Concept of Declaration of Beneficial Ownership in Company Shares

Understand this concept with an example, Let say there is a Company XYZ Pvt. Ltd. and Mr. A wants to holds 100% shareholding in the Company, but according to the Sec 2(68) of the Companies Act, 2013, minimum 2 members are required.

In this case, Mr. A may present Mr. X as a representative of him to fulfill the condition of minimum number of members in a private company.

Mr. X’s name would be listed in the Registered of Members, but actually he serve for the Beneficial owner Mr. A.

As stated above, it is clear that Mr. X is a registered owner of the Company, he requires to file MGT-4 to the company within 30 days of entering his name in register of members or change therein as the case may be.

And also Mr. A (Beneficial Owner) requires to file MGT-5 to the company within 30 days of entering his name in register of members or change therein as the case may be.

Thereafter, the company must enter the details of the declaration in the register of members and submit a return in the MGT-6 form to the Registrar within 30 days of receiving the declaration.

This example may apply to public company also.

Now, Summarized the Concept of Declaration of Beneficial Ownership in Company Shares is as follows:

1. Declaration of Registered Owner: If person’s name is listed as a shareholder of a company but they’re not the beneficial owner of those shares, they must declare about the holding the shares as registered owner only.
2. Declaration by Beneficial Owners: Anyone who owns or acquires a beneficial interest in company shares must declare their interest to the company, specifying details like the nature of their interest and particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed.
3. Updates on Changes: If there are any changes in beneficial ownership, both the registered holder and the beneficial owner must notify the company within 30 days.
4. Government Rules: The Central Government can make rules about how beneficial ownership should be held and disclosed.
5. Penalties for Non-Compliance: Failure to make required declarations can lead to penalties. Initially, a penalty of Rs. 50,000 applies, and for continuing failures, an additional penalty of Rs. 200 per day can be imposed, up to a maximum of Rs. 5 lakh.
6. Company Responsibilities: When a declaration is received, the company must note it in their register and file a return, ie., MGT-6 with the Registrar of Companies within 30 days.
7. Penalties for Non-Compliance: If any persons fails to make declaration then he shall be liable to a penalty of Rs. 50,000/- and in case of continuing failure, with a further penalty of Rs. 200/- for each day after the first during which such failure continues, subject to a maximum of Rs. 5,00,000.
8. Enforceability of Rights: If a beneficial owner fails to make a required declaration, they cannot enforce their rights related to those shares.
9. Dividend Payment Obligation: This section doesn’t affect the company’s obligation to pay dividends to shareholders.
10. Beneficial Interest: 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.

It includes any right or entitlement, directly or indirectly, to exercise rights attached to shares or receive dividends.

11. Government Exemptions: The Central Government can exempt certain classes of persons from complying with some requirements of this section, but not from the core aspects related to beneficial interest.

Conclusion: This section essentially aims to ensure transparency in share ownership, making sure that companies and regulators have a clear understanding beneficial and registered owner.