Indian SMEs on the path to global recognition through LEI registration

30 március 2023

In March 2022, a significant step towards promoting financial inclusion of small and medium-sized enterprises (SMEs) in India was taken when the first Indian company took the role of Validation Agent in the Global LEI System. A year later, we see how this new role enables greater financial inclusion for SMEs across India.

Background to the Validation Agent Framework

In 2020, the Global Legal Entity Identifier Foundation (GLEIF) introduced the Validation Agent (VA) role within the Global LEI System. This enables financial institutions to simplify the issuance of Legal Entity Identifiers (LEIs) for their clients, shorten the onboarding time to revenue generation, and future-proof their institutions for digital innovation. The validation agent role is now performed by more than ten organisations worldwide, including in India.

Challenges of Indian SMEs

Proof of identity and trust deficit

SMEs in India face considerable challenges when entering international markets. A fundamental problem is proving and verifying their identity. With a verifiable business identity, SMEs can access capital, credit and trade finance agreements. This deficit makes participation in the global market considerably more difficult.

Financial inclusion through LEIs

A verifiable business identity such as the LEI can open doors for SMEs in the financial ecosystem. The LEI enables SMEs to prove their identity and access more favourable financing opportunities. This helps to ensure that SMEs are less likely to fall victim to unscrupulous lenders who charge exorbitant interest rates.

The role of validation agents

Promoting awareness of LEIs in India

Since the introduction of the validation agent role, various organisations have been working to raise awareness of the LEI’s benefits. This includes helping Indian SMEs obtain an LEI, which enables them to access trade finance and integrate into global supply chains. For example, one organisation signed a memorandum of understanding with the Federation of Indian Export Organisations (FIEO) to facilitate LEI issuance to Indian exporters.

Cooperation with Indian interest groups

Various export promotion bodies in India are being engaged to strengthen the understanding of the value of obtaining an LEI. Promoting the LEI in ample supply and distribution chains will prevent fraud and money laundering and promote comprehensive risk management.

Further advantages for Indian SMEs

Compliance with regulatory requirements in India

Organisations acting as validation agents help Indian SMEs streamline regulatory compliance and obtain an LEI seamlessly. This includes working with Indian banks to issue the LEI to their clients and ensure compliance with relevant guidelines from the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority of India (IRDAI).

Integration into Indian risk management solutions

The LEI complements Know Your Customer (KYC) offerings and helps customers establish their global identity. It is integrated into business information reports and due diligence reports that banks, FinTechs, and SMEs rely on to make risk decisions.

The role of the LEI in the Indian and global economy

Promoting transparency and growth

Globally and in India, the LEI improves transparency, simplifies identity verification and helps combat money laundering and terrorist financing. These measures are essential for risk mitigation in the global financial system.

Importance in India’s digital economy

In a digitalised world, the LEI makes it easier for businesses in India to transact with banks and other financial players. As more and more jurisdictions adopt the LEI as their preferred identifier, its importance will continue to grow.

Conclusion

Introducing the validation agent in the Global LEI System is a crucial step towards promoting the financial inclusion of Indian SMEs. The provision and promotion of the LEI will help Indian SMEs overcome the challenges of accessing capital and international markets and drive India’s economic development.