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UNVEILING THE VEIL OF LLPS - SBO RULES Gaming Law 2023 - India
[GOVERNMENT STRENGTHENS BENEFICIAL INTEREST DISCLOSURE REGIME - PART II] December 22, 2023
BACKGROUND:
Prevention of Sexual Harassment at
the Workplace (POSH)
On November 9, 2023, the Ministry of Corporate Affairs (“MCA”) notified the Limited Liability Partnership (Significant December 09, 2023
Beneficial Owners) Rules, 2023 1 (“SBO Rules”). These SBO Rules are issued pursuant to Section 90 of the
Companies Act, 2013 (“CA 2013”), which was applied to all the Limited Liability Partnerships (“LLPs”) through the
MCA’s Notification dated February 11, 2022 2, with certain amendments wherein the words ‘shares’, Research Articles
‘ company’, ‘member’ and ‘ officer’ used under said provision were substituted with ‘ contribution’, ‘ LLP’, ‘ partner’ and
‘designated partner’, respectively in the context of LLPs. Emerging Legal Issues with use of
Generative AI
Until now, only the companies were subjected to identify their Significant Beneficial Owners (“SBOs”) and the related
October 27, 2023
compliances under Sections 89(10) and 90 of CA 2013 read with Companies (Significant Beneficial Owners) Rules,
2018 3, read with the Companies (Significant Beneficial Owners) Amendment Rules, 2019 4 (“Companies SBO Reciprocity requirement for
Rules”), which have now been extended to the LLPs through these SBO Rules. As a result, all the existing LLPs and enforcement: A roadblock in ease of
the SBOs identified pursuant to SBO Rules would be required to take necessary steps and make requisite disclosure doing business?
August 24, 2023
of such significant beneficial ownership.
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KEY HIG HLIG HTS O F SBO R ULES Indian GPs
a) SBO in relation to reporting LLP: SBO Rules define SBOs in relation to reporting LLP as an individual, who acting July 07, 2023
alone or together or through one or more persons or trust, hold one or more of following rights or entitlements – (i)
holds indirectly (or together with any direct holdings), at least 10% of contribution; (ii) holds indirectly (or together with
any direct holdings), at least 10% of voting rights in respect of the management or policy decisions; (iii) has right Audio
to/participate in at least 10% of total distributable profits/any other distribution through indirect holdings alone (or
together with direct holdings); and (iv) has right to exercise/actually exercises significant influence or control, in any
Lookout circulars: An Introduction
manner other than through direct-holdings alone (together, referred to as ‘ Four Parameters’). While the first three
December 29, 2023
parameters are objective and quantitative in nature, the fourth parameter is a subjective and qualitative test.
Guerilla Tactics in International
b) Direct and Indirect holding in reporting LLP: Explanations to SBO’s definition clarifies as to what amounts to
Arbitration
direct and indirect holding of right or entitlement in reporting LLP under different circumstances. As clarified, only an December 27, 2023
individual who holds any right or entitlement indirectly should be treated as an SBO and direct holding is only
optional and in addition to indirect holding. In this context, the scenarios - (i) where the contribution representing The Silent Shield: Understanding
such right or entitlement is held directly in the name of individual; or (ii) such individual has declared himself as Legal Privilege
December 26, 2023
beneficial partner under Rule 22B(2) of the Limited Liability Partnership Rules, 2009 (“Amended LLP Rules”)5 are to
be considered as direct holding. In addition, the explanations also guide as to how to determine indirect holding in
the context of different types of partners such as body corporate, partnership firm, trust, Hindu-undivided family (HUF)
or pooled investment vehicles (PIV), in reporting LLP. NDA Connect
The term ‘majority stake’ has been defined (which is essential for determining indirect holding in case of body
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corporate or partnership firm being a partner), which broadly mean holding more than one-half of equity share capital
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in the body corporate; or contribution in a partnership entity; or voting rights in the body corporate; or right to more
than one half of distributable profits or any other distribution. The terms ‘control’ and ‘significant influence’ have also
been defined specifically in the context of LLPs.
