[Opinion] Are the New LLP Rules Really Aim At Finding SBO in LLP

CS Deepti Jambigi Joshi – [2023] 156 taxmann.com 355 (Article)

Corporate entities are shielded with corporate veil, behind which the real decision maker individual manages the show. In the last few years, the Ministry of Corporate Affairs (“MCA”) has been attempting to identify the real decision maker behind all corporate entities registered with it. One such mechanism is the disclosure requirement under section 90 of the Companies Act, 2013 (“Cos Act”) about the significant beneficial owner (“SBO”) of every Company. Last year, in 2022, this section 90 of the Cos Act was made applicable to LLPs also. Now on 27 October 2023, the LLP Rules, 2009 (“LLP Rules”) have been amended to introduce the requirement to identify ‘beneficial owner’ in every LLP. In this article, we shall deliberate on whether this new amendment under LLP Rules really help in finding out the SBO of LLP or whether it aims at something else !!!

I. Can one person hold shares or any other property in the name of any other person?

The entire concept of ‘SBO’ or ‘beneficial owner’ in Cos Act is based on the ground that one person is the registered owner of shares whereas the beneficial interest lies with some other person. So a question arises that whether such holdings are really legitimate?

The answer to this lies in The Prohibition of Benami Property Transactions Act, 1988(“Benami Act”) which prohibits entering into any benami transaction. A ‘benami transaction’ is defined in this Act ‘as a transaction or an arrangement—

(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and

(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration’

This definition indicates that if the consideration of a property (including shares) is paid by some other person and the property is registered in the name of another person, then it is a benami transaction, i.e., an illegitimate transaction. However, this definition also has some exceptions and it exempts the below mentioned situations from being considered as ‘benami transaction’ when any property (including shares) are held by:

• A karta or member of HUF holding shares for benefit of HUF
• A trustee holding shares for benefit of a trust
• An executor of a will holding shares for benefit of the testator
• A partner of a partnership firm holding shares for benefit of the firm
• A director of a company holding shares for benefit of a company
• A depository (eg: NSDL/CDSL) holding shares for benefit of the individual who is the holder of demat account

From this definition, it can be said that the above situations can be legitimate situations where a property is owned by one individual for the benefit of another.

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