LEI & TReDS

The Reserve Bank of India has progressively mandated LEI for large-value financial transactions. All entities (other than individuals) participating in the over-the-counter (OTC) derivatives market, non-derivative markets, and large-value transactions in the Centralised Payment Systems (RTGS/NEFT) above ₹50 crore must hold an LEI as per RBI circular RBI/2018-19/95 (October 2018) and subsequent circulars. Companies availing of bank credit above ₹5 crore are required to obtain LEI under RBI/2020-21/76 issued by the Department of Regulation. SEBI has separately mandated LEI for FPIs, mutual funds, and large corporates issuing debt securities via SEBI circular SEBI/HO/DDHS/CIR/P/2022 dated March 2022. LEI is obtained through Legal Entity Identifier India Limited (LEIL), a subsidiary of the Clearing Corporation of India Limited (CCIL), and must be renewed annually.

To obtain an LEI from LEIL (Legal Entity Identifier India Limited), an entity must submit its Certificate of Incorporation, Memorandum and Articles of Association, PAN card, latest audited financial statements, and a list of beneficial owners holding more than 10% per the Global LEI Foundation (GLEIF) guidelines on Level 2 (who-owns-whom) data. For LLPs, the LLP Agreement and Certificate of Registration from MCA are substituted for MOA/AOA. The application is filed online at the LEIL portal (lei.org.in) and LEIL typically issues the 20-character alphanumeric LEI code within 3-5 working days after document verification. The LEI must be renewed annually by submitting updated financial statements and confirming that beneficial ownership data remains current, as GLEIF requires all published LEI records to reflect current information under the GLEIF data quality guidelines.

TReDS (Trade Receivables Discounting System) is an electronic platform authorised by the RBI under the Payment and Settlement Systems Act 2007 (Section 4) for facilitating the financing of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. Sellers eligible to upload invoices on TReDS must be MSMEs registered under the MSME Development Act 2006 (Udyam Registration), while buyers can be any corporate, PSU, or government entity irrespective of size. The RBI mandated all companies with a turnover above ₹500 crore and all CPSEs and government departments to register on at least one TReDS platform per RBI circular RBI/2019-20/130 dated November 2019. The three SEBI/RBI-authorised TReDS platforms are Receivables Exchange of India Limited (RXIL), M1xchange (Mynd Solutions), and Invoicemart (A.TREDS Limited).

Under GST, factoring or invoice discounting through TReDS constitutes a 'financial service' provided by the financier (bank or NBFC) to the MSME seller; such services are exempt from GST under Entry 27 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017, as they are in the nature of extending deposits, loans, or advances. From the MSME seller's perspective, the invoice uploaded on TReDS represents a supply already subject to GST when raised on the buyer; the discounting charge paid to the financier is an input service expense deductible under Section 37(1) of the Income Tax Act 1961 as a business expenditure for AY 2026-27. The buyer makes payment on the due date directly to the financier and must deduct TDS under Section 194A only if the discounting charge is separately billed as 'interest' — if embedded in the purchase price, no TDS is required. Gains from early payment by the financier are not capital gains but are revenue receipts of the MSME.

Under Section 16 of the MSME Development Act 2006, if a buyer fails to pay an MSME within the agreed period (not exceeding 45 days under Section 15), compound interest at three times the bank rate notified by the RBI becomes payable. From the buyer's tax perspective, such interest is not deductible as a business expense under Section 23 of the MSME Development Act 2006, which was re-confirmed in the CBDT clarification and by the insertion of Section 43B(h) of the Income Tax Act 1961 (effective from AY 2024-25 onwards) — payments to MSMEs beyond the prescribed period are disallowed in the year of accrual and allowed only in the year of actual payment. TReDS effectively eliminates delayed payment risk for the MSME seller because the financier pays the MSME immediately upon buyer acceptance of the invoice; the buyer's liability shifts to the financier on the due date, removing the Section 43B(h) disallowance risk for the buyer and the delayed-payment interest risk for the MSME.