NDA Hotline
c) Reporting duties on LLP and SBO: All the existing LLPs are required to identify any individual who is an SBO and
cause him to declare his significant beneficial ownership (in Form No LLP BEN-1). The LLPs are also obligated to
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send notice (in Form No. LLP BEN-4) to all the existing non-individual partners holding at least 10% of contribution /
voting rights / profit rights, seeking information of SBO and wherever applicable, require them to declare it. In respect
of individuals who have already become SBO pursuant to SBO Rules, they are required to declare it within 90 days
of commencement of SBO Rules and in respect of any future acquisition of (including any change in) such significant Video
beneficial ownership, they have to declare it within 30 days of such acquisition or change. After receiving
declarations from SBO as stated above, reporting LLP will need to file them (in Form No LLP BEN-2) with the Indian Vyapk Desai speaking at a webinar
registrar. organized by the Bar Association of
d) Register of SBOs and NCLT: SBO Rules provide for maintenance of register of SBOs (in Form No LLP BEN-3) Sri Lanka
November 17, 2023
based on the declarations received from SBO(s). It is also provided that when a person fails to give information of
significant beneficial ownership as required under law or has provided unsatisfactory information, reporting LLP Webinar : Unlocking Wealth
should approach the National Company Law Tribunal which can then, at its discretion, restrict the transfer of or Navigating Family Offices in Gift City,
suspension of voting rights or profit distribution rights associated with the contribution in question.
Gandhinagar
e) Non-applicability: SBO Rules exemptfrom its requirements in case of contribution of an LLP – (i) held by Central or October 13, 2023
State government or any local authority (including such holding by a reporting LLP / body corporate / entity controlled
between Central or State government); or (ii) held by investment vehicles registered with and regulated by the Basava Rao on India’s Merger
Securities and Exchange Board of India (SEBI) or those regulated by the Reserve Bank of India (RBI), or the Demerger Wave with Business
Insurance Regulatory and Development Authority of India (IRDA), or the Pension Fund Regulatory and Development Standard
October 13, 2023
Authority (PFRDA),
Broadly, except a few suitable modifications from an LLP perspective, the overall framework of SBO Rules is quite
similar to that of Companies SBO Rules applied for the companies.
O UR AN ALY S IS , AMBIG UIT IES & C HAL L EN G ES :
a) Direct holding & Indirect holding: Requirement of declaring beneficial interest in LLP’s contribution got notified
through Rule 22B(2) of the Amended LLP Rules recently which provided LLPs with a similar framework as provided
by Section 89 of CA 2013 for the companies. For our detailed analysis of Amended LLP Rules, please visit this Link.
Any such beneficial interest declared under Rule 22B(2) and holding of such interest directly in the name of
registered partner himself, both would qualify as direct holding of right or entitlement from SBO Rules standpoint. On
the other hand, the interest of Section 90 of CA 2013 and SBO Rules goes a step further and is aimed at piercing the
corporate veil for identifying any natural person(s) who indirectly holds right or entitlement in an LLP. Hence,
existence of indirect holding is essential for SBO Rules to operate and they will not apply if there is no indirect
holding of any right or entitlement by any natural person.
Pertinent to note that, Rule 22B which requires to declare beneficial interest, has not explicitly clarified what
‘beneficial interest in contribution of an LLP’ would mean. The meaning of ‘beneficial interest in shares’ has been
however clarified under Section 89(10) of CA 2013 (which corresponds to Rule 22B) for the purpose of both Section
89 and Section 90 of CA 2013. Also, while Section 90 is applied to LLPs, Section 89(10) which defines as what the
beneficial interest mean has not been applied to LLPs. However, as per the LLP Act, the partner’s contribution in an
LLP can be in any form and the obligation to contribute, voting rights and profit distribution rights in relation to such
contribution are governed by LLP agreement, which essentially mean that, pursuant to LLP agreement, the beneficial
partner may have acquired voting or profit distribution rights which may not exactly corelate with the contribution
standing in the name of registered partner. Hence, the expression ‘beneficial interest in contribution’ could have
been defined in the context of LLPs as it could have helped what nature of interest needs to be declared as per Rule
22B. Notably, while Rule 22B refers to only beneficial interest in contribution of an LLP, SBO Rules require to declare
indirect holding of right or entitlements in an LLP as per aforesaid Four Parameters (one of which includes right or
entitlement by virtue of contribution in an LLP).
