SBOs behind LLPs all set to be surfaced

– Avinash Shetty, Asst. Manager & Hari Dwivedi, Executive (corplaw@vinodkothari.com)

Introduction

The Ministry of Corporate Affairs (‘MCA’) in the year 2018, introduced the provision for declaration by individuals identified as Significant Beneficial Owners (‘SBOs’) for companies under section 90 of the Companies Act, 2013 (‘Act’). Subsequently, MCA extended the ambit of the said provisions to Limited Liability Partnerships (LLPs) through notification dated February 11, 2022. However, the notification prompted concerns and queries regarding the implementation of SBO provisions on LLPs. These concerns have been addressed by the recent notification dated  November 9, 2023 (‘LLP SBO Rules’). The rationale behind this extension is to align the framework for identification of SBO’s of LLPs with that of companies.

While the provisions are on similar lines as that brought for companies under the Act, however, the difference is mostly in terms of the manner of determining the SBOs in case of LLPs. In case of LLPs it is calculated based on holding of capital contribution (shares in case of companies), voting rights in respect of management or policy decisions of LLP (shares in case of companies) and right to receive or participate in distributable profits (dividend in case of companies) or any other distribution besides, the right to exercise control or significantly influence in any manner other than direct holdings.

The article explains the requirements of the LLP SBO Rules, obligations of the LLPs, and the actionables to be taken in order to comply with the requirements.

Applicability

The LLP SBO Rules are effective from November 10, 2023, the date of publication in the Official Gazette. These rules are applicable to all LLPs except for certain kinds of contribution as discussed  in the para dealing with exemptions below.

Meaning of SBO

SBO, in relation to a reporting LLP, means an individual who possesses one or more of the following rights or entitlements in such reporting LLP, acting alone or together with one or more persons or trust, namely:-

(i) holds indirectly or together with any direct holdings not less than 10% of the contribution;

(ii) holds indirectly or together with any direct holding voting rights not less than 10% of voting rights in respect of the management or policy decisions in such LLP;

(iii) has right to receive or participate in not less than 10% of the total distributable profits, or any other distribution, in a financial year through indirect holdings alone or together with any direct holdings;

(iv) has right to exercise or actually exercises, significant influence or control, in any manner other than through direct-holdings alone.

Prerequisite of holding indirect right or entitlement by the SBO:

An individual cannot be considered as an SBO if he does not hold any right or entitlement indirectly in the LLP. For the purpose of classification of direct holding, the individual should either hold the contribution in his/her own name or must have declared the beneficial interest^[1] in relation to the holding in terms of Rule 22B (2) of the Limited Liability Partnership Rules, 2009 (‘LLP Rules’).

Individuals identified as SBO:

The following individuals will be considered to hold right or entitlement indirectly in the reporting LLP in respect of a partner of reporting LLP:

Sr. No.	Partner of LLP	Who is considered to hold right or entitlement in LLP
(i)	Body corporate (whether incorporated or registered in India or abroad) other than an LLP.	Individual who holds: a. Majority of stake in that partner or, b. Majority of stake in the ultimate holding company (whether incorporated or registered in India or abroad) of that partner
(ii)	Hindu Undivided Family (HUF) (through Karta)	Individual who is Karta of an HUF
(iii)	Partnership entity (through itself or a partner)	Individual who: a. Is a partner; or b. Holds majority stake in the body corporate which is a partner of a partnership entity; or c. Holds majority of stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.
(iv)	Trust (through trustee)	Individual who is: a. A trustee in case of discretionary trust or a charitable trust; b. A beneficiary in case of specific trust; c. The author or settlor in case of a revocable trust.
(v)	Pooled Investment Vehicle (‘PIV’) or an entity controlled by the PIV, based in the country which is a member State of the FATF on Money Laundering and the regulator of the securities market in such a member State is a member of the International Organisation of Securities Commissions.	Individual who: a. Is a general partner; or b. Is an investment manager; or c. Is a Chief Executive Officer where the investment manager of such PIV is a body corporate or a partnership entity
(vi)	PIV or an entity controlled by the PIV, based in a jurisdiction which does not fulfill the requirement mentioned in clause 5 above	Individual who is regarded as SBO under clause (i) to (iv) above, as the case may be.

In view of Section 5 of LLP Act, an individual or a body corporate can be a partner in the LLP. Therefore, the need to assess SBO in case of Trust, HUF, Partnership entity may not practically arise. In case of PIV, in view of MCA Circular of 37/2014, it is not barred for a trustee, being a body corporate, to hold partnership in an LLP in its name without the addition of the statement that it is a trustee.

Meaning of Significant Influence:

Significant influence means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting LLP but does not mean control or joint control of those policies.

