Admission of LLPs as Stock Exchange Members — Eligibility and Structuring

Limited Liability Partnerships (LLPs) are now eligible to be admitted as members of stock exchanges and obtain registration as stock brokers under SEBI regulations. This article explains the regulatory basis, the eligibility criteria, and the structuring considerations for LLPs seeking stock exchange membership.

The Regulatory Basis

The Securities Contracts (Regulation) Rules, 1957 (SCRR) did not explicitly mention LLPs since the LLP Act, 2008 was a subsequent development. However, SEBI Circular CIR/MIRSD/12/2011 dated July 11, 2011 clarified that LLPs are akin to Limited Liability Companies and partnership firms. Since the LLP Act, 2008 defines an LLP as a body corporate, and Rule 8(4A) and Rule 8(5) of the SCRR provide that LLCs and partnership firms are eligible to be admitted as members, stock exchanges may consider granting membership to LLPs.

Eligibility Criteria for LLPs

An LLP seeking membership of a stock exchange must comply with the following conditions, as far as they apply to LLPs:

• Registration under LLP Act, 2008. The LLP must be registered with the Ministry of Corporate Affairs and must have a valid registration number.

• Object clause. The LLP agreement must include the object of carrying on the business of a stock broker / trading member. If the object clause does not specifically include stock broking, the LLP agreement must be amended accordingly.

• Designated partners. The LLP must have at least two designated partners who are individuals and who are resident in India. At least one designated partner must be a whole-time designated partner responsible for compliance.

• Net worth requirement. The LLP must satisfy the minimum net worth requirement prescribed for the relevant segment. For cash segment membership, the minimum net worth is ₹1 crore for a trading member and ₹5 crore for a self-clearing member. Reference: SEBI Master Circular for Stock Brokers, Para 47 — Networth Requirements

• Fit and proper person criteria. All designated partners, partners, and key managerial persons must satisfy the fit and proper person criteria under Schedule II of the SEBI (Intermediaries) Regulations, 2008.

• No disciplinary action. The LLP and its designated partners must not have been subject to disciplinary proceedings under the rules and bye-laws of any stock exchange or enforcement action under securities laws.

• Infrastructure. The LLP must have adequate office space, equipment, and manpower to effectively discharge its activities as a stock broker.

Structuring Considerations

• Capital structure. LLPs do not have share capital but have partner contributions. The contributions should be adequate to meet the net worth requirement. Partners may contribute in cash or kind, but the valuation of non-cash contributions must be certified by a practising chartered accountant.

• Management and control. The designated partners are responsible for the day-to-day management. The LLP agreement should clearly delineate the roles and responsibilities of each designated partner, especially the compliance officer and the designated director.

• Compliance functions. The LLP must appoint a compliance officer who is an employee of the LLP and who is responsible for monitoring compliance with SEBI regulations and exchange bye-laws. Reference: SEBI Master Circular for Stock Brokers, Para 17 — Appointment of Compliance Officer

• Internal audit. The LLP must carry out a complete internal audit on a half-yearly basis by an independent qualified Chartered Accountant, Company Secretary, or Cost and Management Accountant who is in practice and does not have any conflict of interest. Reference: SEBI Master Circular for Stock Brokers, Para 13.2

• Client onboarding. The LLP must follow the uniform documentation prescribed by SEBI for client account opening, including the Account Opening Form, Rights and Obligations document, and Risk Disclosure Document. Reference: SEBI Master Circular for Stock Brokers, Para 21 — Simplification and Rationalization of Trading Account Opening Process

• Taxation. LLPs are taxed as partnership firms under the Income Tax Act, 1961. The income of the LLP is taxed at the flat rate of 30% (plus surcharge and cess). The partners are taxed on their share of income only when distributed.

Conversion of Partnership Firm to LLP

Existing partnership firms registered as stock brokers may convert to LLPs. The conversion does not require a fresh SEBI registration if the following conditions are met:

• All erstwhile partners become designated partners or partners of the LLP.
• The net worth of the LLP is not less than the net worth of the partnership firm.
• The LLP agreement contains the same object clause and management structure.
• The LLP obtains a no-objection certificate from the stock exchange.

Documents Required for LLP Admission

• Copy of LLP Agreement and Certificate of Registration.
• List of designated partners and partners with their PAN and addresses.
• Net worth certificate from a practising chartered accountant.
• Declaration of no disciplinary action against the LLP and its partners.
• Undertaking that the LLP will comply with all SEBI regulations and circulars.
• Proof of infrastructure (office lease, IT systems, etc.).
• Board resolution / partners' resolution authorising the application.

Common Pitfalls

• Inadequate capital contribution. Partners must contribute sufficient capital to meet the net worth requirement. Shortfall can lead to rejection of the application.
• Non-compliance with fit and proper person criteria. Any designated partner or partner with a disciplinary record can disqualify the LLP.
• Defective LLP agreement. The object clause must explicitly include stock broking; otherwise, the application will be returned.
• Failure to appoint a compliance officer. The LLP must appoint a compliance officer who is an employee of the LLP.

Timeline

The entire process — from LLP incorporation to grant of SEBI registration — typically takes 3–4 months, provided all documentation is in order and the Exchange processes expeditiously.

How We Help

At Anuj Desai & Associates, we structure LLPs for stock exchange membership, draft the LLP agreement with appropriate object clauses, prepare the application for SEBI registration, and coordinate with the stock exchange for admission. If you are considering converting your partnership firm to an LLP or setting up a new LLP as a stock broker, reach out to our corporate and capital markets desk.