b) Partners of reporting LLP: Section 5 of the LLP Act provides that only an individual or body corporate can
become a partner of an LLP. Hence, the circumstances of a trust, HUF, PIV (not being a body corporate) or
partnership firm being a partner of an LLP as contemplated in the explanations to SBO’s definition needs to be
evaluated in the context of Section 5. Going by this, only when a body corporate is acting as partner of LLP on behalf
of entities restricted under Section 5 (like, as a partner of partnership firm or a trustee of trust etc.), the requirement of
applying SBO test (and requisite declarations as per Rule 22(B)) may trigger. Also, an HUF or its Karta cannot
become a partner or designated partner of LLP, as clarified under MCA’s General Circular No. 13/2013 dated July
29, 2013 6 read with General Circular No. 2/16 dated January 15, 2016 7 and this directly contradicts with explanation
(ii) to SBO’s definition.
c) SBO Identification and Indirectholding computation: There are also certain anomalies while computing indirect
holding of 10% and identifying SBO, by relying upon the SBO’s definition and explanations thereunder, as discussed
below:
Body corporate being a partner: Though the definition of SBOs seems to suggest that ‘indirect holding of
10% ’ needs to be calculated on a look-through basis (i.e., effective holding test), the explanations provided
thereunder requires an individual to hold ‘majority stake’ either in the body corporate partner or in its ultimate
holding company as a pre-requisite to calculate such indirect holding. This ‘majority stake’ requirement directly
contradicts with look-through test suggested under SBO’s definition. For instance, in a layered structure, if an
individual holds 70% of ultimate holding entity, which in turn, holds 60% of the body corporate partner entity which
holds 20% of reporting LLP, then, on a look through basis, the indirect holding of that individual in reporting LLP
comes to 8.4% (i.e., less than 10% threshold) and therefore, SBO Rules should not trigger. However, going by
majority stake criteria, since such individual hold more than half (i.e., 70%) of equity capital/voting rights in an
ultimate parent entity and the body corporate partner entity holds more than 10% (i.e., 20%) in reporting LLP, he
becomes an SBO for reporting LLP, although his indirect holding on a look through basis is well within 10%
threshold.
Partnership firm being a partner: Since only a body corporate or natural person can become a partner, a firm can
become a partner of an LLP only through its partner who is an individual or body corporate, subject to necessary
declarations under Rule 22B. Also, where an individual is acting as a partner on behalf of firm, there may not be
any indirect holding so, practically, SBO Rules should apply only when a body corporate is a partner acting on
behalf of a firm. Further, where a partnership firm (through its partner) holds at least 10% in reporting LLP and
pursuant to the definition of ‘majority stake’, only if an individual hold more than one-half of the contribution, such
partnership entity should be treated as an SBO. However, the explanation to SBO’s definition considers all
individual partner(s) of that partnership firm as SBO even if such individual partner(s) do not hold majority stake
thus making the majority stake criteria prescribed for a firm infructuous.
Pooled Investment Vehicle (PIV): SBO Rules do not explicitly define what would constitute a PIV. Globally, the
investors often use non-fund structures (such as corporate vehicles, LLPs, and trusts) to operate a PIV and hence,
adequate guidance is needed as to what SBO Rules construe to be within the ambit of PIV in such different
structures. Also, it is unambiguously clarified that, in case of an offshore PIV (or an entity controlled by such PIV)
being a partner of a reporting LLP and based in a member state of the FATF where the securities market regulator
is a member of the International Organization of Securities Commission (IOSCO), an individual who is the general
partner or investment manager of that PIV shall be an SBO. Where the investment manager is a body corporate or
partnership entity, the CEO of that manager entity needs to be considered as an SBO. Thus, in a scenario where
general partner of PIV is not an individual, no SBO should be identified further. Notably, the limited partners of PIV
are clearly excluded from being treating as SBO.
Acting together: SBO Rules have defined this expression in a much broader sense in order to bring into books an
individual who may be acting together with any person or trust to exercise any right or entitlement. However, from
reporting LLP’s perspective, it may be practically difficult to track such arrangements and impose SBO compliances
on such individual(s). For instance, where the individual is acting in concert with any other non-individual partner
without the knowledge of LLP and no disclosure of such arrangement has been made, no practical guidance or
steps have been provided for an LLP to bring those arrangement into books. Also, where the individuals are
relatives, they are not deemed as ‘acting together’ by virtue of relationship itself and hence, unless they fulfil the
criteria of ‘acting together’ as per SBO Rules, their individual holdings are not to be clubbed. These aspects
become relevant while ascertaining the majority stake at the immediate partner entity or at an ultimate parent entity
level.
