SBO Declarations: A Significant Compliance Challenge

Through an order dated May 6, 2024,1 the Registrar of Companies (the “RoC“) of NCT Delhi and Haryana imposed an order of penalty against Leixir Resources Private Limited (“Company“) for non-compliance with the disclosure requirements mandated for significant beneficial ownership under Section 90 of the Companies Act, 2013 (the “Act“).

Vide a notice issued by the RoC to the Company on February 7, 2024, the RoC required information to determine whether the Company was required to comply with Section 90 of the Act. Through a reply dated February 20, 2024, the Company stated that it was not required to furnish any declaration in Form BEN – 1, as required under Section 90 of the Act, given that no individual held any indirect right or entitlement in the Company and could not be considered to be a Significant Beneficial Owner (“SBO“). It further stated that Comvest Leixir Holdings LLC (“Comvest Leixir Holdings“) is the ultimate holding company of the Company and Comvest Investment Partners V LP (“Comvest Investment Partners“) (which holds 54.32% of Comvest Leixir Holdings) is a Pooled Investment Vehicle (PIV) based in the USA which is a member State of the Financial Action Task Force on Money Laundering and its regulator of the securities market is a member of the International Organization of Securities Commissions. The Company further represented that no individual in relation to Comvest Investment Partners serves as a general partner, investment manager, or Chief Executive Officer, and therefore there is no SBO for the Company.

The RoC, based on a review of the Company’s financial statements for Financial Year 2022 – 23, noted that the Company had declared an entity named Leixir Holdings LLC as its ultimate holding company but, basis its written submissions to the RoC, it represented that Comvest Leixir Holdings, which holds 99.38% in Leixir Holdings LLC, is actually the ultimate holding company of the Company. Furthermore, the RoC noted that the Company had disclosed that Comvest Investment Partners holds 54.32% in Comvest Leixir Holdings, making it the actual ultimate holding company of the Company. Given that the members of the Company are controlled by a PIV, the RoC was of the opinion that the provisions of the Companies (Significant Beneficial Owners) Rules, 2018 (the “Rules“) were applicable to the present case. A major point of determination for the RoC in this case was to ascertain how the SBO would be determined if both the investment manager and the General Partner of the PIV were bodies corporate.

Section 90 of the Act requires all individuals to make a declaration to the reporting company specifying the nature of his or her interest and other particulars as provided in the Rules if such individual, while acting alone or together or through one or more persons or trust, holds beneficial interest of not less than 10% of the shares of a company or the right to exercise (or actually exercising) ‘significant influence’ or ‘control’ over an Indian company. As per Rule 2 (1) (h) of the Rules a ‘significant beneficial owner’ in relation to a company means such an individual (as stated in Section 90 of the Act) who possesses one or more of the following rights or entitlements in such reporting company: (i) holding, indirectly or together with any direct holdings, at least 10% of the shares of the company; (ii) holding, indirectly or together with any direct holdings, at least 10% of the voting rights in the company; (iii) the right to receive or participate in at least 10% of the distribution in a financial year through indirect holdings alone, or together with any direct holdings; and/or (iv) right to exercise, or actually exercise, significant influence or control, in any manner other than through direct-holdings alone. For the present case, clause (v) of the Explanation III to Rule 2(1)(h) of the Rules also becomes relevant. Under this Rule, where the member of the reporting company is either a PIV or an entity controlled by a PIV based in a member State of the Financial Action Task Force on Money Laundering and the regulator of its securities market is a member of the International Organization of Securities Commissions, an individual is considered to hold a right or entitlement indirectly in the reporting company if the individual in relation to the PIV is: (i) a general partner; (ii) an investment manager; or (iii) a Chief Executive Officer where the investment manager of such PIV is a body corporate or a partnership entity.

Following an earlier show cause notice issued by the RoC, wherein the RoC averred that the CEO of the investment manager ought to have been reported as an SBO, the Company contended that the Rules suggest that the individual considered as an SBO should be the CEO of the PIV and not the CEO of the investment manager. However, the RoC rejected this line of argument for a number of reasons including that, given that the general partner and the investment manager of Comvest Investment Partners were bodies corporate, as per the Rules, the CEO of the investment manager should have been reported as the SBO of the Company. Additionally, basis certain SEC filings made by Comvest Advisors LLC (“Comvest Advisors“), the entity to which management of Comvest Investment Partners has been designated, it was represented before the SEC that Comvest Advisors was ultimately owned and controlled by its CEO. The RoC also found that this CEO is, therefore, not engaged with Comvest Advisors solely in his professional capacity, as was earlier erroneously submitted by the Company. Therefore, the RoC held that the CEO of the investment manager would be the SBO and is required to undertake the compliances required under the Act and the Rules.

In the present case, the RoC imposed monetary penalties on the CEO of the investment manager and certain directors/officials of the Company, and required Form BEN – 2 to be filed in relation to the CEO of the investment manager within a period of 60 days. Pursuant to this decision, the additional compliance burden of filing the SBO declarations for Indian companies owned or controlled by PIVs may prove to be a challenge. Given that the declaration of a SBO requires the individual to undertake certain KYC formalities and file personal documentation with the concerned RoC, this decision could have far reaching implications on the introduction of foreign capital into the country through the venture capital or private equity route.

1No. ROC/D/Adj/Order/Section 90/Leixir/1978 – 1986.