PROJECT

REGULATORY             2018-11-14

Significant Beneficial Ownership under Companies Act, 2013

 

Corporate vehicles are being misused for evasion of tax and laundering money for corrupt and illegal purposes. Complex structures and chain of corporate vehicles are being used to hide the real owners behind these structures. With a view to prevent misuse of corporate vehicles for illicit purposes such as corruption, tax evasion, money laundering, the Financial Action Task Force ("FATF"), an international intergovernmental body has made a series of recommendations on transparency and beneficial ownership of legal persons and arrangements. These recommendations mandate countries to ensure that adequate, accurate and timely information on beneficial ownership of a corporate is made available and assembled by competent authorities. Various member countries, including India, have either proposed or already brought about legislative measures on beneficial ownership

 Position under Companies Act, 2013 prior to Amendment – Section 89:

  • Section 89 of CA 13 identifies two types of owners – legal owner and holder of beneficial interest
  • Legal owner is the one in whose name the shares are registered who is also referred to as ostensible owner
  • On the other hand, holder of beneficial interest is the one who is not registered but owns the beneficial interest in the shares
  • Both have to declare their nature of interest to the company
    • The company is required to record this information in its register and file requisite return with the Registrar of Companies within 30 days of receipt of declaration
    • No right in relation to shares in respect of which declaration is required to be made but not made can be enforceable by him or any person claiming through him. Whenever a change occurs in such beneficial interest declaration is to be given to the company
    • The Registered owner is always presumed to be the Legal / Beneficial owner unless this declaration is filed
    • There is no onus on the company to find out such interests.
      • However, CA 13 does not define term 'beneficial interest in a share' and does not provide a mechanism to identify the 'significant beneficial owners' of a company.
      • Hence, such declarations were restricted to cases of wholly owned subsidiaries where a nominee of the parent company holding shares to satisfy the legal requirement of having a minimum of two shareholders.

 

Recognition of Beneficial Interest and provisions:

The Companies Act, 2013 ("CA 13"), now recognizes the concept of `beneficial interest’ in the shares of the company under Section 89 (10) inserted by way of the Companies (Amendment) Act, 2017, which came into force effective May 7, 2018.

Beneficial interest in a share includes, directly or indirectly, through any contract or arrangement or otherwise, the right or entitlement of a person alone or together with any other person to

  • Exercise or cause to be exercised any or all of the rights attached to such share; or
  • Receive or participate in any dividend or other distribution in respect of such share

 

 

'Significant Beneficial Owner' (SBOs) and provisions:

To address the existing lacunae in CA 13, the concept of 'significant beneficial owner' (SBO)is now introduced vide Section 90 of the Companies (Amendment) Act, 2017 which was made effective from June 13, 2018

As per Section 90 (1) SBO is referred to as Every individual

  • who acting alone or together, or
    • through one or more persons or trust, including a trust and persons resident outside India,
    • holds beneficial interests, of not less than 25% or such other percentage as may be prescribed,
    • in shares of a company or
      • the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of Section 2, over the company

 

As per Section 2 (27) ``control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

 

 

As per Rule 2 (e) of Companies (Significant Beneficial Owners) Rules, 2018 (Rules) :

  • SBO means an individual referred to in sub-section (1) of Section 90 holding ultimate beneficial interest of not less than 10% read with sub-section (10) of Section 89, but whose name is not entered in the register of members of a company as the holder of such shares
  • Here Individual means a natural person
  • In the Rules the threshold limit has been reduced from 25% to 10%

 

Explanations to the law related to ‘Significant Beneficial Owner’:

I)     In case of persons other than individuals or natural persons, SBO shall be determined as under:

 

 

Along with

Percentage

I Company

Significant beneficial owner is the natural person, who,

–  Whether acting alone or

–  together with other natural persons, or

–  through one or more other persons or trust

Holds not less than 10% of share capital of the Company or

 

Who exercises significant influence or control in the company through other means.

II. Partnership Firm

Significant beneficial owner is the natural person, who,

–  Whether acting alone or

–  together with other natural persons, or

–  through one or more other persons or trust

Holds atleast 10% of capital or

 

Has entitled to not less than 10% of profits of the partnership firm.

III. Where no natural person is identified Under i & ii above

the significant beneficial owner is the relevant natural person who holds the position of senior managing official

 

IV. Trust (through Trustee)

The beneficial owner shall includes

 

–  identification of the author of the trust, and

–  the trustee, and

–  the beneficiaries with not less than 10% interest in the trust and

–  any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.

