MCA to lift open the ‘ownership’ veil on Limited Liability Partnerships

After taking steps to identify the “real owners (individuals)” with “beneficial ownership” in companies, the government has now turned its sight on Limited Liability Partnerships (LLPs).

It has now decided to identify those individual(s) holding/exercising significant ownership/control in LLPs by requiring them to disclose details of their “Significant Beneficial Owners” (SBOs) so that those with “controlling interests” are identified.

Read also: Significant beneficial owners in companies to face strict action for wrong disclosures

A beneficial owner -- different from a legal owner -- is an individual who ultimately owns or controls more than 25 per cent (or sometimes even more than 10 per cent) of a company’s shares or exercises control over the management. The provisions around SBOs in the Companies Act 2013 are proposed to be soon extended to LLP Act, the MCA has now said.

This is going to send some shivers down the spine of those who have been using LLPs as preferred holding structure to facilitate inter-se transactions among promoters — transactions that were not subject to necessary Related Parties compliance /disclosures as are applicable to companies, said company law experts.

The whole intent behind obtaining SBO declaration in LLPs is to find out the real owner of the entity concerned. This information could also be helpful in FDI policy matters and situations where foreign investment restrictions are placed in respect of countries with which India shares land border, some experts said.

The concept of SBO was introduced in the company law in 2018 and was implemented from 2019. Even SEBI has come up with disclosure of SBO in respect of listed companies.

One of the reasons why LLPs are a preferred structure these days is the less compliance requirements that comes along with the benefit of limited liability. Given the attractiveness of LLP structures, about 14,700 companies have so far converted themselves into LLPs.

Besides extending the concept of SBO to LLPs, the MCA will also soon extend the provisions dealing with disqualification of directors, limitation on number of directorships to LLPs. This would mean that the government may soon specify the maximum number of LLPs in which an individual can act as a partner or a designated partner.

Also, the Centre will soon assume powers —already provided under Company law—to inspect books of accounts of LLPs and conduct inquiries. The government may also soon notify some of the offences relating to LLPs as non-cognisable offences, that is, the police cannot arrest a person without a warrant.

Also read: Steps soon to decriminalise Limited Liability Partnership Act

Aseem Chawla, Managing Partner, ASC Legal, said “The MCA intent signals that LLPs would going forward be required to disclose significant ownership interest and hence identification of details of individual holdings would become imperative. All this is in due consideration of the policy announcements made during budget suggesting a focus on LLPs in the ongoing pursuit of ease of doing business and the proposed reforms of LLPs.”

Sumit Naib, Director, Nangia Andersen India said: “Earlier there was no curb on the number of LLPs in which a person can be appointed as Designated Partner. When these changes come into force, the DPs would need to structure their partnerships. Further, LLPs would also need to identify details of individuals holding beneficial interests similar to companies”.

Harish Kumar, Partner, L&L partners said: “While this proposal of extending SBO provisions to LLP would help ensure transparency and strengthen corporate governance in LLPs’ functioning, it would however be worth witnessing as to what specific criteria/mechanism is provided for such disclosures by LLPs”.