Introduction
Provisions relating to the disclosure of significant beneficial owners (“SBOs”) have been introduced into the Companies Act 2013 (“the Act”) to prevent the misuse of legal structures for tax evasion or money laundering for corrupt or unlawful purposes.
Section 90 of the Companies Act, read with the Companies (Significant Beneficial Owners) Rules 2018 (“SBO Rules”), requires companies to disclose their significant beneficial owners (“SBOs”). Rule 2(1)(h) of the SBO Rules provides that any person holding more than 10% of the shares or having significant influence or control in a company is an SBO for all purposes under the Companies Act. In addition, Rule 2(1)(i) also extends the scope of the rules to include any person who has significant influence, i.e., the power to directly or indirectly participate in the financial and operating decisions of the reporting company. Within this scope, the reporting company (the company required to report its SBOs) must complete Form BEN-2 and update this form whenever there is a change in the status of the company’s SBOs.
Dilemma surrounding the SBO Rules
Although the introduction of Section 90 of the Companies (Substantial Beneficial Ownership) Act and Rules, 2018 (“SBO provisions”) initially sparked a lot of discussion and debate on compliance, the situation gradually calmed down in the immediate aftermath. The level of compliance has declined over time, with many entities concluding that they do not need to delve deeper into the layers based on the shareholding test under the SBO provisions. Similarly, Indian companies that send notices to shareholders consider their job done and do not pursue the matter further.
This went on until the Registrar of Companies (“RoC”) took cognizance of this matter and issued two recent orders, reigniting the debate on compliance with the SBO provisions. Samsung Display Pvt Ltd (“Samsung”) and LinkedIn Technology Information Pvt Ltd (“LinkedIn”) were recently placed in a legal bind after the Registrar of Companies (“RoC”)
penalized them in separate judgments for their active non-compliance in disclosing significant beneficial ownership of their companies. These decisions are particularly notable because the sanctions apply not only to the company but also to senior executives, including the chairmen, CEO and non-executive directors of the parent company.
This article aims to assess whether the Ministry of Corporate Affairs (“MCA”) intends to expand the scope of the existing SBO regulations. The article will first consider the judgment against Samsung Noida and LinkedIn India, and finally analyze the possibility of the MCA expanding the scope of the old SBO rules.
The Linkedin Case
In May 2024, the RoC of the NCT in Delhi issued an order imposing sanctions on various senior executives of LinkedIn India and Microsoft for failing to comply with the disclosure requirements of the SBO. LinkedIn India claimed that no individual held a significant stake in its company; hence, no disclosure was required. However, the RoC held that LinkedIn India didn’t disclosed LinkedIn Corporation as the beneficial owner, that ultimately belonged to Microsoft Corporation. LinkedIn India argued that it was not subject to any provision of Rule 90 or Rule 2(1)(h) of the SBO Rules as no individual directly held more than 10% of the shares.
The deciding authority rejected this argument, observing that the scope of the article was wide enough to encompass any person who exercises “substantial control” over the reporting company, directly or indirectly, consequently going beyond the individual’s simple percentage participation. In this case, the adjudicating officer used two tests to determine SBO: the subjective test and the objective test.
The objective test is whether an individual owns more than 10% of the shares. On the other hand, the subjective test examines if an individual has significant influence or control over the corporation Here, Microsoft Corporation’s ultimate control over LinkedIn India was established through the company’s articles of incorporation. According to the RoC, under the Articles of Association of Microsoft Corporation, the CEO has the power to oversee and direct the management of LinkedIn India; thus, composing significant beneficial ownership.
Accordingly, the RoC held that the term “significant influence” within the meaning of Rule 2(1)(i) includes Ryan Roslansky, CEO of LinkedIn Corporation and Satya Nadella, CEO of Microsoft Corporation, thus classifying them as SBOs. The officer held that Microsoft Corporation has substantial influence over LinkedIn India and has extensive control if seen from the lens of the subjective test.
The Samsung case
Similar to its order against LinkedIn India, the RoC also imposed penalties on Samsung Noida for failing to comply with the SBO disclosure requirements despite repeated notices. The RoC noted that the reporting company, Samsung Noida, is a wholly owned subsidiary of Samsung Display Corporation Ltd (“SDC”), but did not disclose that SDC is wholly owned by Samsung Electronics Corporation of Korea (“SEC Korea”) and Samsung SDI Corporation of Korea (“SDI Korea”). Ultimately, the RoC rejected Samsung Noida’s argument that there was no identifiable person falling under the category of SBO, and noted that the family of the late Lee Kun-hee, the largest shareholder of SEC, was the SBO.
The RoC found this because the board, on the recommendation of the chairman, appointed Lee’s son, Lee Jae-yong, as executive chairman, regardless of him not holding a majority of the shares. Applying Section 90 of the Act, the SBO Rules, and the objective and subjective tests, the RoC held that Lee, together with his family, indirectly controlled SEC. Therefore, the reporting company was required to report it as an SBO. Although Lee Jae-yeon has been given full decision-making authority by the SEC Korea board of directors, the company’s articles of incorporation establish a chairman. This represents a form of proxy control granted through a legally remote mechanism, thus providing Lee with sufficient control to influence SEC management decisions independently of the individual micro-shares he holds.
Analysis
In the LinkedIn India case, it was found that Satya Nadella and Ryan Roslansky, who served as CEOs of Microsoft Corporation and LinkedIn Corporation, were deemed to be SBOs of LinkedIn India according to a subjective test. As a result, they were penalized for not disclosing their status as SBOs. Strictly speaking, under Indian law, an SBO must exercise significant control or influence (other than by ownership) over the reporting entity. In this regard, a CEO needs to be declared as an SBO only if he is a member of a Public investment vehicle (PIV).
Although Nadella and Roslansky were mere employees of the companies and neither company was a PIV, the scope and hierarchy of power of the CEOs of their respective companies gave them the power to exercise control or significant influence within the meaning of the SBO Rules. Similarly, the Samsung Noida case set a far-reaching precedent by bringing any form of proxy management within the ambit of the SBO Rules. These cases suggest that the inherent ambiguity in the term “participation” and the definition of the term “control” have been interpreted broadly by the RoC such that if a senior executive of the parent company or any other person is deemed to exercise any form of substantial control over a reporting entity, it is classified as an SBO.
Analysing the LinkedIn and Samsung case, the RoC’s interpretation of Section 90 previously read with the SBO Rules reflects an expansive interpretation of the law. The RoC used a subjective test to infer significant control exercised by the CEO of the parent company over LinkedIn India even though the parent company is not a PIV. Presumably, this expansive interpretation of the SBO Rules took into consideration the rise in financial crime cases in the country and the difficulties in investigating them.
Hence, a stricter interpretation of the disclosure obligations of companies is required. Though this interpretation is debatable, it is consistent with the objective of Section 90 in terms of ensuring corporate transparency and good corporate governance. However, this interpretation still has to withstand judicial scrutiny. If this interpretation survives judicial scrutiny, this position will improve the level of compliance for many businesses across India. While this may be a tedious task for businesses, in the long run, it will pave the way for higher levels of corporate governance, ensuring that India’s corporate economy grows further on a stronger and healthier footing.
Conclusion
These rulings of ROC make it is clear that businesses need to be more careful about complying with the SBO provisions and no leniency is being extended to large global corporations with diversified ownership or even venture capital/investment funds with large backers. A case-by- case analysis has to be done by companies in India to comply with the SBO provisions as facts differ in each case. However, the number of sanctions imposed by the RoC for these orders is negligible and raises questions about how seriously companies will comply.
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