d) Voting and Profit Distribution Rights: Under the LLP Act, the voting rights in respect of the management or policy
decisions and profit distribution rights are governed by the terms of LLP agreement and they need not always
correlate with the extent of contribution by the partners. So, if LLP agreement do not explicitly mention as to how such
rights are distributed among the partners, then the provisions of Schedule I of the LLP Act8 would prevail and as per
which, generally, equal voting and profit distribution rights are conferred to all the existing partners irrespective of the
contribution made by each of them. Resultantly, in such cases, all the body corporate partners of an LLP, by virtue of
being the holders of equal rights as per Schedule I, may have to undergo SBO test by default, although the actual
contribution of some of them may be less than 10% threshold.
e) Control and Significant Influence: These are subjective cum qualitative tests and are explicitly defined from an
LLP’s standpoint. As per SBO Rules, only an individual exercising control or significant influence over an LLP
through indirect means (and not directly by virtue of contribution made in an LLP) needs to be treated as an SBO.
However, what exactly amounts to ‘control’ and ‘significant influence’ needs a careful evaluation in view of
fundamental structure of an LLP.
Unlike a company, there is no clear separation of management and ownership in an LLP structure. It is the partners
who will assume both management and ownership rights (as per LLP agreement) considering only they can become
the designated partners (apart from being the actual owners) and this basic feature of an LLP makes the ability of a
partner to appoint majority designated partners practically infructuous. Also, as discussed above, unless LLP
agreement specifically provide, by operation of law, every partner would get equal rights to vote and for profit
sharing, leading to all the partners having equal and joint control over the affairs of an LLP. In such a case, the SBO
test may have to be applied in respect of all existing body corporate partners (irrespective of percentage of their
contribution). Notably, the ‘control’ has been defined to include holding it also by virtue of ‘any other agreement or
manner’ thus, not limiting it only to the terms of LLP agreement. In case of any external investor or lender, who has
been given affirmative voting rights on key operational matters either under LLP agreement or other investment or
loan agreement, whether those rights amount to having actual voting rights or control or significant influence needs
to be evaluated in the context of LLP. In case of a company, based on some case laws, there seems to be a clarity
that such rights should not amount to ‘control’ as they only signify a ‘negative’ and ‘reactive’ power. Additionally, an
individual SBO is obligated to provide the agreement copy, through which he has acquired significant influence
and/or control over reporting LLP, while declaring his significant beneficial ownership to reporting LLP
Further, what would constitute participation in financial and operating policy decisions of an LLP is unclear. Every
designated partner in case of an LLP and the key executives and/or board of directors of body corporate partners of
an LLP (including such executives / directors of their ultimate parent entities) generally participates in financial and
operating policy decisions. Should they be treated as an SBO for an LLP? Going by the intent of SBO Rules, it should
not be the case since these persons exercise such powers under the law by virtue of the position they hold.
CO NCLUDING THO UG HTS:
An LLP as a structure has gradually become a popular business model for many reasons. Bringing LLPs within the
regulatory framework of identifying and reporting of SBOs compliances, quite in similar lines with the obligations that
are already applied for the companies, reflects that the Government's efforts are now directed towards enhancing
transparency levels in terms of ultimate beneficial ownership of LLP structures also. The initiative of issuing SBO
Rules has been applauded for its potential to improve overall transparency in ownership, strengthening corporate
governance, and foster trust in the business ecosystem. However, the overall impact and effectiveness of these SBO
Rules would be assessed over time as they are implemented, and their implications become clearer.
– Palomita Sharma and Chandrashekar K
You can direct your queries or comments to the authors.
1Available at https://www.mca.gov.in/bin/dms/getdocument?mds=pJZaasqhxL5W9F46Ukp5lw%253D%253D&type=open.
2Available at https://www.mca.gov.in/bin/ebook/dms/getdocument?doc=MTE3OTE3MTA=&docCategory=Notifications&type=open
3Available at https://www.mca.gov.in/Ministry/pdf/CompaniesSignificantBeneficial1306_14062018.pdf
4Available at https://www.mca.gov.in/Ministry/pdf/CompaniesOwnersAmendmentRules_08020219.pdf
5Available at https://www.mca.gov.in/bin/ebook/dms/getdocument?
doc=Mzc2OTA4ODA4&docCategory=NotificationsAndCirculars&type=open
6Available at https://www.mca.gov.in/Ministry/pdf/General_Circular_13_2013_LLP.pdf
7Available at https://www.mca.gov.in/Ministry/pdf/General_Circular_2_2016.pdf
8Available at https://www.mca.gov.in/content/dam/mca/pdf/LLP_Act_2008_15jan2009.pdf
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