MCA’s New SBO Compliance Regulations for LLPs – A Futile Effort?

[Manya Sharma is a 3^rd year B.A., LL.B. (Hons.) student at National Law University Odisha]

The Ministry of Corporate Affairs (MCA) issued a notification dated 27 October 2023 introducing The Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023 effective from November 10. These rules come in addition to MCA’s notification last year extending the applicability of section 90 of Companies Act, 2013 to limited liability partnership (LLP) firms. They aim at strengthening compliance for identification of ‘significant beneficial owners’ (SBOs) of LLPs in India, with a view to ensuring transparency and accountability. This post aims to critically analyse the introduction of new LLP rules along with section 90 of Companies Act, 2013 and implications of the same on LLP firms in India

An SBO is an individual who exercises direct and significant control and decision-making power over a company or LLP, as the case may be. This individual may not always appear to be directly in control of the company or LLP and often exercises this control indirectly, hiding behind multiple layers of entities posing as owners. SBO in the case of LLPs can be ascertained based on the following criteria: contribution of ownership, voting rights, profit entitlement, influence or control.

Extending the Applicability of Section 90 to LLPs

Last year, MCA issued a notification dated 11 February 2022 through which provisions of Section 90 of the Companies Act, 2013 were made applicable to LLPs, to further achieve the same objective of identifying the SBO.

Section 90 of Companies Act, 2013 provides tests for identifying an individual as the SBO of a company or LLP. Any individual acting alone or together or through one or more persons or trust, including a trust and persons resident outside India, who holds beneficial interests of not less than 10% 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 section 2(27), over the LLP shall make a declaration to the LLP. 

For an LLP in the 2022 notification, the only changes were replacing ‘shares’ with ‘contribution’, ‘partner’ with ‘member’ and ‘partner/designated partner’ with ‘officer’. The definition of ‘beneficial interest’ referred to in section 90 is provided under section 89 of the Companies Act, 2013 and has not been made applicable to LLPs. The sole application of section 90 to LLPs creates room for ambiguity for proper identification of SBO.

Insertion of New LLP Rules

A year later, the MCA amended the LLP Rules by inserting rule 22A and rule 22B to strengthen the mechanism for identifying persons having SBO in LLPs. The disclosure rules require firms to identify the SBO and submit the information to the Registrar of Companies (RoC) within 30 days of declaration of the SBO.

The said rules require continual disclosure in case of a change in the status of an individual as an SBO. This is to be made within 30 days to the RoC. In case of failure, the LLP firm can approach the National Company Law Tribunal against the individual.

Rule 22A provides for the maintenance of the register of partners and the extent to which they hold interest. Rule 22B requires a declaration to be made by the partners who have transferred their interest or right to receive profits to another person. It is the partner’s responsibility to furnish information on such a person who is not in the register of partners but holds beneficial interest in the firm.

The rules however, exempt government or government-controlled entities’ contribution, and LLPs held by an investment vehicle registered and regulated by the Securities and Exchange Board of India, 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

Analysis

Identification of ‘beneficial interest’ is a crucial step towards promoting transparency and accountability to improve the ease of doing business and better corporate governance. The objective is to uncover the actual decision-maker and interest holder behind the entities to ensure legitimacy.

The mechanism for identification of an SBO in companies is comprehensively provided under section 89, section 90 and section 187 of the Companies Act, 2013 along with the Companies (Significant Beneficial Owner) Rules, 2014. An LLP firm is structurally and functionally very different from a company, governed by its nascent regulations in India. A minor change of phrases in section 90 CA does not cover an LLP’s intricacies.

Although the LLP Rules have been amended, they are not sufficient to effectively enforce the SBO regulations on LLPs. Firstly, there is no explanation as to the manner of identifying SBO in LLP. The same in the case of companies is governed by the SBO Rules, although there is no clarification as to whether or not these rules will also apply to LLPs with necessary modifications. Secondly, there is no explanation concerning the interpretation of the term ‘voting rights.’ The concept of ‘voting rights’ in LLPs is not tied to the proportion of share capital or contribution. Therefore, it has to be read in the context of the relevant LLP agreement and is not equivalent to the changed phrase ‘contribution’. Thirdly, the term ‘beneficial interest’ is not defined in the context of LLPs. It is defined under section 89(10) of Companies Act, 2013. However, the applicability of the same to LLPs is not provided, leaving room for ambiguity.

Conclusion

Through these rules, the onus of compliance is on the LLP firms, although in the presence of such ambiguities in rules the LLPs may find it difficult to strictly comply with the same, and as a result, MCA’s purpose will stand defeated even with the introduction of new LLP rules.

The regulations pertaining to SBO play a significant role in corporate governance and in honouring the commitment to transparency and accountability. The Government’s move to include LLPs in this regulatory framework shows its commitment to creating an accountable corporate environment. Nevertheless, a mechanism is required to be formulated specifically for LLPs, instead of fitting LLPs within the companies’ framework. The essential features of an LLP firm are inherently different from a company. Given the importance of the identification of SBOs, separate regulations for LLPs are required at the earliest.

– Manya Sharma