Significant Beneficial Ownership

Significant Beneficial Owners

The Ministry of Corporate Affairs issued the Companies (Significant Beneficial Owners)Rules 2018 on directing few reporting requirements from companies on 13 June 2018. These rules amended sec 90 of Companies Act 2013, dealing with an investigation into the ownership of beneficial shares. These rules mandate all Indian Companies to maintain an official record of persons holding beneficial ownership. Further filing return with Registrar of Companies mentioning a detailed account of significant beneficial owners. However, Companies and corporations regulated by SEBI, pooled investment funds or entities, such as mutual funds or real estate investment trusts (REITs) are exempted from these rules.

These rules have majorly drawn inferences from the UK’s ‘people with significant control’ (PSC) legislation that requires most commercial entities to produce, keep, and maintain a register of any persons or relevant legal entities that have significant control over that company or limited liability partnership (LLP). however, the percentage criteria in India is as low as 10% as compared to 25% in the UK

Defining a significant beneficial owner

An SBO is any person who is not a registered shareholder of the company (whose name is not entered the company’s statutory register of members) but:

  • either individually or jointly owns not less than 10 per cent of the share capital of the company; or
  • directly or indirectly exercises significant influence or control over the company.

In case of partnership firms, SBO is any person or beneficiary with rights to at least 10 per cent interest in the entitlement to profits of the LLP. In the case of a trust, SBO is any natural person exercising control over the trust. However, in the absence of natural persons, SBO is the person holding the most senior management position of the company, such as the director.

Earlier sec 90 of Companies Act the threshold of 25% was given to classifying an individual as SBO. However, Rules have come out with a major deviation reducing the threshold to a striking 10% of holding. The threshold specified in rules survives over the threshold mentioned in the act due to the verbatim of sec 90 which provides that the beneficial interest should not be less than 25 (twenty-five) per cent or “any other percentage as may be prescribed”. Therefore, the threshold of 10 (ten) per cent as prescribed under the Rules would be the final threshold percentage to determine significant beneficial ownership. The concept of SBO revolves around these five heads :

  • The central point of every SBO will always be an individual.
  • SBO will always be unregistered in the register of members of the company, he can never be a member of the company.
  • He is to hold a beneficial interest in the company of not less than 10%.
  • Significant influence should be deemed when an individual holds not less than 20% of the total voting power or has a decisive authority in business governed by an agreement.
  • Control refers to the power to appoint a majority of directors or has control over the management or policy decisions.

The Compliance Mechanism

  • Within the time limit of 90 days from the commencement of these rules a declaration is to be filed to the company, in case there is a change further declaration is to be made within 30 days under Form BEN-1.
  • In response to such declaration, the company is to file form BEN-2 within 30 days of receipt of the declaration under BEN-1.
  • Form BEN 3 mandates maintaining a register of significant beneficial owners
  • Form BEN 4 facilitates the serving of notice by the company to seek information. The individual upon having been served the notice is required to revert within 30 days of receipt of the notice. In case the company is unsatisfied with the information provided, it is entitled to apply to the tribunal within 15 days of the expiry of the period mentioned in the notice.

Conclusion:

This is essentially the outcome of Financial Task Force Action recommendations to combat money laundering and terrorism financing. Previously the USA also came out with measures to identify natural individuals holding 25% or more. Following this many country in the European Union adopted similar measures. All this lead to the amendment in Sections 89 and 90 of the Indian Companies Act, 2013. These Rules are a sincere attempt by the Indian government to address issues related to money laundering, bribery, corruption, insider dealings, tax crimes, terrorist financing and other illegal activities. Reduction in threshold limit and strict deadlines are aimed at providing greater transparency and timely information. This in a way also is an attempt to bring the Indian companies to act in the international paradigm. However, the timelines for compliance prescribed in the Rules are quite stringent in comparison to the timelines adopted by other developed jurisdictions. Strict penalties have also been prescribed for non-compliance. This broad applicability, lower threshold and stringent timelines are going to put the additional burden on the companies. This may also result in demotivation and harassment of innocent investors. Further, the process is also not simplified or straightforward. It has many complexities which can create problems for a layman like investors to comply in such a short time span. Although the legislative intent here is absolutely bonafide and works against the malice of money laundering, terrorism funding etc. yet these drastic rules cast a doubt as to their workability in the Indian Corporate system. This may also counteract the government’s proposal of ease of doing business. It is indeed paradoxical how on one hand the government is promoting business culture by easing out the complexities and on the other hand, it is creating such complex procedures which are detrimental to its own initiatives. Therefore these rules need a relook as to their deadlines and compliances so as to make them efficiently workable.

Frequently Asked Questions(FAQ’S)

1. To which company such SBO’s don’t apply?

The provisions shall not apply to the holding of shares of companies/body Corporates, in case of pooled investment vehicles/investment funds such as Mutual Funds,

1. Alternative Investment Funds (AIFs),

2. Real Estate Investment Trusts(REITs) and

3. Infrastructure Investment Trusts (lnvlTs) regulated under the SEBI Act.

2. Whether a body corporate can be an SBO?

As per Section 90, only a Natural Person can be Significant Beneficial Owner. For the purpose of the significant beneficial owner, in case of ‘person other thanindividuals or natural person’.

3. What are the checks for applicability of SBO provisions in India?

  • There should be a Natural Person.
  • An individual having a beneficial interest not less than 10% of share capital.
  • Name of such individual not entered into the register of Members.
  • Share capital includes (GDR+CCP’s+CCD’s)

4. Whether these rules are applicable to non-resident Indians? 

The definition of SBO includes non-residents as well. Therefore, the non-residents shall also be covered by the said provisions

5. Who is a senior managing official?

The same has not been defined in the final rules or anywhere else under the Companies Act. Therefore, as per the General practices: SMO shall be someone who exercises strategic decision making powers in respect of the legal person (for example, a company director).

In situations where there is more than one official of a legal person with strategic decision-making powers and none is senior to the others, all should be treated as senior managing officials.

Accordingly, the CEO/ MD/ Manager/WTD of the company to be identified as SBO.

Edited by – Sakshi Agarwal

Approved & Published – Sakshi Raje

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I am Shipra Sayal from Nirma University, Institute of Law pursuing B.Com LLB (Hons.) Corporate law, Company law and Securities law form part of my core interest area. I love to keep myself updated with news, law and politics. I participate in Moots and Trial Advocacy competitions. My leisure time activities are playing badminton and cricket. I also enjoy watching sci-fi series and movies. I love to read, write and research as this helps a lot in shaping one’s personality and honing skills. I believe in smart work and efficient time management to get success at any work