Why the corporate borrowers should registered for LEI

31 Jan Why the corporate borrowers should registered for LEI

Legal Entity Identifier ( LEI) is a 20-digit alpha-numeric code based on the ISO 17442, a standard global reference number that provides a unique identity to a legal entity that is involved in a financial transaction.

Post the global financial crisis of 2007-08  the importance of maintaining a common global database that facilitates the identification of parties in a financial transaction has become of utmost importance.

Local Operating Units (LOUs) are the LEI issuers. They supply registration, renewal and other services, and act as the primary interface for legal entities wishing to obtain an LEI.

The organizations duly accredited by the Global Legal Entity Identifier Foundation (GLEIF) are authorized to issue LEIs.

The LOU  performs the same function in every country but the LOUs are different in different countries.

For example, in the UK, London Stock Exchange Group is the authorized LEI issuer. Similarly, in India, the authority to allot LEI rests in the hands of Legal Entity Identifier India Limited (LEIIL), a subsidiary of Clearing Corporation of India (CCIL).

The LOU was officially certified by the GLEIF and recognized by the Reserve Bank of India (RBI) as the domestic issuer of LEI(Legal Entity Identifier)  in the country.

The ambiguity of the dealing parties and a shortage of information led to a breakdown in the financial world. In light of such crisis, establishing a universal identity of all entities engaged in a financial transaction was seen as imperative. This led to the establishment of Global Legal Entity Identifier Foundation (GLEIF) in the year 2014, the Central Operating Unit for registration for a Legal Entity Identifier.

The Legal Entity Identifier (LEI) aims at multiple financial stability objectives such as improved risk management in firms and also better assessment of micro and macro-prudential risks. As a result, it promotes market integrity while containing market abuse and financial fraud.

The Reserve Bank of India (RBI) last year asked banks to direct their large corporate borrowers with aggregate exposure of Rs 50 crore and more to obtain a legal entity identifier (LEI) latest by the end of 2019.

The RBI has decided that it is required by banks to make it mandatory for corporate borrowers having aggregate fund-based and non-fund based exposure of ₹ 5 crores and above from any bank to obtain Legal Entity Identifier (LEI) registration and capture the same in the Central Repository of Information on Large Credits (CRILC).

Borrowers have been divided into four groups and the RBI has set a deadline for companies in each of the sets to obtain an LEI code.

The timeline for implementation is as  follows:

As per the instructions given by RBI, the borrowers who do not obtain LEI as per the schedule are not to be granted renewal/enhancement of credit facilities.

They also said that this move will facilitate the assessment of aggregate borrowing by corporate groups, and monitoring of the financial profile of an entity or group. This requirement will be implemented in a calibrated and in a manner which is time-bound.

LEI will be assigned on application from the legal entity and after due validation of data. For the organization, LEI will be serving the following purposes.

• Serve as a proof of identity for a financial entity
• Help to abide by regulatory requirements
• Facilitate transaction reporting to Trade Repositories

So far the main intention of the move by RBI has been  because of the following:

• To avoid another major financial crisis like the one that happened in 2007-08.
• To bring in transparency in global transactions.
• To know both the parties who participate in the transaction, to avoid fraudulence and financial cyber crimes.

Borrowers who fall under the category mentioned by the RBI and do not apply for a LEI number will be prohibited from availing the credit facilities from banks. Further, the parent entity, subsidiary as well as the associates of the entity must obtain the LEI.

Also Read:

Why Legal Entity Identifier Is Mandatory For Corporate Borrowers