This write up is prepared in regards to the newly introduced/ substituted provisions under the Companies Act, 2013 (herein referred thereafter ‘the Act’) i.e. Section-90 (Register of significant Beneficial Owners in a Company) herein enforced and the Companies (Beneficial Interest and Significant Beneficial Interest) Rules, 2018 (‘Final Rules’) issued by MCA in relation to Significant Beneficial Ownership (‘SBO’) by MCA vide its Notification dated June 13, 2018.
Why this concept…?
This measure is implemented for the avoidance of misuse of “Corporate vehicles” such as —such as companies, trusts, foundations, partnerships, and other types of legal persons and arrangements, which plays a vital role in economy round the globe. These corporate vehicles in some or the other ways are misused for unlawful purposes such as Tax Evasion, Money Laundering, Corruptions, insider dealing and other illegal/ Benami transactions.
By introduction of this concept in India law, it attempts to procure and conceal as much information about the legal owners and beneficial owners (who are actual source of these corporate vehicles) about their beneficial interest which enhances transparency in corporate world. By securing the Legal and beneficial ownership information, aid to the concerned investigation and other competent authorities can be provided which allows them to identify those natural persons who may be responsible for the underlying fraudulent or illegal activity of concern, or who may have relevant information to further an investigation.
Individuals, every so often create, administer, control, own and operate numerous corporate vehicles financially or in other specified manner from different countries with ready access to the international financial system, thereby making difficult for investigation and other competent authorities for procurement of information from different jurisdiction which is exposed to investigation under Money Laundering or other illegal transaction. For Example: Information in regards to “Beneficial Owner” can remain unnoticed through following ways:
Therefore, Law in India; herein the companies act, 2013 has recognised the concept “Declaration in Respect of Beneficial Interest in any Share under Section 89 of the Act” and Maintenance of Register of significant beneficial owners in a company under section 90 of the Act” which will ensure that adequate, accurate and timely information on the beneficial ownership of corporate vehicles is available (in form of declaration of beneficial interest in a share to be given by both the legal owner and the person holding beneficial interest) which increases transparency and avoidance of illicit transactions.
Before understanding the provisions of the sections, let’s discuss with the crux of the sections and important terms used therein:
1. Section 89: This section provides that declaration to be filed by “registered owner” as well as “beneficial owner” holding beneficial interest in the shares of the Company. Thereby requiring the Company to record this information in its register and file requisite return with the Registrar of Companies within a prescribed time period. However, CA 13 does not define term ‘beneficial interest in a share’. It also specifies fines and penalties for non-compliance of same.
2. Section 90: Whereby this is new section which has introduced the concept of “Significant Beneficial owner” and filing of declarations by such ‘SBO’ of the Company, “Maintenance of Registers of interest so declared” and also specifies fines and penalties for non-compliance of same.
3. Beneficial Interest: A beneficial interest is “that right which a person has in a contract made with another” (third) person. The typical example is “if A makes a contract with B that A will pay C a certain sum of money, B has the legal interest in the contract, and C the beneficial interest. In our case; it is right to receive benefits on shares held by another.
Erstwhile, the expression “beneficial interest” was not defined, and in absence of specific provisions, the term has been defined by amending the section 89 of the Act, in form of insertion of sub section (10);
It provides the following- “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.”
Please Note: “beneficial Interest” Cannot be created for Debentures
4. Registered Owner: It is standing defined in the Companies (Significant Beneficial Owners) Rules, 2018 (‘Final Rules’):
It means a person whose name is entered in the register of members of a company as the holder of shares in that company but who does not beneficial interest in such shares.
Beneficial owner: In layman language “beneficial owner are the one who hold shares indirectly either through bank or sub broker” however they are the actual owners of the shares and has to right to enjoy the benefits attached with such shares.
Beneficial owner definition includes it includes natural persons on whose behalf a transaction is being conducted, even where that person does not have actual or legal ownership or control over equity. It’s like person enjoy ownership of the shares irrespective of the title.
In other words: on the natural (not legal) persons who actually own and take advantage of capital or assets of the legal person; and have control over it rather, than just the persons who are legally (on paper) entitled to do so.
For example: if a company is legally owned by a second company (according to its corporate registration information), the beneficial owners are actually the natural persons who are behind that second company or ultimate holding company in the chain of ownership and who are controlling it.
6. Significant Beneficial Owners: As per the Section 90 and the Companies (Beneficial Interest and Significant Beneficial Interest) Rules, 2018 (‘Final Rules’):
|“SBO” means||Individual Referred in sub section (1) of section 90
|Holding beneficial Interest||Holding beneficial Interest:
|Securities Covered||Equity shares, Global Depository Receipts, Convertible Preference Shares, Compulsory Convertible Debentures; (For the purpose of “SBO”)|
|Register||And whose name is not entered in Register of Members
It means shareholders whose name is entered in “Register” are not required to file.
|Difference between Beneficial owner and Significant Beneficial Owner||BO: They are required to make disclosures as per section 89 of the Act, even when their holdings are less than 10%.
