Legal Compliance refers to whether the borrower is meeting the laws and regulatory requirements applicable to its business and credit facility. For MSMEs, this can include entity registration, licences, GST, labour laws, environmental permissions, factory approvals, contract obligations, charge registration, and sector-specific rules. For example, a food-processing unit may need FSSAI registration, while a manufacturing unit may need pollution or factory-related approvals. This matters because non-compliance can lead to penalties, closure risk, delayed operations, or enforceability issues for the lender. Legal compliance should be reviewed in proportion to business size and sector. The common caution is to avoid a generic yes/no answer; material licences, expiry dates, pending disputes, and legal opinions should be captured clearly.