Government Directs LLPs To Disclose Their Beneficial Owners
A man completes paperwork. Photographer: Simon Dawson/Bloomberg

Government Directs LLPs To Disclose Their Beneficial Owners

The Ministry of Corporate Affairs has extended the rules relating to significant beneficial ownership to limited liability partnerships. For companies, the requirement was first notified in January 2018.

In a website notification, the ministry has asked designated partners in LLPs to be ready for the compliance requirements. Besides disclosure on significant beneficial ownership/owners, the notification also suggests individuals will have to limit their role as a partner to only a prescribed number of LLPs.

To be clear, Section 67 of the LLP Act allows the central government to issue a notification for extending provisions of the Companies Act to any LLP with or without a modification. The government had used this provision last year to extend powers for condonation of delay to any filings under the LLP Act as well.

The intent behind obtaining significant beneficial ownership declaration is to find out the real or beneficial owner in an entity. For instance, the law allows a body corporate to be a shareholder or a partner in a company or LLP respectively. But the ultimate control over such entities is generally exercised by an individual or a group of them. SBO declaration aims to find such beneficial owners.

While this requirement was introduced for companies in early 2018, it was fraught with implementation challenges. This had prompted the government to extend the deadline and then freeze it. Finally, a new set of rules were issued in 2019 but companies continued to have a lot of unanswered questions.

New Provisions For LLPs

As per the website notification, following provisions of Companies Act will be extended to LLPs as well:

  • Requirement of obtaining SBO declaration from persons holding beneficial interest beyond a prescribed threshold and the need to maintain a register of such declaration. As a result, LLPs may have to obtain SBO declaration from its partners.
  • Provisions dealing with disqualification of directors, limitation on number of directorships. Through this, the government may specify the maximum number of firms in which an individual can act as a partner or designated partner and the grounds for disqualification and vacation of office.
  • Certain powers under the Companies Act relating to calling of information, inspecting books of accounts, conducting inquiries will also apply to the LLP Act.
  • Government may notify some offences relating to LLPs as non-cognisable. Non cognisable offenses are those for which a police cannot arrest a person without a warrant.

Focus Is On Improving Governance, Experts Say

While the government is yet to issue the required rules, experts pointed out that designated partners and LLPs may have to relook at their structures.

A lot of businesses prefer LLP over the company form due to limited liability and very less compliance requirements compared to the latter, Sameer Jain, managing partner at PSL Advocates and Solicitors, said. Data from the Ministry of Corporate Affairs’ January 2021 report shows that more than 14,700 companies have converted to LLPs till date, he said.

Considering this, it’s very reasonable for the ministry to extend SBO compliance towards LLPs, he added.

Both form of legal entities serve the same primary purpose, which is to have a limited liability. As companies were already required to comply with SBO and other requirements, extending this to LLPs will prevent their misuse by bringing them under same amount of scrutiny and core compliance requirement
Sameer Jain, managing partner, PSL Advocates and Solicitors

The proposed adaptation of certain specific provisions of Companies Act to LLPs will have far-reaching consequences on governance of LLPs in India, Pratyush Khurana, partner at IndusLaw, explained. The intent is to bring in transparency in the operation and management of LLPs, he said.

The wordings of the final notification will be important and one hopes that the process of SBO identification in the context of a LLP partner who is a body corporate will be less contentious. 
Pratyush Khurana, partner, IndusLaw

The cost of compliance for LLPs is set to rise as more and more provisions of the Companies Act are extended to them, Khurana added.

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