SBO: They are required to make disclosure’s as per section 90 of the Act if interest is or more than 10%
7. Significant Beneficial to be determined (Other than individuals/natural Person):
|MEMBER WILL BE:||SIGNIFICANT BENEFICIAL OWNER||HOLDING|
|Partnership firm||Natural Person
through one or more other persons or trusts
|Where there is No Natural person In aforesaid Situation → “Senior Manging Official” will be beneficial owner|
|Trust through trustee||“SBO” will be:
– author of the trust,
– the trustee
– the beneficiaries- Holds at least 10 % of interest in trust
– any other natural persons- exercising of significant influence or control
QUICK REFERNENCER FOR DECLARATION: IN SECTION 89 OF THE ACT:
As per Section 89 and the Companies (Management and Administration) Rules, 2014; Declaration in Respect of “Beneficial Interest” in any Shares by Registered owner and beneficial Owner is to be made in following Manner:
|Registered owner (Section 89 (1))
|Beneficial owner (Section 89 (2))||
|In case of Change of Beneficial Interest (Section 89 (3))||
|Declaration by Company
(Section 89 (6))
|Penal Provision for RO or BO||
|Penal Provision for Company||
QUICK REFERNENCER FOR DECLARATION: IN SECTION 90 OF THE ACT:
As per Section 90 and the Companies (Significant Beneficial Owners) Rules, 2018; Declaration in Respect of “Significant Beneficial Ownership” in any Company by Significant Beneficial owner is to be made in following Manner:
(As on commencement date: 13.09.2018)
(Acquisition after commencement date: 13.09.2018)
|Declaration by Company||
|Maintenance of registers||
|Powers of Company
(Section 90(5) & (6))
i. To be SBO
ii. Having knowledge of the identity of SBO or another person likely to have such knowledge
iii. Have been SBO of the Company at any time during the 3 years immediately preceding the date on which notice is issued & who is not registered with company
|Power to Apply to Tribunal||
i. Restriction on transfer of shares
ii. Suspension on receiving of dividend
iii. Suspension on voting rights etc.
|Penal Provisions for SBO
(Section 90 (10))
|Penal Provisions for Company
(Section 90 (11))
EXEMPTIONS FROM DECLARATIONS:
Section 89 and 90 of the Act, will not apply to a “Government Companies”, vide Notification dated 05.06.2015.
Further rule 8 of the Companies (Significant Beneficial Owners) Rules, 2018 identifies that compliance of declaration is not required: for holding shares of following Companies / body corporate regulated under SEBI Act:
Illustration to be released in next series
Disclaimer: Appreciate your support and so happy to have you as reader.
This article is only knowledge sharing initiative and is not intended to be a part of any advertising. The information contained therein is of general nature and the entire contents of this document have been developed based on relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all or any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document . READER SHOULD SEEK APPROPRIATE COUNSEL FOR YOUR OWN SITUATION. AUTHOR SHALL NOT BE HELD LIABLE FOR ANY OF THE CONSEQUENCES DIRECTLY OR INDIRECTLY
 Note: Recommendations and guidelines on beneficial ownership were initially introduced by The Financial Action Task Force (FATF) which is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard.
 A bearer share is an equity security wholly owned by whoever holds the physical stock certificate, thus the name “bearer” share. The issuing firm neither registers the owner of the stock nor tracks transfers of ownership; the company disperses dividends to bearer shares when a physical coupon is presented to the firm.
 Inserted by the Companies (Amendment) Act, 2017, however; the enforcement of the amended Section 89 (10) shall be awaited.
Definition of ‘beneficial owner’ from the Glossary to the FATF Recommendation: Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.
 Whether the limit stated above shall apply to a particular class of shares or to all shares together held by a significant beneficial owner is not clear. (Salient Issue remained unanswered)
 Significant influence” in relation to an associate company means control of at least 20 percent of total voting power, or control of or participation in business decisions under an agreement.
 “Control” shall include the right to appoint a 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
 For Beneficial Owner: Only “equity and preference Shares (weather convertible or not) are included
 How would Company determine Significant Beneficial Owner where shares/interest is held Instruments in form of global depository receipts, compulsory convertible debentures or preference shares, Salient Issue remained unanswered)
 Since rules are silent as regards LLP being a member, how would such membership be treated, (Salient Issue remained unanswered)
 No declaration by Company is to be filed: in respect of beneficial interest in trust which is created for the purpose of Mutual Fund or Venture Capital Fund or other purposes as approved by SEBI. It implies that these entities are not required to make declaration as required under section