November 21, 2023

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.

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:

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

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.

Phase	Entities	Date by which LEI code is to be obtained
Phase I	Entities regulated by RBI / SEBI / IRDA / PFRDA and Corporates With Net Worth above Rs 10000 mn	1st August, 2017
Phase II	Corporates With Net Worth between Rs 2000 mn and Rs 10000 mn	1st October 2017
Phase III	Corporates With Net Worth between Rs 700 mn and Rs 2000 mn	1st December, 2017
Phase IV	Corporates With Net Worth of Rs 700 mn and below	31st March, 2017

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:

Total Exposure	LEI to be obtained on or before
Above ₹25 crore	April 30, 2023
Above ₹10 crore, up to ₹25 crore	April 30, 2024
₹5 crore and above, up to ₹10 crore	April 30, 2025

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:

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.
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.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

MCA imposed Penalty for failure to issue and transfer shares in Demat form

As per Section 29(1A) of Companies Act read with Rule 9A of The Companies (Prospectus and Allotment of Securities) Rules, 2014, every unlisted public company shall ensure that before issuance of any securities entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with provisions of the Depositories Act 1996. Further, every shareholder of an unlisted public company is required to dematerialise its securities before transfer, if such transfer is made on or after 2nd October, 2018.

23/04/2024 No Comments

Proceedings can’t be initiated under Section 74 when tax liability is already discharged along with interest

Judgements

Proceedings can’t be initiated under Section 74 when tax liability is already discharged along with interest

The petitioner is engaged in the business of generation of electricity through solar plants. The GST returns filed by the petitioner for the period of July, 2017 to March, 2019 were subject to audit. The petitioner was informed about tax liability during audit proceedings on account of wrong availment of ITC and ITC availed with respect to exempted supply. Upon receipt of initial audit observation, the petitioner discharged the entire tax liability alongwith interest. The final audit report was issued much after payment of GST liability. Post audit, the respondent issued show cause notice to the petitioner under Section 74 of CGST Act and confirmed the demand through DRC-07. The petitioner contended that it falls under purview of Section 73(1) and 73(5) of CGST Act and therefore, SCN under section 74 is not sustainable. Whereas, the respondent contended that this is the case of fraud and willful misstatement.

23/04/2024 No Comments

Establishment of Non-SEZ IT/ITES business in IT/ITES Special Economic Zones| Insertion of Rule 11B to SEZ Rules

Information

Establishment of Non-SEZ IT/ITES business in IT/ITES Special Economic Zones| Insertion of Rule 11B to SEZ Rules

Post COVID-19, there are many corporate entities which are allowing employees to work on Complete Work From Home (WFH) basis or on hybrid basis, i.e., Employees are required to come to office on selected days. This approach has reduced occupancy of physical premises by corporate offices and caused vacation of various rented premises.

23/04/2024 No Comments