Legal entity identifier (LEI) code is a unique identification code which is being issued to the entities which trade in financial markets. These Financial Markets may be stocks, bonds, futures, forex, etc. The transactions or the deals conducted in the markets by one entity will have connected to another entity by an LEI code. LEI codes are generally used for regulators to oversee financial markets. LEI help to connect the financial markets, companies and the regulators.
WHY LEI CODE IS REQUIRED
The main reason behind the Global Legal Entity Identifier is to simplify, standardize and provide the ease of identification of any legal entity worldwide. There may be any no. of methods to identify the entities varies from market to market and country to country but the Global LEI System ensures to have just one standard system when it becomes operational world wide. If we look from point of Reserve Bank of India, The LEI system helps to improve the transparency in financial data systems and ensure reduction in financial crises in the country
Moreover, it helps banks and credit providers in monitoring the exposure of corporate borrowers. It will prevent banks from issuing multiple loans against the same collateral.
The Legal Entity Identifier (LEI) is a global reference number that uniquely identifies every legal entity or structure that is party to a financial transaction, in any jurisdiction. It is mandatory to acquire LEI for every entity 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.
ENTITIES REQUIRE TO HAVE LEI REGISTRATION
An entity registered in India needs to apply for LEI code from time to time. The list of entities eligible to apply for LEI codes are but not limited to Sole Proprietorships, Limited Liability Partnerships, Partnership Firms, Trusts, Private Limited Companies, Public Limited 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 Cooperative Societies Mutual Fund, Mutual Funds-Sub Scheme, Pension Fund, pension Fund Sub-Scheme, Alternative Investment Fund (AIF), AIF- Sub Scheme, Nationalised Banks, Scheduled Urban Cooperative Bank, RRBs, Payment Banks, Banking Companies – Others, Stand Alone Primary Dealers, Public Financial Institutions, Unlimited Companies, Cooperative Societies or Multistate Cooperative Societies, Government Organizations, Companies Limited by Guarantee, Provident/Superannuation/Gratuity/Insurance Fund, HUF, etc. Other entities as may be specified from time to time. The Reserve Bank of India 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,
However, individual acting in natural capacity is currently out of scope to apply for LEI.
WHO CAN ISSUE THE LEIs
GLEIF has introduced the concept of the ‘Registration Agent’. A Registration Agent helps legal entities to access the network of LEI issuing organizations responsible for performing LEI issuance and related services. LEI issuers are also referenced as Local Operating Units or LOUs.
Banks are one example of companies who use different identifiers internally to identify the same customer. Vendors associated with the bank may also use different identifiers. LEI can consolidate some of these issues.
The bank of the future will use LEIs and organisation identity to save time onboarding, make processes more efficient and have a greater understanding of the transactions they are being asked to make, thereby providing a better safety net for the bank and for the clients they work with.
Conclusion: So from above, we can conclude that to ensure the transparency in the Financial Market, RBI may bring more and more entities into the ambit of LEI which will help the banks to ensure and to know the history and the transactions of its customers to avoid any risk of NPAs in the future.