After the global financial crisis between the years 2007 and 2009,  leaders operating through the G-20 and Financial Stability Board (FSB)  agreed to develop a solution to establish a global entity identification  system, in order to quickly and accurately assess the financial risk  exposures of the transacting entities worldwide. The coordinated efforts  led to introduction of Legal Entity Identifier (LEI) System and obtaining  LEI Code (a unique 20 digit code) by the transacting entities worldwide.

LEI allows each entity to be identified on a global database of entities  searchable by number, as many entities may have similar or the same  name.

Many countries like United States, United Kingdom, Canada and Australia have mandated obtaining LEI in order to  transact in financial markets activities (like securities trading, borrowing, or derivatives).

In India, the Reserve Bank of India (RBI) introduced LEI first through a circular issued in June 2017 for participants in Over  the Counter (OTC) derivatives markets. In November 2017, the RBI extended LEI for large corporate borrowers. In  November 2018, the RBI further extended LEI for non-derivative markets. In June 2020, the Insurance Regulatory and  Development Authority of India issued a circular for insurers to obtain LEI. In January 2021, the RBI introduced LEI for  large value transactions. Now recently, in December 2021, to further harness the benefit of LEI, the RBI has mandated the  requirement of obtaining LEI for high value cross border transactions.

This article briefly focuses on the LEI requirement for cross border transactions.

As a result of the recently announced guidelines by the RBI, the resident entities  (non-individuals) undertaking any capital or current account transactions of Rs.50  crores and above (each transaction) under the Foreign Exchange Management  Act, 1999 shall be required to obtain the LEI.

With regard to non-resident counterparts/overseas entities, while many countries  already have the LEI requirement in place, the RBI has not specifically mandated  the non-resident entities to obtain the LEI. In some cases, the Authorised Dealer  may insist the non-resident entities to furnish the LEI, which requirement may  then be waived by the Authorized Dealer on case-to-case basis.

Although the requirement to obtain the LEI shall come into effect from October 1, 2022, the RBI also said that banks may  encourage concerned entities to voluntarily furnish LEI while undertaking transactions before October 1, 2022. The RBI  has also clarified that once an entity has obtained an LEI, it must be reported in all transactions of that entity, irrespective  of transaction size.

Considering the new guidelines of the RBI, obtaining LEI will now become an additional requirement in domestic and cross  border transaction with the underlying value of Rs.50 crores and above. Accordingly, suitable confirmations will have to be  sought from the transacting parties (both resident and non-resident entities) for such transactions, on whether or not theyhave the LEI. Also, provisions will have to be made in the definitive agreements entered between them for cross border  transactions (including inbound and outbound investments), which may attract the mandated, optional or case-to-case  requirement of obtaining the LEI. Suitable confirmations and provisions can be made in the definitive agreements, in  consultation with the Authorised Dealers of the transacting party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.