Transparency: New LLP rules to improve transparency: Experts

MUMBAI: The ‘Significant Beneficial Owners‘ (SBO) rules, issued recently by the ministry of corporate affairs (MCA) for Limited Liability Partnerships (LLPs), will result in greater transparency in investment structures, say experts.
While a body corporate can be a shareholder or partner in a company or LLP, the ultimate control is generally exercised by an individual or group of individuals.According to Anshul Jain, partner, tax and regulatory services, atPwC India, SBO rules which call for identification and cast a reporting obligation on LLPs will strengthen the framework around disclosures of ultimate owners. Previously, the requirement was only applicable to companies registered under the Companies Act.
An LLP is an alternative corporate business form that gives the partners the benefits of limited liability (to the extent of their capital contribution) and the flexibility of a partnership. As of January 31, there were nearly 2.60 lakh registered LLPs in India, with nearly 75% being those operating in the services sector. The exact number of LLPs that have been used as investment vehicles could not be ascertained from the MCA data.
While LLPs were covered by the SBO norms under a notification issued by the ministry of corporate affairs in February, the relevant rules were issued on November 9.

Jiger Saiya, partner heading tax and regulatory services at MSKA & Associates, adds, “With LLPs gaining acceptance as a form of business entity or investment vehicle in India, it was imperative for the government to introduce regulations to ensure transparency and curb illicit financing.”
“For instance, foreign direct regulations require RBI’s approval where any investment comes from beneficial owners residing in neighbouring countries. The SBO regulations will aid tracing any such investments which may have used circuitous routes without seeking the mandated approvals. The challenge would be reaching or seeking the data of beneficial ownership residing outside India and requiring them to share the relevant details with the LLP,” said Saiya.
According to these rules, an SBO in an LLP means an individual who, acting alone or together with one or more persons or trusts, meets any one or more of the four parameters that have been set. These include owning or controlling not less than 10% of capital contribution or voting rights. Or having the right to receive at least 10% of the total distributable profits in a financial year, or having the right to exercise significant control in any manner.
Within 90 days of the notification of the rules, all individuals identified as SBOs have to file a declaration with the LLP. In turn, LLPs have to share details of SBO’s in the entity with the Registrar of Companies, within 30 days of the date of declaration made by an individual about holding or acquiring a significant beneficial owner status.
“The notified rules are not free from ambiguity, specifically where the LLPs have complex organisation structure,” states Jain. Reporting obligations could be cumbersome in case where structures are complex, said Saiya.