LEI becomes mandatory for Large Corporate Borrowers

By Mayank Agarwal (finserv@vinodkothari.com)

 

Overview

The global financial crisis of 2007-08 underlined the importance of maintaining a common global database that facilitates identification of parties to a financial transaction. Ambiguity of the dealing parties and a shortage of information led to a breakdown in the financial ecospace, contributing to the downfall of established stalwarts such as Lehmann brothers as well. In light of such crisis, establishing a universal identity of all entites 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.

Legal Entity Identifier (in short LEI) is a 20-digit global reference number that provides unique identity to a legal entity that is involved in a financial transaction. The authority to allot LEI in India rests in the hands of Legal Entity Identifier India Limited (LEIIL), a subsidiary of Clearing Corporation of India (CCIL). The latter was officially certified by the GLEIF and recognized by the Reserve Bank of India (RBI) as the domestic issuer of LEI in the country under the Payment and Settlement System Act, 2007, in 2014[1].

So far, having a LEI was mandatory for entities having interaction with financial institution with respect to Rupee Interest Rate derivatives, foreign currency derivatives and credit derivatives in India in the OTC (over the counter) market[2]. The timeline for implementation of the same being as follows:

Phase Entities Date by which the 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 1st December, 2017
Phase IV Corporates With Net Worth between Rs 700 mn and below 31st March, 2018

Recently, vide the notification “Introduction of Legal Entity Identifier for Large Corporate Borrowers” dated 2nd November, 2017[3], RBI has implemented the said compliance for Large Corporate Borrowing entities also, whose fund-based and non-fund based exposure to banks exceeds Rs. 5 crores.

Timeline for Registration

The aforesaid notification further provides for the implementation based on the exposure limits to which borrowers belong, in a phased manner. The same has been reproduced herein below:

Total Exposure to SCBs To be completed by
Rs.1000 crores and above 31st March, 2018
Rs.500 crores to Rs. 1000 crores 30th June, 2018
Rs.100 crores to Rs. 500 crores 31st March, 2019
Rs.50 crores to Rs. 100 crores 31st December, 2019
Rs. 5 crores to Rs.10 crores Yet to be announced

Persons eligible to apply for LEI in India

Any legal entity that satisfies the criteria mentioned by the RBI is eligible to apply for LEI. This, however, does not include an individual operating in personal capacity. The following entities are eligible to register with the LEIIL as per its FAQs[4] :

·         Sole Proprietorships,

·         Limited Liability Partnerships,

·         Partnership Firms,

·         Trusts,

·         Private Limited Companies,

·         Public Limited Companies,

·         Banking Companies.

·         Government Companies,

·         One Person Company,

·         Insurance Companies,

 

·         Housing Finance Companies,

·         Non-Banking Finance Companies,

·         Non-profit companies,

·         Special Purpose Vehicles – Trusts,

·         Special Purpose Vehicles – Companies,

·         SPV – Partnership Firms,

·         SPV – Co-operative Societies or Multistate Co-operative Societies

 

·         Mutual Fund,

·         Mutual Funds-Sub Scheme,

·         Alternative Investment Fund (AIF),

·         AIF- Sub Scheme,

·         Nationalised Banks,

·         Scheduled Urban Cooperative Bank,

 

Steps to obtain LEI

In order to obtain a LEI, the entity must:

  • Get on to the website of Legal Entity Identifier India Limited
  • On top right “create an account”
  • Fill in the credentials
  • The officials will receive a confirmation e-mail to activate and verify his/her account. The official may then click on the link provided in the e-mail to activate the account. Post successful login, on LEI service tab, the official may register and fill in necessary details.
  • The registration of LEI code has to be done by the authorized person and for companies, a duly authorized person, is the one authorized by the Board Resolution
  • If all documents have been submitted, LEI should be issued within 3 days of your having made the payment for the issuance fee.
  • An LEI is valid for one year. After that, the entire record needs to be validated again in order to ensure the actuality and accuracy of the information.
  • The renewal date for existing LEI can be checked on “View Details” which provide the “LEI Next Renewal Date”.

Documents required for Registration

In order to register for an LEI, the entity is required to submit the following documents:

  • Certificate of Incorporation/Registration Certificate
  • PAN Card proof
  • Undertaking –cum-Indemnity as per the format specified by LEIL
  • Audited Financial Statements
  • Board Resolution as per the format specified by LEIL
  • Power of Attorney as per the format specified by LEIL
  • Statutory Auditor’s Certificate as per the format specified by LEIL.

It is worth mentioning the although the LEIIL requires detailed private information of about the entity, including its financial data, the search index does not yield such intensive data and only states basic public information such as the name, address and details about parent and subsidiary companies of the entity. Hence, the LEI acts basically as a universal global identification number of the entity.

The financial set of documents submitted by the entity is duly verified by the body that governs the entity (Ministry of Corporate Affairs for Companies, Securities and Exchanges Board of India (SEBI) for MFs, and so on) and the corporation charges a minimal fee at the time of registration/ renewal.

Consequence of Non-Registration

Borrowers who 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. Further, upon expiry of the validation period of one year, the entity will need to renew its license by submitting the entire records again in order to ensure accuracy and actuality of information.

Conclusion

With more than 1741 accounts in India registered with the LEIIL and a corresponding global figure of approximately 280000,[5] the introduction of this rule will facilitate the universal identification of borrowers. The primary motive remains to strengthen the risk management measures and eliminate fears of counterparty fallibility. The introduction of LEI in banking sector is a step in the right direction and will aid in the integration in this era of globalization as well. With the Indian banking industry neck-deep with stressed assets, the introduction of LEI will ensure loans are granted in a much more judicious manner and banks can carry out a better assessment of micro and macro-prudential risks, curbing financial fraud and contribute to accuracy of financial data.

 

[1] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30347

[2] https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=10988

[3] https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11154&fn=2&Mode=0

[4] https://www.ccilindia-lei.co.in/Documents/FAQs_V1.1_01-07-2017.pdf

[5] https://www.gleif.org/en/lei-data/access-and-use-lei-data

 

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