Increasing legal enforcement of LEI in India promotes an identifier that can open doors to global trade and financial opportunities for the region’s MSMEs
The Legal Entity Identifier (LEI) star is on the rise in India. A wave of mandates from multiple regulators has harnessed the LEI’s unique ability to provide trust and transparency in transactions across multiple applications, and LEI adoption is growing as a result. However, in the Indian economy, which is driven by micro, small and medium enterprises (MSMEs), there is another very welcome side effect of regulation that is driving the increasing issuance of LEIs across the country. The increasing normalization of LEIs as an integral tool for enabling business means that more MSMEs than ever before have access to an identifier that could help them formally verify their identity across borders. This opens up opportunities for them to engage in global trade and financial opportunities – many for the first time.
This blog post summarises the regulatory developments regarding LEIs in India. It also explores how the growing nationwide acceptance of a universally recognized and trusted business identifier could further empower regional MSMEs, which are already responsible for nearly one-third of India’s GDP.
Mandates gain momentum in India
Over the past five years, proactive advocacy for LEIs has developed in India and regulatory momentum continues to grow along with LEI issuance. Three major regulators have issued six LEI mandates and one recommendation during this period.
The Reserve Bank of India (RBI) was an early proponent of LEI and introduced it in 2017 as a necessary requirement for all participants in over-the-counter (OTC) markets for rupee interest rate derivatives, foreign currency derivatives and credit derivatives in India. In November of the same year, the RBI followed suit by further phasing in LEI for all large corporate borrowers from banks in India. As a result, companies without an LEI will not be allowed to renew or extend credit facilities of €50 billion or more from the end of December 2019. A separate LEI roadmap for borrowers with a loan volume of between EUR 5 million and EUR 50 million was published at the end of April 2022.
In the following years, the RBI has issued three more mandates:
Another regulator that has recognized the opportunity to benefit from the LEI is the Securities Exchange Board of India. It recommended the use of the LEI for eligible foreign entities in the commodity derivatives market in October 2018. The Insurance Regulatory and Development Authority of India (IRDAI) followed suit in June 2020 with a mandatory requirement for the LEI for all insurers and their corporate borrowers with transactions above ₹ 50 crore.
Continued upswing in the issuance of LEIs
The combined impact of these LEI mandates and recommendations is that a broad base of Indian companies and organizations are now required to obtain an LEI for the first time. The resulting increase in demand for LEIs in India in recent years is reflected in India’s position among GLEIF’s top five fastest-growing jurisdictions for LEI issuance in 2020 and 2021. In these two years, the country recorded 45.6% and 62.4% growth in annual issuance, respectively.
By the end of 2021, GLEIF reported that the total number of LEIs issued nationwide had reached 76,432. And GLEIF expects demand to continue to grow exponentially this year and beyond as more companies register for LEIs based on existing and future mandates.
In a separate but complementary development, the Global Legal Entity Identifier System was recently expanded to serve another expected increase in regional LEI demand. In March 2022, Rubix Data Sciences announced that it had become the first validation agent in India. Rubix will work with Legal Entity Identifier India Ltd (LEIL), a GLEIF-accredited LEI issuer and a wholly-owned subsidiary of the Clearing Corporation of India Ltd, to help customers obtain LEIs.
The Validation Agent Framework was launched by GLEIF in September 2020 to enable financial institutions, certification authorities and fintech organizations to leverage their know-your-customer and anti-money laundering onboarding processes to facilitate their customers’ access to LEIs. Validation agents play an important role within the global LEI system. By providing LEIs to their customer base, they promote financial inclusion while creating value and opportunities, such as cross-border supply chain relationships thanks to easier counterparty verification and simplified cross-border payments.
What are the wider benefits for MSMEs?
So how can the evolving regulatory landscape for LEIs, along with the increasing issuance of LEIs, provide a foundation for the growth of MSMEs in India?
MSMEs constitute a significant and dynamic part of the Indian economy and contribute significantly to the economic and social development of the country. According to official sources, at the last census (2015-16), there were an estimated 63.39 million MSMEs in India and in 2018-19, this base was responsible for generating 30.27% of the country’s GDP. Yet, many of them face difficulties in trading internationally or accessing finance because they cannot prove their identity or trading history to the outside world.
With the increasing ‘normalization’ of LEI as a critical business enabler in the Indian economy, thanks to enforcement of regulations on certain transactions, more and more MSMEs are confronted or even required to obtain an LEI. At the very least, awareness is growing and access is certainly becoming easier with the local activation of the Validation Agent Framework. The ability to obtain robust corporate credentials, including a trusted corporate identity that can be used digitally, could be transformative for many small businesses thanks to the many associated benefits. The facilitation of international trade partnerships, the ability to obtain credit financing and better access to financial services are just some of the most notable. Not to forget the impact that greater inclusion of Indian MSMEs in financial and supply chains will have on the country’s economy. An increase in capital inflows will contribute significantly to India’s economic development.
While Indian regulators intend to leverage the benefits of LEIs to improve trust and transparency within the banking and financial services system, it is important to recognize – and welcome – the broader economic benefits they are initiating by encouraging the nationwide adoption of LEIs. They potentially create the conditions for Indian MSMEs to thrive in a global economy by promoting the widespread adoption of a trusted and verified identity that is recognized across international borders.