Significant Beneficial Owner: Extremely significant to identify One!

Recently, the Registrar of Companies, NCT of Delhi & Haryana (“ROC”), held that the Significant Beneficial Owner (“SBO”) of Leixir Resources Private Limited (“Reporting Company”) was the CEO of the investment manager of the Reporting Company’s ultimate holding company. The Reporting Company had confirmed that there is no individual who can be considered as the SBO with respect to the Reporting Company and had accordingly not issued notice in Form BEN-4 as required under Section 90(5) of Companies Act 2013 (“Act”) read with sub-rule (2) of Rule 2A of Companies (Significant Beneficial Owners) Rules, 2018 (“Rules”).

Structure

The shareholding pattern of the Reporting Company is illustrated in the diagram below:

Background & facts

Pursuant to a series of correspondences between the ROC and the Reporting Company, the below facts emerge:

i. As per the Reporting Company there was no individual who held any right or entitlement indirectly and / or who could be considered to be Significant Beneficial Owner (“SBO”) of the Reporting Company in terms of Rule 2(1)(h) of Rules. Thus, the requirement for procuring the declaration in Form BEN-1 was not applicable. The Reporting Company averred that Leixir Intermediate Corp. (“LIC”) (holding 99.99% shares in Reporting Company), as the member of Reporting Company, was controlled by Comvest Investment Partners V LP (“LP 1”) which is a pooled investment vehicle (“PIV”). According to Reporting Company there was no individual in LP 1 who served as a general partner, investment manager or Chief Executive Officer (“CEO”). Therefore, as per Reporting Company no individual could be considered as the SBO of Reporting Company as per the definition of ‘SBO’ under Rule 2(1)(h) of the Rules.

Accordingly, they claimed that the provisions of filing BEN-2 in terms of Section 90(4) of the Act is not applicable to them.

ii. Comvest Leixir Holdings LLC (“CLHL”) was asserted as its ultimate holding company by the Reporting Company. The majority shareholders of CLHL is LP 1 (holding 54.32% of shares) and Comvest Investment Partners V-A LP (holding 45.50% of shares) (“LP 2”).

iii. With respect to query on disclosure of nominee directors, the Reporting Company claimed that Mr. William Marshall Griffin and Mr. Krishna Srirama Bhadriraju, directors of the Reporting Company, were appointed only as additional directors in accordance with the provisions of the Act. The Reporting Company further stated that under Section 161(3) of the Act, a nominee director can be appointed by an institution pursuant to the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company. Since the member/ shareholder of the Reporting Company is not an institution but a body corporate in terms of the provision of the Act, it cannot have nominee directors. The Reporting Company further stated that Partners, Professionals and Senior Executive of Comvest Group were appointed as non-executive directors who did not get any remuneration. Thus, according to Reporting Company the appointment of the directors was made as additional directors only and they didn’t exercise any significant control over the Reporting Company.

iv. As per the ROC, the the disclosures given by the Reporting Company in its financial statements were not accurate as it had stated that Leixir Holdings LLC is the ultimate holding company while in its written submissions during the proceedings, the Reporting Company itself submitted that CLHL, which held 99.38% of shares in Leixir Holdings LLC, is actually the ultimate holding company. In addition, the Reporting Company also stated that LP 1 was the majority shareholder in CLHL. Thus, according to the ROC, the member of the Reporting Company was an entity controlled by a PIV which meant that the provisions of clause (v) of the Explanation III to Rule 2(1)(h) of the Rules were clearly applicable to the Reporting Company in this case.

v. On the ROC’s query as to why the CEO of the investment manager of the PIV which was the ultimate holding company should not be considered as SBO of the Reporting Company (as per sub-section (C) of sub-clause (b) of clause (v) of Explanation III to Rule 2(1)(h) of Rules), the Reporting Company argued that the Rules refer to an individual who “in relation to the said pooled investment vehicle” is the CEO of PIV itself. The Reporting Company claimed that from the literal interpretation of phrase “in relation to the pooled investment vehicle” in the abovereferred

clause, it is clear that the “CEO” referred to therein pertains to CEO of the PIV i.e. LP 1 and not the CEO of investment manager of LP 1 i.e. Comvest Advisors LLP (“CAL”). The Reporting Company also produced an excerpt from A. Ramaiya, Guide to Companies Act (LexisNexis, 19th Edition, Volume 1, pg 1762-1763) which, according to the Reporting Company, was in consonance with the view of the Reporting Company. vi. Further, the Reporting Company stated that the CEO of CAL (which is the investment manager of LP 1), Mr. Michael Falk, was neither exercising any rights or entitlements or exercising control or significant influence over the Reporting Company. The Company argued that neither Form No. BEN-1 or the instruction kit for e-Form BEN-2 contemplate disclosure of an individual that is a CEO of the Investment Manager per se, but the paragraph (v) of Explanation Ill of Rule 2(1)(h) is triggered only when there is an individual who is a CEO of the PIV. As per the Reporting Company, LP 1 had no CEO to be disclosed under BEN-1 and BEN-2.

vii. The Reporting Company further put forward the averment that despite Mr. Falk’s ownership status, the decisions at the CAL level with respect to the investment funds that it managed were typically made by various investment committees. Additionally, it was claimed by Reporting Company that LP 1 is one of the clients of CAL and not a subsidiary. Thus, Mr. Falk’s ownership stake in Comvest Group Holdings LP (CGH) does not automatically confer upon him a SBO status in relation to LP 1.

