Rules governing significant beneficial owners under the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023

INTRODUCTION

The Central Government through the Ministry of Corporate Affairs and in exercise of its powers conferred under Section 79ⁱ of the Limited Liability Partnership Act, 2008 (“Act”)ⁱⁱ has issued certain rules governing significant beneficial owners vide notification no. G.S.R. 832(E) dated November 09, 2023. The rules are titled as the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023 (“LLP Rule”)ⁱⁱⁱ and are applicable to all the limited liability partnerships (“LLP”).

THE FOLLOWING ARE THE KEY HIGHLIGHTS OF THE LLP RULE: -

1. Applicability of the LLP Rule
   
   The LLP Rule is applicable to any LLP^iv except where to the extent the contribution of the reporting LLP^v is held by; a) the Central Government, State Government or any local authority, b) a reporting LLP, a body corporate and an entity controlled by Central Government or by one or more State Government or partly by Central and State Government, c) investment vehicles regulated by the Securities Exchange Board of India and d) investment vehicles regulated by the Reserve Bank of India or the Insurance Regulatory and Development Authority of India or the Pension Fund Regulatory and Development Authority of India^vi.
   


2. Important definitions under the LLP Rule in relation to identification of a significant beneficial owner:
   
   
   1. Control- Rule 3(c)
      
      
      1. Right to appoint majority of the designated partners; or
      
      
      2. Having direct or indirect control over the management or policy decisions exercisable individually or in concert and due to their contribution or management rights or LLP agreement or any other agreement.
   
   
   
   2. Majority stake- Rule 3(f)
      
      
      1. Holding more than 1/2 (one-half) of:
         
         
         • equity share capital in body corporate; or
         • contribution in partnership entity; or
         • voting rights in body corporate; or
      
      
      2. The right to receive or participate in more than 1/2 (one-half) of the distributable dividend or distributable profits or any other distribution by the body corporate inclusive of a partnership entity.
      
      
   3. Significant beneficial owner- Rule 3(k)
      
      

      Significant beneficial owner in relation to a reporting LLP means an individual who is acting alone or together or through 1 (one) or more persons or trust, possesses 1 (one) or more of the following rights or entitlements:

      1. Holds indirectly or together with any direct holdings, not less than 10% (ten percent) of contribution; or
      
      
      2. Holds indirectly or together or with any direct holdings, not less than 10% (ten percent) of voting rights in respect of management or policy decisions in such limited liability partnerships; or
      
      
      3. Has right to receive or participate in not less than 10% (ten percent) of the total distributable profits, or any other distribution, in a financial year through indirect holdings alone, or together with direct holdings; or
      
      
      4. Has the right to exercise or actually exercises, significant influence or control in any manner other than direct holdings alone.
      
      

      Explanations that further the understanding of a significant beneficial owner:

      
      
      1. An individual who does not hold any right or other entitlement indirectly would not be considered as a significant beneficial owner.
      
      
      2. An individual is considered to have a direct right or entitlement in the reporting LLP if he satisfies: -
      
      
      • The contribution in reporting LLP representing the right is held in his name; or
      • The individual holds or acquires a beneficial interest in the contribution of the reporting LLP under sub-rule 2 of Rule 22B of the LLP Rules, 2009 and has made a declaration in this regard to the reporting LLP.
      
      
      3. An individual is considered to hold any right or entitlement indirectly in a reporting LLP if the following criteria in relation to the partner are satisfied: -
      
      
      • The partner is a body corporate other than a reporting LLP and the individual has a majority stake in that partner or the ultimate holding company^vii of that partner, irrespective of whether it was incorporated in India or abroad.
      • The partner if a Hindu undivided family (“HUF”) and the individual is a karta of the HUF.
      • The partner is a partnership entity and the individual is a partner or holds majority stake in the body corporate which is a partner of the partnership entity or in ultimate holding company of that body corporate.
      • The partner in the reporting LLP is a trust, and the individual is a
      1. Trustee in case of discretionary trust or charitable trust;
      2. Beneficiary in a specific trust; or
      3. Author or settler in a revocable trust.
      • The partner is a pooled investment vehicle or entity controlled by the pooled investment vehicle, and it is based in member state of a Financial Action Task Force on Money Laundering and the regulator of the securities market that is a member of International Organization of Securities Commissions. Further, the individual in relation to the same is a general partner or an investment manager or a chief executive officer where investment manager of the vehicle is a body corporate or a partnership entity.
      
