Declaration By Beneficial & Significant Beneficial Owners Section 89 & 90 of Companies Act 2013

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[1] 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[2].

Why this concept…?

[3]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:

• Formation of Shell Companies
• Complex ownership: holding of shares through different names
• [4]Bearer shares and share warrants (Bearer shares are not permitted under Indian legislation. The Companies Act permits ownership of public companies through bearer share warrants, but there appear to be adequate safeguards in place to ensure that beneficial owners of these instruments are identified)
• Unrestricted use of legal persons as directors.
• formal nominee shareholders and directors where the identity of the nominator is undisclosed
• informal nominee shareholders and directors, such as close associates and family,
• Trusts and other legal arrangements which enable a separation of legal ownership and beneficial ownership of assets.
• use of intermediaries in forming legal persons, including professional intermediaries

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.

Terminologies

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)[5];

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.

[6]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 Means Every Individual (natural person) Acting alone or together (directly) Or through one or more persons (indirectly) Including trust or person resident outside India (NRI/ Foreign Nationals)
Holding beneficial Interest	Holding beneficial Interest: More than 10% (minimum): in shares[7] of a company or the right to exercise, or the actual exercising of significant influence[8] or control[9]; Where significant influence or control is defined in clause (27) of section 2 of the Act: (i.e., control of at least twenty per cent of total voting power, or of business decisions under an agreement) Threshold limit has been decreased to 10% Refer Sub Section (10) of section 89:It defines “Beneficial Interest” in shares”
Securities Covered[10]	Equity shares, Global Depository Receipts, Convertible Preference Shares, Compulsory Convertible Debentures; (For the purpose of “SBO”)[11]
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
Company	Natural Person who, whether acting alone or together with other natural persons, or through one or more other persons or trusts	Whose name is not entered in register of members Holds at least 10 % in shares of a company or the right to exercise or the actual exercising of significant influence or control
Partnership firm[12]	Natural Person who, whether acting alone or together with other natural persons, or 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))	Declaration by person who does not hold BENEFICIAL INTEREST but his name is entered in Register: Form MGT-4 within 30 days from date of entry in Register of Members To be file with Company
Beneficial owner (Section 89 (2))	Declaration by person who holds BENEFICIAL INTEREST but his name is not entered in Register: Form MGT-5 within 30 days from acquisition of such beneficial interest  To be file with Company
In case of Change of Beneficial Interest (Section 89 (3))	Form MGT-4 within 30 days from date of Change by “RO” Form MGT-5 within 30 days from date of Change by “BO” To be file with Company
Declaration by Company[13] (Section 89 (6))	On receipt of such declaration either in Form MGT-4 or Form MGT-5 Within 30 days from such receipt of declaration Form MGT-6 to be filed by Company To be file with Registrar
Penal Provision for RO or BO	If declaration as required under section 89 (1), (2) or (3) is not made Fine up to INR 50000/- and on Continuation for 1 year extension with INR 1000 per day Further rights of BO is not enforceable if he fails to make declaration
Penal Provision for Company	If declaration as required under section 89 (6) is not made Fine up to INR 500/- to INR 1000/- for defaulting officer and on Continuation for 1 year extension with INR 1000 per day

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:

Ownership (As on commencement date: 13.09.2018)	Every ‘SBO’ to make disclosures In Form BEN-1 Within 90 days from such commencement Within 30 days; if any changes in such ownership
Ownership (Acquisition after commencement date: 13.09.2018)	Every ‘Individual’ to make disclosures In Form BEN-1 If they acquire Significant Beneficial Ownership i.e. whose ultimate beneficial holding is at least 10% Within 30 days; if any changes in such ownership
Declaration by Company	On receipt of such declaration Within 30 days Form BEN-2 to be filed by Company To be file with Registrar
Maintenance of registers	Company to maintain Register of SBO in Form BEN-3 Same to be open for inspection, On payment of fees not exceeding INR 50/- for each inspection
Powers of Company (Section 90(5) & (6))	A company has power to give notice to “Any person” In Form BEN-4 If Company has reasonable cause to believe that: 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 Reply to given by “Concerned Person” with 30 days of such notice.
Power to Apply to Tribunal	If “Concerned person” fails to give information to company within stipulated time Company will apply to tribunal with 15 days from end of ‘stipulated time’ For order direction restriction in regards to shares in question such as: i. Restriction on transfer of shares ii. Suspension on receiving of dividend iii. Suspension on voting rights etc. Person so aggrieved may also make application to tribunal for relaxation in regards to order passed
Penal Provisions for SBO (Section 90 (10))	If declaration as required under section 90 (1) is not made Fine up to INR 100000/- and on Continuation for 1 year extension with INR 1000 per day If it is wilful act than will be liable under section 447 of the Act
Penal Provisions for Company (Section 90 (11))	If declaration as required under section 90 (2) or (4) is not made Fine up to INR 10,00,000/- to INR 50,00,000/- for defaulting officer and on Continuation for 1 year extension with INR 1000 per day

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:

• Mutual Funds,
• Alterative Investment Funds (AIFs),
• Real Estate Investment Trusts(REITs) and Infrastructure Investment Trusts (lnvlTs)

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[1] MCA notifies 5 section of Companies (Amendment) Act, 2017 wef 13.06.2018

[2] Companies (Significant Beneficial Owners) Rules, 2018

[3] 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.

[4] 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.

[5] Inserted by the Companies (Amendment) Act, 2017, however; the enforcement of the amended Section 89 (10) shall be awaited.

[6]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.

[7] 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)

[8] 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.

[9] “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

[10] For Beneficial Owner: Only “equity and preference Shares (weather convertible or not) are included

[11] 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)

[12] Since rules are silent as regards LLP being a member, how would such membership be treated, (Salient Issue remained unanswered)

[13] 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