Decision

The ROC referred to law relating to limited partnership in Delaware which defined a Limited Partnership (“LP”) to mean “a partnership formed under the laws of the State of Delaware consisting of 2 (two) or more persons and having 1 (one) or more general partners and 1 (one) or more limited partners, and includes, for all purposes of the laws of the State of Delaware, a limited liability limited partnership.”

• The ROC opined that the above-referred definition makes it clear that the LP is mandatorily required to consist of at least two actors – one general partner and one limited partner. The limited partners are investors in a LP and are not generally involved in the day-to-day management which is left to the general partners. Liability of general partner is unlimited. General partner has the onus to manage the affairs of the LP. The ROC remarked that this is one of the main reasons for appointment of bodies corporate as general partners, so that the overall liability can be limited. For the same reason, the investment managers appointed by the general partners are bodies corporate.

• The ROC further opined that laws provide for delegation of the powers by the general partner to other person(s) for managing and controlling the affairs of the LP. In pursuance of the same, the general partner, i.e. Comvest V Partners LP, of both LP 1 and LP 2 had designated their management to CAL i.e. the investment manager and its CEO, Mr. Michael Falk. The management of both the LP 1 and LP 2 [which together control the member of the Reporting

Company] was in the hands of the investment manager. Thus, the CEO of the investment manager would in sum and substance act be the CEO of LP 1 and LP 2.

• While interpreting sub-section (C) of sub-clause (b) of clause (v) of Explanation III to Rule 2(1)(h) of Rules, the ROC while rejecting the argument of the Reporting Company took the view that the expression “in relation to the pooled investment vehicle” has to be given a wider connotation. It relied on Supreme Court of India’s decision in Indian Social Action Forum (INSAF) v. Union of India (Civil Appeal no. 1510 of 2020) to explain the principle of purposive

construction1. Further, the CEO is required to be reported when the investment manager is a body corporate since the rule is designed to identify an individual who is a SBO. The ROC adjudged that the very purpose of this rule is to identify an individual “in relation to the PIV” which indirectly controls the member of the Reporting Company. Thus, the CEO of the investment manager is in effect the CEO of the PIV. The ROC also dismissed the argument of

the Reporting Company about the use of the Commentary of Shri A Ramaiya as it was not relevant for resolving the present issue of interpretation.

• ROC decided that the reasoning of the company regarding the meaning of “institution” under section 161(3) is not correct. The word “institution” is broad enough to cover a body corporate. In addition, the fact that these directors are not drawing salary also suggest that in substance they are acting as nominees of the Comvest Group.

• For the aforesaid reasons, Mr. Michael Falk was held to be the SBO in relation to the Reporting Company and held to be liable to a penalty under Section 90(10) of the Act, due to the failure to report as provided under Section 90(1) of the Act.

• Reporting Company and its officers were also held to be liable for action under Section 90 (11) of the Act for its failure to take necessary steps as per Section 90(4A) to identify the SBO in relation to the Reporting Company. All the officers, including the non-executive directors were held to be liable for this violation due to the presumption of clear knowledge on part of each of such directors about the holding structure of the Reporting Company.

Analysis

The biggest takeaway from the decision is that it is imperative that an SBO is identified. The ROC’s view that if a literal interpretation does not provide the answer, a purpose interpretation should be applied.

What is also striking is that no arguments were also given by the Reporting Company as to why and how no person had significant influence over the Reporting Company considering that the definition of significant influence is extremely wide and does not require shareholding in the Reporting Company to exercise influence or any sort of control. Typically, in a PIV context, it is the investment manager who takes decisions and had asserts control over the PIV and therefore it was surprising that the argument made by the Reporting Company was that there cannot be an SBO who can be identified.

[1] Hon’ble Supreme Court’s judgement in Indian Social Action Forum (INSAF) v. Union of India (Civil Appeal no. 1510 of 2020) was cited by ROC which explained the principle of purposive construction as follows: “It is settled principle of interpretation that the provisions of the statute have to be interpreted to give the words a plain and natural meaning. But, if there is scope for two interpretations, the Courts have preferred purposive construction, which is now the predominant doctrine of interpretation. In case of ambiguity in the language used in the provision of a statute, the Courts can take aid from the historical background, the Parliamentary debates, the aims and objects of the Act including the long title, and the endeavour of the Court should be to interpret the provisions of a statute to promote the purpose of the Act.”