Meaning of Majority Stake:

The majority stake shall mean:

(i) holding more than one-half of the equity share capital in the body corporate; or

(ii) holding more than one-half of the contribution in a partnership entity; or

(iii) holding more than one-half of the voting rights in the body corporate; or

(iv) having the right to receive or participate in more than one-half of the distributable dividend or distributable profits or any other distribution by the body corporate including a partnership entity as the case may be;

Meaning of Control:

Control includes the right to appoint majority of the designated partners or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their contribution or management rights or limited liability partnership agreements or other agreements or in any other manner;

Obligations of the SBO

Initial Disclosure:

Every individual who is an SBO in a reporting LLP will be required to file a declaration in Form No. LLP BEN-1 to the reporting LLP within 90 days from November 9, 2023 i.e. by February 7, 2024. The SBO is not required to wait for receipt of some communication from the LLP (discussed in para below), as the onus of declaration is on the SBO.

Continual Disclosure:

Every individual, who subsequently becomes an SBO or where the significant beneficial ownership undergoes any change will be required to file a declaration in Form No. LLP BEN-1 to the reporting LLP, within 30 days of acquiring such significant beneficial ownership or any change therein.

Changes in SBO during the transition period:

In case an individual becomes an SBO or where his significant beneficial ownership undergoes any change, within 90 days of the commencement of this rules i.e. from November 9, 2023 to February 7, 2024, it shall be deemed that such individual became the SBO or any change therein happened on the date of expiry of 90 days from the date of commencement of this rules, and the period of 30 days for filing will be reckoned accordingly.

Obligations of the LLPs

Identification of the SBO:

• Every reporting LLP will be required to take necessary steps to find out if there is any individual who is an SBO in relation to that LLP and if so, identify him and cause such individual to make a declaration in Form No. LLP BEN-I.
• Reporting LLP will be required to give notice to a partner (other than an individual), who holds not less than ten percent of its contribution or voting rights or right to receive or participate in the distributable profits or any other distribution payable in a financial year in Form No. LLP BEN-4 seeking information where it knows or believes such person:
  • Is an SBO of the LLP;
  • Have knowledge of the identity of the SBO or another person likely to have such knowledge; or
  • Have been an SBO of the company at any time during the three years immediately preceding the date on which the notice is issued.
  • Is not registered as an SBO with the LLP.

Filing of return of SBO:

On receipt of SBO’s declaration, the reporting LLP will file a return in Form No. LLP BEN-2 with the Registrar of Companies within a period of 30 days from the date of receipt of declaration by it.

Maintain Register of SBO:

• LLP will be required to maintain the register of SBO in Form No. LLP BEN-3.
• The register will be available for inspection during business hours, at a reasonable time of not less than two hours, on every working day, as decided by LLP agreement or partners of LLP upon payment of the fee specified by LLP not exceeding fifty rupees for each inspection.

Remedial from Tribunal

The reporting LLP can apply to NCLT for remedy in the following cases:

• Where the person is required to provide information as asked by the reporting LLP in Form No. LLP BEN-4 does not submit such information within a specified time; or
• The information provided by the person as mentioned above is not satisfactory.

The reporting LLP can seek the following remedies from the Tribunal with respect to ‘contribution in question’:

1. Restrictions on transfer of interest attached to the contribution in question;
2. Suspension of the right to receive profits or any other distribution in relation to contribution in question;
3. Suspension of voting rights in relation contribution in question;
4. Any other restrictions on all or any of the rights attached with the contribution in question.

Exemption from the SBO rules

These rules will not be applicable to the extent the contribution of the reporting LLP is held by.-

• the Central Government, State Government or any local authority;
• a reporting LLP or a body corporate or an entity, controlled by the Central Government or by one or more State Government, or partly by the Central Government and partly by one or more State Government;
• investment vehicles registered with, and regulated by the SEBI, such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InVITs).
• an investment vehicle regulated by the Reserve Bank of India, or the Insurance Regulatory and Development Authority of India, or the Pension Fund Regulatory and Development Authority.

The exemption to a subsidiary, where the holding reporting company submits SBO details, as available to a company has not been extended in case of an LLP. Accordingly, where an LLP is held by another LLP, both the entities will have to independently comply with the norms.

Conclusion

The new LLP SBO rules, akin to what companies currently follow, introduce a similar framework for Limited Liability Partnerships (LLPs). This means that LLPs will now be required to adhere to SBO declarations and maintain registers, just like companies. The objective remains the same i.e. to ensure transparency and accountability by identifying and disclosing the individuals who ultimately hold the beneficial interest and steer the decision-making within LLPs. The idea is to uncover  the intricate networks of holdings and cross holdings, a practice commonly employed to hide the identity of the individual (s) actually owning an entity. 

Our other writeups on SBO can be read here: Article corner on SBOs

Our resource on MCA notification dated February 11, 2022 can be read here: https://vinodkothari.com/2022/07/applicability-of-provisions-of-the-companies-act-on-llps-reporting-requirements-recent-changes/

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^[1]  Person who holds or acquires a beneficial interest in contribution of a LLP but his name is not registered in the register of partners and has filled declaration disclosing such interest in Form 4C specifying the nature of his interest, particulars of the partner in whose name the contribution stand registered in the books of the LLP.