RBI Mandates Legal Entity Identifier (LEI) for Entities w.e.f 1 April 2021

The Reserve Bank of India, on 5th January 2021 introduced a legal entity identifier (LEI) for the transactions of and above 50 crores or INR 500 million by Non individual entities utilizing Reserve Bank-run Centralised Payment Systems i.e. RTGS (Real-time Gross Settlement) and NEFT (National Electronic Funds Transfer). 

1. What is Legal Entity Identifier (LEI) system is all about

The Legal Entity Identifier (LEI) system was developed by G20. The system was developed because of the inability of financial institutions to identify organizations uniquely. G20 is an international forum for the governments and central bank governors from 19 countries and the European Union (EU), which was founded in 1999. The first LEI was issued in December 2012.

Legal Entity Identifier, also known as LEI code or LEI number, is a unique global code for the legal entities participating in financial transactions. Legal entities can be government or any companies participating in financial transactions. Legal Entity Identifier (LEI) is a unique 20 digit number that is used for uniquely identifying parties to financial transactions throughout the world. After Global Financial Crisis, it has been considered as a major measure for better risk management by increasing quality as well as the accuracy of the financial data systems. 

2. Understand LEI Code structure

The 20 digit number or code is an alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO).

Each Legal Entity Identifier (LEI) database entry contains information about an entity’s ownership and thus answers the questions of ‘who is who ’ and ‘who owns whom ’.

Any company who wants to get its Legal Entity Identifier code can get it by the Global Legal Entity Identifier Foundation (GLEIF) and in the case of India, any company in India can get its LEI code through Local operating units (LOUs) or by Legal Entity Identifier (LEI) registration agent, both are the issuer of LEI, recognized by Reserve Bank of India.

The code structure of LEI is such that its first four characters identify the local operating unit that is issued by the LEI, then the 5th – 18th characters are the unique alpha-numeric digits assigned to the organization or company by the Legal Operating Unit and the final two characters are the checksum digit.

Some examples of the Legal Entity Identifier (LEI) code are, the LEI of Jaguar Land Rover (JLR) is 2138 00 WSGIIZCXF1P5 72, LEI of British Broadcasting Corporation (BBC) is 5493 00 0IBP32UQZ0KL 24.

3. Reserve Bank of India’s mandate LEI

Reserve Bank of India has made is mandatory via circular no RBI/2020-21/82 DPSS.CO.OD No.901/06.24.001/2020-21 that from 1st April 2021, every legal entity will be required a Legal Entity Identifier (LEI) code for the transactions above Rs. 50 Crore through Nation Electronic Fund Transfer (NEFT) or Real-Time Gross Settlement (RTGS).

The  Reserve bank of India also mentioned that the Legal Entity Identifier (LEI) has been introduced in a phased manner for corporates in over-the-counter (OTC) derivative and non-derivative markets as also for large corporate borrowers.

Along with this, the apex bank has also instructed every member bank that they should advise all the eligible entities to acquire the Legal Entity Identifier (LEI) code in time if they do not possess it already.

Another responsibility of the bank is that they should include remitter and beneficiary Legal Entity Identifier (LEI) information in Real-Time Gross Settlement (RTGS) or National Electronic Fund Transfer (NEFT) payment messages and that they should maintain records of all transactions of Rs. 50 crore and above through Real-Time Gross Settlement (RTGS) or National Electronic Fund Transfer (NEFT).

Reserve Bank of India also instructed on how an organization can get its Legal Entity Identifier code. They can get it through the Global Legal Entity Identifier Foundation (GLEIF) or Local operating units (LOUs) or by Legal Entity Identifier (LEI) registration agent.

All these directions were issued by the Reserve Bank of India under Section 10(2) along with Section 18 of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007).

Section 10(2) of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007) says that the Reserve Bank of India can issue any guideline at any time, which it considers mandatory for the proper and efficient management of the payment systems.

Section 18 of Payment and Settlement Systems Act, 2007 (Act 51 of 2007) says that Reserve Bank of India can lay down policies relating to the regulation of payment systems including electronic, non-electronic, domestic and international payment system which affects the domestic transactions to regulate the payment systems or in the interest of the management or the operation of any of the payment system or the public interest.

4. What is the need for a Legal Entity Identifier (LEI) for transactions above and around Rs 50 Crore

Legal Entity Identifier facilitates transparency and data accuracy within the global market. It helps in tracking the financial transactions also which will help the regulating authorities to check and catch any of the fraud. With the introduction of Legal Entity Identifier (LEI) for large value transactions of Rs.50 crore and above, it will cover almost all the entities. Thus, decreasing the financial risks and speeding up the data validation process for RBI and financial service providers.

Read more Process of RBI approval to open Liaison Office (LO)| Branch office (BO)| Project office (PO) in India

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.

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