[Smruti Kulkarni and Manas Rohilla are 3rd year B.A., LL.B. (Hons.) students at the Gujarat National Law University, Gandhinagar]
On 9th November 2023, the Ministry of Corporate Affairs (“MCA”) notified the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023, which mandate all Limited Liability Partnerships (“LLPs”) to identify and disclose their Significant Beneficial Owners (“SBOs”). The Rules have been issued pursuant to section 90 of the Companies Act, 2013, which was applied to LLPs with certain modifications earlier in February, 2022. The Rules are aimed at enhancing the transparency and accountability of the LLP structures, which have become a popular business model in India. However, the Rules also pose several ambiguities and challenges for LLPs and their partners, especially in the context of the unique features and flexibility of the LLP structure.
This post aims to provide a brief overview of the new rules, explain the fundamentals and current legal framework of LLPs and SBOs in India, describe the newly laid requirements for LLPs and their partners, and analyse the implications and challenges of the new rules for various stakeholders.
LLPs and SBOs – Legal Framework
LLPs, governed by the Limited Liability Partnership Act, 2008, are separate legal entities with perpetual succession. The liability of partners is limited to their agreed contributions, whereas the LLP itself is liable to the full extent of its assets. LLPs require a minimum of two designated partners, with at least one being a resident in India. The rights and obligations of partners and the LLP are determined by the LLP agreement, a written contract between the partners.
SBOs are individuals who, acting alone or together with others, hold certain rights or entitlements in an LLP, either directly or indirectly, through various layers of entities or arrangements. The Rules define SBOs in relation to a reporting LLP as an individual who meets one or more of the following criteria:
- Holds indirectly (or together with any direct holdings), at least 10% of contribution in the LLP;
- Holds indirectly (or together with any direct holdings), at least 10% of voting rights in respect of the management or policy decisions of the LLP;
- Has the right to/participates in at least 10% of total distributable profits/any other distribution through indirect holdings alone (or together with direct holdings); and
- Has the right to exercise/actually exercises significant influence or control, in any manner other than through direct holdings alone.
The identification and disclosure of SBOs is important for several reasons, such as to prevent the misuse of LLP structures for money laundering, tax evasion, fraud, or other illegal activities. It is also crucial to ensure the accountability and responsibility of the ultimate owners of the LLPs, who may otherwise remain hidden behind the corporate veil. Further, this practice aligns the LLPs with the global standards and best practices on beneficial ownership disclosure, as recommended by the Financial Action Task Force and other international bodies.
The New Mandate: Key Aspects and Requirements
The MCA’s Rules for SBOs encompass several crucial aspects, including SBO identification, reporting by LLPs, duties of designated partners, and the powers of the Registrar.
Every individual who is an SBO in an LLP, or becomes one after the commencement of these rules, must submit a declaration (Form No. BEN-1) to the LLP within 30 days of acquiring such status or any subsequent change. The declaration should contain the individual’s particulars, the nature of significant beneficial ownership, and other prescribed information. LLPs are obligated to file a return of SBOs (Form No. BEN-2) with the Registrar within 30 days of receiving the SBOs’ declarations. The return should include particulars of the SBOs, any changes thereto, and other prescribed information. LLPs must also maintain a register of SBOs (Form No. BEN-3) to record and update the particulars of SBOs, which is accessible to LLP partners upon payment of prescribed fees.
Designated partners hold the responsibility of identifying and reporting SBOs in LLPs. They must take reasonable steps to obtain SBO declarations, file returns with the Registrar, and maintain the register of SBOs. They are also accountable for ensuring the accuracy and completeness of information received from SBOs and furnished to the Registrar. Non-compliance with the rules may subject designated partners to penalties under the LLP Act and the rules.
The Registrar of LLPs possesses the authority to request information from any LLP if there is reasonable cause to believe an individual is an SBO or if changes occur in significant beneficial ownership. Issuing a notice (Form No. BEN-4) to the LLP, the Registrar can require the submission of information within 30 days. Failure to comply with the notice or unsatisfactory information may lead the Registrar to apply to the Tribunal for an order directing the LLP to make necessary disclosures or imposing restrictions on SBO interests in the LLP.