      
      4. Pursuant to the above explanation, where the partner of a reporting LLP is a pooled investment vehicle or entity controlled by it and it is not a member state than either of the conditions specified in the above clause (iii) would be applicable.
      
      
      5. If an individual or individuals through any person act with a common intent to exercise any right or entitlement, have a significant influence over a reporting LLP pursuant to a formal or informal agreement, then the individuals exercising the same through person or trust will be considered to be ‘acting together’.
   
   
   4. Significant influence- Rule 3(l)
   
   

   An individual is said to have a significant influence if they have the power to directly or indirectly participate in the financial policies of the reporting LLP, not control or joint control of it.

3. Duty of the reporting LLP



Rule 4 of the LLP Rule states that every reporting LLP shall take steps to find if an individual is a significant beneficial owner as per the criteria mentioned and make a declaration under Form No. LLP BEN-1 (Declaration by the beneficial owner who holds or acquires significant beneficial ownership in Contribution) to that effect and give notice to such partner in Form No. LLP BEN-4 to seek information in accordance with Section 90(5) of Companies Act, 2013^viii as applied to LLP as per the notification G.S.R 110 (E) dated February 11, 2022^ix .



4. Declaration of significant beneficial ownership



Rule 5 of the LLP Rule states that: -



1. Every individual who is a significant beneficial owner in a reporting LLP shall file a declaration in Form No. LLP BEN-1 (Declaration by the beneficial owner who holds or acquires significant beneficial ownership in Contribution) within 90 (ninety) days of its commencement.


2. Subsequent to the 90 (ninety) day period, if an individual becomes a significant beneficial holder or undergoes any change, the same must be filed to the reporting LLP within 30 (thirty) days of the change or acquisition.


3. However, if the individual becomes or undergoes change in such ownership or becomes a significant beneficial owner during the 90 (ninety) day period of the commencement of the rules, it will be deemed that the change happened at the date of expiry of the 90 (ninety) days and a period of 30 (thirty) days will be applicable accordingly.


5. Reporting LLP to file a return with the registrar



Rule 6 of the LLP Rule mentions that upon receiving the receipt of declaration by the significant beneficial owner, the reporting LLP shall file a return in Form No. LLP BEN-2 (Return to the Registrar in respect of declaration under Section 90) with the registrar within 30 (thirty) days from the date of the receipt of the declaration along with the requisite fee as per the fees provisions mentioned in Annexure ‘A’ of the Limited Liability Partnership Rules, 2009 and depending upon the contribution of the LLP^x.

6. LLP to maintain a register of significant beneficial owners



A register of significant beneficial owners shall be maintained by LLP in Form No. LLP BEN-3 (Register of beneficial owners holding significant beneficial interest). It shall be open for inspection during business hours at a reasonable of not less than 2 (two) hours during every working day as decided by the LLP agreement or partners on payment of a fees not exceeding INR 50 (Rupees Fifty Only) for each inspection.

7. Role of the tribunal



In accordance with Rule 9 of the LLP Rule, a reporting LLP shall apply to the tribunal under certain conditions. The tribunal referred to herein is the National Company Law Tribunal as per Section 2(u) of Act. And the conditions are as follows:



1. Any person fails to give information required by notice in Form No. LLP BEN-4 within the time specified therein; or


2. Information given is not satisfactory under Section 90(7) of Companies Act, 2013.



Pursuant to which, the tribunal may pass an order directing the contribution in question be subjected to any of the following restriction(s):



1. Restrictions on transfers of interest attached to the contribution;


2. Suspension of the right to receive profits or any distribution in relation to the contribution;


3. Suspension of voting rights in relation to the contribution; and/or


4. Any other restriction on all or any of the rights attached with the contribution

The LLP Rule, mark a significant stride towards ensuring transparency and accountability in the operations of LLPs in India. By establishing a comprehensive framework for the identification, declaration, and reporting of significant beneficial owners, these rules aim to curb illicit financial practices and enhance the integrity of financial transactions within LLPs. The detailed criteria and procedural obligations outlined in the LLP Rule require all stakeholders to meticulously adhere to the guidelines, thereby fostering a culture of compliance and governance excellence. Through the diligent implementation of these rules, LLPs are positioned to reinforce trust amongst their partners, investors, and regulatory bodies, ultimately contributing to a more robust and transparent corporate environment in India.