[Gaurav Pingle is practising company secretary and can be reached at [email protected]]
With an intention to regulate limited liability partnerships (‘LLPs’) more stringently, the Ministry of Corporate Affairs (‘MCA’) issued a notification dated February 11, 2022 (‘MCA Notification’) whereby certain provisions of the Companies Act, 2013 are now applicable to LLPs. The said amendment falls under section 67 of the Limited Liability Partnership Act, 2008, which relates to ‘Application of the provisions of the Companies Act’. According to the said provision, the Central Government may, by notification in the Official Gazette, direct that any of the provisions of the Companies Act specified in the notification shall apply to any LLP or shall apply to any LLP with such exception, modification and adaptation, as may be specified, in the notification. This post is a critical analysis of the said MCA Notification in relation to the application of SBO provisions to LLPs.
Register of Significant Beneficial Owners in a Company
According to the MCA notification, ‘contribution’ shall be substituted for ‘shares’, ‘LLP’ shall be substituted for ‘company’, ‘partner’ shall be substituted for ‘member’ and ‘partner/designated partner’ shall be substituted for ‘officer’. After the said changes, the provisions of section 90(1) of the Companies Act now apply to LLPs. By this, every individual, who acting alone or together or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than 25% or such other percentage as may be prescribed, in ‘contribution’ of a LLP or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of section 2, over the LLP (herein referred to as ‘SBO’) shall make a declaration to the LLP. The declaration must specify the nature of the interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed.
It is interesting to note that only section 90 of the Companies Act is applicable to LLP but not section 89(10) of the Companies Act (which defines ‘beneficial interest’, which is referred to in section 90 of the Companies Act). For LLPs, the voting right is not defined in the LLP Act or the Rules. The LLP Act gives liberty to the partners to determine the voting rights in the LLP Agreement. In addition, the contribution is in monetary value (i.e. in cash or kind). Section 32 of LLP Act defines the ‘form of contribution’ as a contribution of a partner that may consist of tangible, movable or immovable or intangible property or other benefit to the LLP, including money, promissory notes, other agreements to contribute cash or property, and contracts for services performed or to be performed. For LLPs, there no concept of face value or shares. However, it may happen that a partner holding 15% of contribution in LLP may control all or important decisions of the LLP. In such cases, the concerned person cannot be SBO.
Section 2(27) of the Companies Act defines the expression ‘control’, and this is also referred to in section 90 of the Act. Control shall include the right to appoint a majority of the directors 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 shareholding or management rights or shareholders agreements or voting agreements or in any other manner. This definition of ‘control’ cannot be applied to LLPs without any modifications or changes. For LLPs, there ought to be some changes in the definition of ‘control’, which includes references to LLP Agreement, voting for LLPs, and control over policy and management decisions. It is also important to note that definition of ‘control’ in section 2(27) of the Companies Act is same as that contained in regulation 2(e) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. It defies logic if one were to apply the definition of ‘control’ in the context of listed companies to LLPs when the regulatory regimes for the two entities are altogether different.
Section 89(10) of the Companies Act defines ‘beneficial interest in shares’. The said definition is an inclusive one. Therein, beneficial interest in a share includes the right or entitlement of a person (directly or indirectly, through any contract, arrangement or otherwise) to: (i) exercise or cause to be exercised any or all of the rights attached to such share; or (ii) receive or participate in any dividend or other distribution in respect of such share. For LLPs, it is necessary to have an independent definition for ‘beneficial interest in contribution’ which becomes the basis for section 90 of the Companies Act.
Maintenance of Register of SBO under Companies Act vis-à-vis LLP
According to section 90(2) of the Companies Act, every company shall maintain a register of the interest declared by individuals and changes therein, which shall include the name of individual, their date of birth, address, details of ownership in the LLP and such other details as may be prescribed. Taking into consideration the said MCA notification, every LLP would be now required to maintain register of interest declared by individuals and changes therein. This is the only provision that requires LLPs to maintain a register under the LLP, which would be open for inspection by any partner of the LLP on payment of fees. Interestingly, there is no provision in LLP Act for maintenance of register and its inspection, but it is now made applicable to LLPs through the said MCA Notification.
According to section 90(4A) of the Companies Act, every company shall take necessary steps to identify individuals who are SBOs in relation to the company and require them to comply with the provisions of section 90. The company is required to give notice to any person (whether member or not) whom the company knows or has reasonable cause to believe to be an SBO in the various circumstances outlined therein. Now, the said provisions would apply to an LLP, whereby the LLP would be required to take necessary steps to identify individuals as SBOs and, in certain cases, give notice to them. To ensure proper application of the said provisions, it is necessary to have clarity on the concepts SBO and beneficial interest. Further, it would be equally onerous for the LLP to enforce compliance with the provisions as, otherwise, it may lead to litigation.
Whether Companies (Significant Beneficial Owners) Rules, 2018 are Applicable to LLPs
After a consultation process, the MCA has issued the Companies (Significant Beneficial Owners) Rules, 2018 for companies. It is interesting to note that the MCA has only directed the application of section 90 of the Companies Act to LLPs, although the Companies (Significant Beneficial Owners) Rules, 2018 are not applicable to them. The said Rules provide for the definitions of reporting company, SBO and majority stake. The Rules also provide for the duty of a reporting company, declaration of SBO under section 90 of the Companies Act, return to be filed by reporting company, format of SBO register, inspection-related provisions of SBO register, format of notice seeking information about SBOs and, most importantly, exceptions to the SBO provisions. Since the SBO Rules are not applicable to LLPs, the MCA may either introduce a separate set of SBO Rules to LLPs. Alternatively, only section 90 of the Companies Act would be applicable to LLPs. In the latter case, it would be difficult to comply with the provisions as the SBO Rules provide for the procedural aspects of compliance.
What Lies Ahead?
It would be difficult to apply even section 90 of the Companies Act to LLPs, as there are many concepts that need to be defined exclusively for LLPs. This would leave many open areas for interpretation and litigation. Though the intention would be to ultimately ascertain the details regarding SBOs for LLPs, the open areas for interpretation would militate against the ease of doing business. In order to address this issue, LLP Act and LLP Rules ought to have been amended to include provisions for similar to section 90 of Companies Act. It is also necessary to define certain concepts in the LLP Act or the Rules that are an integral part of SBO in relation to LLP, which may include beneficial interesting, control, voting rights, minimum threshold of voting rights, and the like. In my view, the mere substitution of words and phrases (e.g. ‘LLP’ for ‘company’, ‘contribution’ for ‘shares’) will not be adequate to address the issue of the applicability of SBO provisions to the LLPs.
– Gaurav Pingle