Implications of the new requirements
The new mandate comes with certain implications for the stakeholders concerned. To begin with, the rules impose increased compliance burdens and costs on LLPs, as they must navigate with the new reporting and disclosure requirements. The rules also require the LLP to ensure the accuracy and completeness of information obtained from SBOs. Additionally, maintaining a register of SBOs and allowing partner inspections during business hours further adds to the LLPs’ responsibilities.
SBOs face the obligation to disclose their identities and interests, potentially compromising their privacy and confidentiality. They must update their declarations whenever significant changes occur in their beneficial ownership or control. Non-compliance with the rules or orders from the Tribunal may result in penalties and restrictions on their interests in the LLP. Designated partners bear the responsibility of ensuring compliance with the rules, including identifying and reporting SBOs. They must exercise due diligence to obtain accurate information and maintain the register of SBOs. Failure to fulfil these duties may lead to penalties under the LLP Act and the rules, as well as reputational harm.
Regulators, such as the MCA, the Registrar of LLPs, and the Tribunal, benefit from increased transparency and accountability. These rules enable regulators to access information regarding significant beneficial ownership, monitor compliance, and take appropriate action in case of violations. Access to SBO information aids in other regulatory purposes, such as taxation, anti-money laundering, and fraud prevention. The public, including customers, suppliers, creditors, and investors, benefit from the enhanced transparency and accountability of LLPs and SBOs. They can access and verify SBO information, enabling informed decisions in their interactions with LLPs. They can also identify and report any suspicious or unlawful activities involving LLPs and SBOs, safeguarding their interests and rights.
Challenges and Ambiguities posed by the Rules
The imposition of the Rules on LLPs aims to enhance transparency and accountability within these structures. However, these rules also bring forth several challenges and ambiguities that need to be addressed.
LLPs face challenges due to the ambiguity surrounding Pooled Investment Vehicles (“PIVs”), which are commonly used by investors in India. The Rules lack a clear definition of PIVs, resulting in confusion and inconsistency in identifying SBOs for domestic and foreign PIVs. Another issue arises from the lack of clarity regarding the determination of beneficial interest in the contribution of an LLP. The LLP Act allows partners to contribute in various forms, with rights and obligations governed by the LLP agreement. However, the Rules fail to provide guidance on ascertaining beneficial interest in different scenarios.
Identifying and reporting SBOs pose practical difficulties, particularly in complex, layered structures involving multiple entities and jurisdictions. LLPs may struggle to obtain relevant information from partners and ultimate owners who may be hesitant to disclose their identity or interest. SBOs, on the other hand, may face challenges in complying with declaration requirements if they are unaware of their status or the applicable rules. The absence of exemptions or relaxations for LLPs already subject to similar disclosure requirements under other laws or regulations (such as the Foreign Exchange Management Act, 1999, Income Tax Act, 1961, or the Prevention of Money Laundering Act, 2002) results in duplication and inconsistency of reporting and compliance.
Additionally, rule 9 of the Rules allows LLPs to approach the National Company Law Tribunal (NCLT) in case partners fail to provide the required information on SBO. The purpose is to seek measures that restrict or suspend the rights of non-compliant partners. However, the rules do not provide clear guidance on the exhaustive procedure and grounds for initiating such action with the tribunal, posing challenges for LLPs. Navigating the legal process without specific instructions can be cumbersome for the same.
Conclusion and Way Forward
The Rules are a welcome step towards bringing more transparency and accountability to the LLP structures, which have been widely used by the business community in India. They are also in line with global standards and best practices on beneficial ownership disclosure, which are essential for preventing and combating the misuse of LLP structures for illicit purposes. However, as discussed, these obligations pose several ambiguities and challenges for LLPs and their partners, which need to be addressed and resolved by the MCA and the Registrar, through appropriate clarifications, guidance, and enforcement. LLPs and their partners should also be proactive and diligent in complying with the Rules, and seek professional advice and assistance, wherever required. The new requirements are expected to significantly impact the functioning and governance of LLPs, and hence, their smooth and effective implementation will be important.
– Smruti Kulkarni & Manas Rohilla