 

II)      For the purpose of calculation of 10% of beneficial interest in shares, Shares Include Instrument in form of

  • Global Depository Receipts,
  • Compulsorily Convertible Preference Shares or
  • Compulsory Convertible Debentures.

 

Company’s power (obligation) to seek information

 

  • Section 90 (5) & Rule 6: A company shall give notice, in Form No. BEN-4, to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe—

(a)   to be a SBO of the company;

 

(b)    to be having knowledge of the identity of a SBO or another person likely to have such knowledge; or

(c)   to have been a SBO of the company at any time during the 3 years immediately preceding the date on which the notice is issued, and who is not registered as a SBO with the company as required under this section

Section 90 (6) The information sought under sub-section (5) shall be given within a period not exceeding 30 days of the date of the notice.

 

 

Application to the Tribunal (Section 90 (7) & Rule 7) The company shall:

(a)  where that person fails to give the company, the information required by the notice within the time specified therein; or

(b)   where the information given is not satisfactory,

apply to the Tribunal within a period of 15 days of the expiry of the period specified in the notice, for an order directing that the shares in question be subject to restrictions including

(a)     restrictions on the transfer of interest attached to the shares in question;

(b)   suspension of the right to receive dividend in relation to the shares in question;

(c)   suspension of voting rights in relation to the shares in question;

(d)   any other restriction on all or any of the rights attached with the shares in question.

Order by the Tribunal (Section 90 (8))

On any application made under sub-section (7), the Tribunal may, after giving an opportunity of being heard to the parties concerned, make such order restricting the rights attached with the shares within a period of 60 days of receipt of application or such other period as may be prescribed.

 Non-applicability- Rule 8

These rules shall not apply to the holding of shares of companies/body corporates, in case of

  • pooled investment vehicles
  • investment funds such as Mutual Funds, Alterative Investment Funds (AIFs), Real Estate Investment Trusts (REITs) and
  • Infrastructure Investment Trusts (lnvlTs) regulated under SEBI Act.

 Compliances

Declaration of significant beneficial ownership in shares - Rule 3

 

(1)         Every significant beneficial owner shall file a declaration in Form No. BEN-1 to the company the significant beneficial ownership on the date of commencement of these rules within 90 days from such commencement and within 30 days in case of any change in his significant beneficial ownership.

 

(2)        Every individual, who, after the commencement of these rules, acquires significant beneficial ownership in a company, shall file a declaration in Form No. BEN-1 to the company, within 30 days of acquiring such significant beneficial ownership or in case of any change in such ownership.

 

(Vide General Circular No. 07/2018 dated 06.09.2018 and 10.09.2018, the Ministry of Corporate Affairs would revise the date of filing of BEN-1 declaration from the due date of 10th September, 2018 and a revised BEN-1 form would be notified shortly.)

 

 

Illustrations

  1. A is SBO of X company as on 12th June, 2018.

 

He is required to give notice of declaration to the company on or before 10th September, 2018

 

  1. If B acquires SBO in a company on 15th June, 2018, he is required to give notice of declaration to the company on or before 14th July, 2018

Return of SBO in shares by the Company – Rule 4

 The company shall file a return in Form No. BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of declaration by it.

 Register of SBOs – Rule 5

  1. Every company shall maintain a register of SBOs in Form BEN-3 recording the details of SBOs and changes therein

 

  1. The register shall be open for inspection during business hours, of not less than two hours, by any member of the company on payment of such fee not exceeding fifty rupees for each inspection

Penal Provisions under the act

Section 90 (10) If any person fails to make a declaration as required under sub-section (1), he shall be punishable with fine

  • which shall not be less than one lakh rupees but which may extend to ten lakh rupees and;
    • where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.

 

Section 90 (11) If a company fails to maintain register under sub-section (2) and file the information under sub-section (4), or denies inspection as provided therein,

  • the company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 10 lakh rupees but which may extend to Rs. 50 lakh rupees and
  • where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.

 

(12)   If any person wilfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under this section, he shall be liable to action under Section 447.

 

Challenges in implementation of laws

 

  • Not an easy task for an SBO to find out percentage of shareholding of the company in which he is SBO in other companies.
  • Not an easy task for the company to find out persons who exercises significant influence or control in the company
  • How to find out the percentage of holding in case of Convertible instruments before the conversion price gets determined
  • Rules does not mention about Bodies Corporate and LLP, are they exempted?
  • Does change in SBO means cessation of being SBO or any change in the shareholding requiring to be declared
  • Who is Senior Management official of a company