ACS Shilpa Agarwal

One of the latest buzz of the summers of 2016 have been the Companies (Amendment) Bill, 2016 (Bill, 2016), which was introduced in Lok Sabha on 16th March, 2016 by the Finance Minister in view of several recommendations made in the Company Law Committee report (CLC Report) dated 1st February, 2016. One of the many significant amendments that the bill provided for was is beneficial Ownership of shares.The Bill brings about a systematic change on how beneficial ownership on shares is to be dealt with as compared to Companies Act 2013.

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To have  clear view on the same it would be required to address three sections of the Companies Act, 2013 vis-a-vis amendments brought out by the Bill on the same, namely, section 89, 90 and 216. The bill makes notable additions in section 89 and 217 while section 90 was completely substituted by a new section.

Section 89 of the Companies Act 2013 deals with the provisions related to declaration in respect of beneficial interest in any share, which is corresponding to Section 187C of the Companies Act 1956. The section requires that where the name of a person is entered in the register of members as the holder of shares by who does not hold the beneficial interest in such shares, such person shall make a declaration within 30 days in Form No. MGT 4 to the Company specifying the details of the person who holds the beneficial interest in such shares.

The section also put obligation on the person who holds or acquires beneficial interest to make a declaration within 30 days in Form No. MGT 5 to the Company specifying the details of the person in whose name the shares stand registered in the books of the Company. As per Rule 9(3) of the Companies (Management and Administration) Rules, 2014 the Company shall make a note of the aforesaid declarations in the register of members and shall file, within 3o days from the date of receipt, a return in Form No. MGT 6 with the Registrar of Companies.

The common usage of concept of Beneficial Interest is –

(a) To satisfy the requirement of minimum number of shareholders i.e. two or seven as the case may be;

(b) To incorporate of wholly owned subsidiary.

To begin on the bill, it takes off very well with a definition on Beneficial Ownership but then swiftly lands down as the scope of the definition is too broad for practitioners to understand what actually falls under Beneficial Ownership. However the definition paves road for better understanding of both section 89 and 90 (as the definition clearly states) subject to clarifications expected on the definition.

The definition goes on as:

For the purposes of this section and section 90, beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

(i) exercise or cause to be exercised any or all of the rights attached to such share; or

(ii)receive or participate in any dividend or other distribution in respect of such share.

While reading the definition, one can make the following interpretations:

i. The definition holds good for both section 89 and section 90.

ii. The above definition clearly states that it is not mandatory to have a contract or arrangement to establish beneficial interest.

iii. It could be exercised singly or jointly by a group of person

iv. It can be absolute or limited to certain benefits

The bill does not conclude on beneficial ownership with the definition. It further amends section 90 by substituting it with a completely new section to bring beneficial owners in parity with registered owners in terms of disclosure requirements of acquisition of shares.

On the other hand in addition to above, the Companies Bill, 2016 provides that 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 twenty-five per cent. 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 (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed.

The Rules are yet to be prescribed.

In addition to above the companies are further burdened with additional compliance of filing a return of significant ownership.

If any person fails to make a declaration as required 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.

Hence the bill comes up with another cumbersome disclosure in addition to those already mentioned in section 89.

This disclosure seems to be repetitive at the face of it since the company is already making a declaration under section 89 irrespective of the holding in MGT 6.

Further the bill provides for maintain a register by the company to incorporate the details so received. The register shall be kept open for inspection by members on payment of prescribed fees in same manner as other statutory registers which if the company fails to do so or denies inspection the company and every officer of the company who is in default shall be punishable with fine which shall not be less than ten lakh rupees but which may extend to fifty 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.

The Bill clears away the ambiguity of dealing with disputes regarding beneficial ownership by expressly providing for powers to the company to send a notice seeking information to any person when it has reasonable cause to believe that the person is a:

i. a significant beneficial owner of the company; or

ii. have knowledge of the identity of a significant beneficial owner or

iii. another person likely to have such knowledge; or

iv. have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued,and who is not registered as a significant beneficial owner with the company as required.

The information is required to be furnished within a period of 30 days.

If the information so required is not furnishes or the company is not satisfied the company may seek Tribunal within 15 days to issue ordersimposing restrictions on transfer ability, suspension of all rights attached to shares and other matter as may be prescribed. The rules are yet to be formulated for the same.

The tribunal, after giving opportunity of being heard to both the parties shall issue orders within 60 days of receipt of application. However, company or the person aggrieved by the order of the Tribunal may make an application to the Tribunal for relaxation or lifting of the restrictions placed.

Hence the Bill limits the powers of Central Government to investigate on Beneficial Ownership on section 90 of the Companies Act, 2013 by vesting it on the Tribunal. However the same powers are restored to the Central Government by in section 216 by making the following addition:

“(c) who have or had beneficial interest in shares of a company or who are or have been beneficial owners or significant beneficial owner of a company.”.

Hence it can be concluded that though the bill is a great initiative towards clarifying ambiguities and confusions pertaining to Beneficial Ownership of shares and ways to deal with them, still there is a long way to go. The bill fails to provide for an exhaustive definition. The repetitive filing requirements are cumbersome especially for listed entities. The bill has slightly shifted the purpose of Section 90 towards dealing with Beneficial Ownership and the disputes on ownership are now solely referred in section 216, which is a positive change. However further amendments towards simplifying and reducing repetitive requirements would be awaited.

References:

Companies Act 2013

Companies Bill 2016

Companies Amendment Bill 2016 Referencer

(Author Can be Reached at shilpaa.agarwal17@gmail.com)

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  • MOHIT SALUJA

    Very nicely written