number

• As soon as an entity has obtained an LEI number, it has to be reported in all transactions of that entity, irrespective of the transaction size. 
• Concerned AD Category I banks shall capture the LEI information correctly and shall ascertain that it’s validated against the global LEI database available on the website of the Global Legal Entity Identifier Foundation (“GLEIF”).
• All single payment transactions of INR 50 crore and above undertaken by entities (non-individuals) should include remitter and beneficiary LEI information. LEI reporting is applicable to transactions undertaken through the NEFT and RTGS payment systems.
• LEI is not required for customer transactions where both the remitter and beneficiary are individuals. For transactions, where either or both parties are non-individual/s, LEI will be required.

7. What changes will Legal Entity Identifiers for Cross-Border Transactions bring

Since LEI uniquely identifies legal entities at the global level, it can act as an important tool for reducing financial contagion and promoting financial stability by helping in evaluating systemic risks and adopting remedial measures. Each LEI contains information about an entity’s ownership structure and thus answers the questions of ‘who is who’ and ‘who owns whom’, therefore the publicly available LEI data pool can be regarded as a global directory, which can greatly enhance transparency in the global marketplace. Introducing LEI in a phased manner RBI shows that it is cautious and has thoughtfully planned the implementation to avoid chaos and confusion. It is assumed that LEI will not only enhance transparency but will also contribute to ease in doing business encouraging foreign entities to invest more in Indian markets.