New Compliance Rules for Significant Beneficial Owner in LLP
Overview :The Ministry of Corporate Affairs, through Notification No. G.S.R...(E), dated 09.11.2023, has introduced the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023. These rules come into effect from the date of their publication in the Official Gazette and apply to Limited Liability Partnerships (LLPs) in India. Under these regulations, LLPs are now mandated to report details about Significant Beneficial Owners to the Registrar of Companies within 30 days of an individual declaring their status as a Significant Beneficial Owner. Let's explore the major highlights of these new compliance rules for beneficial owners in LLP.
Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023
The Corporate Affairs Ministry officially introduced the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023, effective November 10. These rules lay down definitions and timelines for reporting clearly, and thus reflecting the commitment to clarify the genuine beneficial ownership and regulate contributions within LLP by partners as well as individuals. According to these rules, it's mandatory to identify significant LLP beneficial owners, submit declarations on time, and maintain registers for every limited liability firm.
Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) offers a unique combination of a Limited Liability Company and a traditional partnership. In other words, you can say that this hybrid entity combines the benefits of corporate status while maintaining flexibility in its internal governance and partner relations. Contrary to companies regulated by statutory provisions, an LLP's internal affairs are mainly governed by its LLP Agreement. Additionally, an LLP designates a partner responsible for ensuring compliance with relevant authorities, highlighting its versatility.
What is a "Significant Beneficial Owner" in an LLP?
The new rules comprehensively define a “Significant Beneficial Owner” in an LLP. Individuals may act independently, jointly, or through various entities or trusts or together with one or more persons. To qualify as a Significant Beneficial Owner, one must meet specific criteria, which include:
- Indirect Contribution: Holding a minimum of 10 percent of the total contribution to the LLP, either directly or indirectly.
- Voting Rights: Holding a minimum of 10 percent of the voting rights concerning management or policy decisions, either directly or indirectly.
- Profit Participation: Having the right to receive or partake in not less than 10 percent of the total distributable profits or any other distributions in a financial year through indirect holdings, whether alone or in conjunction with direct holdings.
- Influence or Control: Exercising significant influence or control over the LLP’s affairs other than through direct holdings alone.
The aforementioned criteria provide a complete framework for identifying significant beneficial owners in an LLP and help ensure transparency and accountability in this business structure.
LLPs Mandated with Identification of Significant Beneficial Owners
To ensure transparency and adhere to regulatory compliance, every LLP must proactively identify any individual who can qualify as a Significant Beneficial Owner within the firm. The identification process of SBO involves certain key steps. It is crucial for every LLP to follow these steps to comply with the new rules.
Declaration by the Individual - Form No. LLP BEN-1
Individuals meeting the criteria for Significant Beneficial Ownership must submit a declaration in Form No. LLP BEN-1 to the reporting LLP. This declaration must be made within 90 days from the commencement of the new rules, which came into effect on November 10.
Submission of Form LLP BEN-1 to Registrar of Companies
Once the declaration is received from the individual, the reporting LLP needs to submit this information to the Registrar of Companies (ROC) about the same. It's necessary to complete this submission within 30 days of receiving the declaration. LLPs need to follow these steps to stay compliant with the new rules and hence can contribute to a more transparent and accountable business ecosystem.
LLPs Must File Form LLP BEN-2 for Declarations Received
LLPs are mandated to file Form LLP BEN-2 for the declarations they have received. The LLPs responsible for reporting should submit this return using Form No. LLP BEN-2 to the Registrar within 30 days of receiving the declaration.
Register of Significant Beneficial Owners in LLP (Form No. LLP BEN-3) and Inspection Guidelines
LLPs must maintain a register of significant beneficial owners, utilizing Form No. LLP BEN-3. This register should be accessible for inspection during standard business hours, as mutually agreed upon in the limited liability partnership agreement, or as the LLP partners decide. Additionally, access to this register can be granted upon payment of a fee determined by the LLP, provided that the fee does not exceed fifty rupees for each inspection.
Reporting Changes and Compliance Obligations for LLPs and Partners
In line with the new rules governing Significant Beneficial Owners (SBOs) in LLPs, individuals qualifying as SBOs must immediately notify the LLP firm about any changes in their status. Here are the key aspects of this compliance process:
- Notification of Status Change : Any individual who qualifies as a Significant Beneficial Owner (SBO) must inform the LLP firm of any change in their SBO status. This notification should be made within 30 days from the change date.
- Form Submission by Partners : Partners who do not meet the criteria of holding 10 percent or more in total contribution, voting rights, and the right to receive 10 percent or more of dividends are also subject to compliance. They are required to file Form LLP BEN-4.
