Today, Indian Banks have reached the minimum maturity level of Due Diligence and Know Your Customer Processes. However, the real challenge starts when the borrower approaches a bank with a solid business proposal but with minimum information on his organisation structure.
A sole Proprietary firm or a Unregistered Partnership firms present business value to the banks but there is little information on who is the real person behind the business.
Financial Stability Board (FSB) was mandated by the G20 leaders with the task of delivering recommendations on the creation and implementation of a unique global code, called the Legal Entity Identifier (LEI).
What is Legal Entity Identifier ?
The Legal Entity Identifier contains within it, two parts of an entity’s lineage: who is who and who owns whom. This, a 20-digit alphanumeric code, holds standardized reference information on legal entities that participate in global financial transactions, serving as a proof of identity. This is basic business card information, giving clarity on “who is who” among market participants.
Interpretation of 20 Digits in LEI
LEI Consists of 20 Digits are divided into 3 sets of Digits
- Characters 1-4: Prefix used to ensure the uniqueness among codes from Local Operating Units
- Characters 5-18: Entity-specific part of the code generated and assigned by Local Operating Units
- Characters 19-20: Two check digits as described in the ISO 17442 standard.
Beneficial Ownership
India witnessed several efforts to align with the objectives of LEI. Reserve Bank of India floated its subsidiary company under Clearing Corporation to issue the Legal Entity Identifiers to the large borrowers.
Ministry of Company affairs made the filing of the returns to declare the beneficial owners of the company. It defined beneficial owner as well as Significant Beneficial owners. In the next few years LEI will become a game changer KYC tool like Adhar Number in India.