Recourse for Non-Compliance
In case an individual fails to submit information about Significant Beneficial Owners (SBOs), LLPs have recourse to address the issue. As a result, they can approach a tribunal to seek remedies. Some of the potential actions the LLP can request from the Tribunal are as below:
- Restrictions on Transfer of Interest : The LLP may request the Tribunal to restrict the transfer of the interest associated with the undisclosed SBO.
- Suspension of Rights : The LLP can seek suspension of the right to receive profits or voting rights related to the contribution associated with the undisclosed SBO.
- Other Restrictions : The Tribunal may also consider imposing restrictions on some or all of the rights associated with the contribution.
By resorting to these measures, LLPs can compel compliance with the reporting requirements related to Significant Beneficial Owners and maintain transparency within the organization.
Exemptions from New Rules
The notification clarified that the newly introduced rules would not apply when government or government-controlled entities held limited liability partnership contributions. These rules also exempted mutual funds, alternative investment funds (AIFs), Infrastructure Investment Trusts (lnVITs), Real Estate Investment Trusts (REITs), or any investment vehicle regulated by the Reserve Bank of India, the Insurance Regulatory and Development Authority of India, or the Pension Fund Regulatory and Development Authority.
Impact on LLPs
The introduction of the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023, has significant implications for Limited Liability Partnerships (LLPs) in India. These rules are designed to enhance transparency and regulatory compliance by mandating the identification and reporting of Significant Beneficial Owners (SBOs) within LLPs.
By requiring LLPs to disclose the individuals who have significant control or influence, the new rules aim to clearly uncover the actual ownership structures of the LLPs. This move is taken with the vision to foster a more transparent business ecosystem by allowing all its shareholders, including regulatory bodies and the public, to completely understand who holds significant power within an LLP.
The significant beneficial owners rules mandate that the LLPs must follow quick steps to identify and report their SBOs, therefore, lowering the chances of fraudulent activities. This shift towards higher transparency is a great move to align LLPs with the global standards of corporate governance.
Operational Changes
The set of new rules bring about various operational changes that LLPs are required to follow to adhere to regulatory requirements. The key requirement is the maintenance of a register of Significant Beneficial Owners (SBOs), which must be easily accessible for the purpose of inspection during standard business hours.
This register, documented in Form LLP BEN-3, acts as a critical record of individuals who have significant influence within the LLP. Moreover, LLPs need to file a declaration to the Registrar of Companies within 30 days of receiving a declaration from an individual qualifying as an SBO. The process mainly comprises of the submission of Form LLP BEN-1 by the individual and is followed by the submission of Form LLP BEN-2 to the Registrar.
To comply with these requirements, LLPs are required to establish robust internal processes for the identification of SBOs and their reporting. This may involve changes to their governance structures, decision-making processes, and record-keeping practices. Applying these operational changes, LLPs can fulfill the new regulatory standards and, therefore, contribute to a more transparent business environment.
Strategic Implications
The introduction of the LLP SBO Rules has significant strategic implications for LLPs. These new rules are introduced to promote transparency and accountability in the ownership and control of LLPs that can impact how the LLPs are operated and take decisions.LLPs may be required to reassess their ownership structures and governance arrangements to adhere to the compliance requirement with the new rules. This may also involve updation in partnership agreements, adjusting voting rights, and changing decision-making processes to match the requirements for identifying and reporting SBOs.
Additionally, these rules may impact the way of raising capital in LLPs and invest in other entities. Due to the requirement to disclose SBOs to investors and other stakeholders, LLPs may have to face challenges in securing investment or involving into the strategic partnerships. Transparency in the ownership structure of LLPs can put a positive impact on the investor confidence and the overall appeal of the LLP as an investment vehicle.
Overall, the LLP SBO Rules mandates the strategic reevaluation of how LLPs manage their networks. By taking these changes into consideration, LLPs can improve their governance practices, build trust with stakeholders, and ensure long-term compliance with regulatory standards.
Conclusion
The Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023, introduce major changes in LLP regulations. According to these rules, it's mandatory to identify significant beneficial owners in LLP, submit declarations on-time, and maintain registers. Moreover, they empower the Tribunal to enforce compliance. The Reporting LLPs must also be engaged with significant beneficial owners, adhering to submission deadlines, and foster transparency and accountability within the LLP framework.
Additionally, they empower the Tribunal to enforce compliance. Reporting LLPs must now actively engage with significant beneficial owners, adhere to submission deadlines, and promote transparency and accountability within the LLP framework. Know more about Compliance for LLP.
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