Introduction:
The Companies Act, with its commitment to transparency and accountability, has introduced amendments that shine a spotlight on Significant Beneficial Owners (SBOs). This article aims to provide clarity on the who, what, and how of SBOs under the Companies Act, specifically referencing Section 90.
Who are Significant Beneficial Owners (SBOs)?
Significant Beneficial Owners are individuals who hold substantial control or ownership in a company, even if their names are not directly recorded in the shareholder register. Section 90 of the Companies Act focuses on unearthing these influential individuals behind the corporate veil.
Identification of SBOs (Section 90(1)):
To identify SBOs, companies must scrutinize their shareholding patterns and control mechanisms. Section 90(1) outlines the criteria for determining Significant Beneficial Owners:
1. Ownership Thresholds (Section 90(1)(i)): Individuals holding at least 10% of the company’s shares or exercising significant influence over management are classified as SBOs. Only when a direct holding clubbed with indirect holding cross the threshold of 10% than the beneficial holding needs to report.
Example:
Alice owns 15% of XYZ Ltd.’s shares. According to Section 90(1)(i), since she holds more than 10% of the company’s shares, Alice qualifies as a Significant Beneficial Owner but no SBO declaration required as per rule 2 (1) (h) (iv).
2. Indirect Holding (Section 90(1)(ii)): If an individual holds shares through another entity, the ultimate individual controlling that entity is considered the SBO.
Example:
Bob holds majority shares in XYZ Ltd., which, in turn, owns 12% of ABC Ltd. As per Section 90(1)(ii), Bob is not directly listed as a shareholder in ABC Ltd.’s records, but since he controls XYZ Ltd, he is considered a Significant Beneficial Owner of ABC Ltd. SBO Declaration required.
- Control and Influence (Section 90(1)(iii)): Individuals with the ability to exercise significant influence or control through voting agreements or board positions also qualify as SBOs.
Example:
Charlie doesn’t own a significant percentage of shares in DEF Corporation, but he has voting agreements with other major shareholders and holds a key position on the company’s board. Section 90(1)(iii) identifies Charlie as a Significant Beneficial Owner due to his ability to exercise significant influence and control over DEF Corporation. In SBO Declaration copy of agreement or any other document which signified the control should be attached.
Points to be noted
1. Shares would mean equity shares, CCPs, CCDs and GDRs.
2. Voting rights locked in case of pledge of shares should not be regarded as those exercisable by the pledgee as this will result in incorrect identification of SBO.
3. Dividend payable on Optionally Convertible or Redeemable Preference Shares shall not be considered for this purpose.
4. Dividend parked in escrow account, if any, case of pledge of shares should not be regarded as those exercisable by the pledgee as this will result in incorrect identification of SBO.
How to identify the individual in case of indirect holding
1. In case of a Body Corporate: Individual who is holding majority stake in the company
Example: XYZ Ltd have shareholders A Ltd. (99%) and B Ltd. (1%). Ankit is holding 58% stake in A Ltd. Than in this case Ankit will be SBO for XYZ Ltd.
2. In case of Partnership Firm: Partners of Partnership firm or LLP
Example: In A Ltd. Ashlar Law LLP holding 85 % shares. LLP have two equal partners Mr. S and Mr. P the Partners of LLP will be the SBO for A Ltd.
- Karta in case of HUF
- Trustee in case of Trust
Who Reports SBOs (Section 90(4))?
The duty of reporting SBOs rests with the company itself. Section 90(4) mandates that once a Significant Beneficial Owner is identified, the company must make necessary disclosures to regulatory authorities. This ensures comprehensive insight into the ownership structure and potential sources of influence within the company. The primary onus of declaration of beneficial interest lies on the person holding such beneficial interest. For the purpose of assigning responsibility to one or more person with respect to the compliance with the said provisions, Rule 9 of the Companies (Management and Administration) Rules, 2014 (“MGT Rules”) has been amended vide the Companies (Management and Administration) (Second Amendment) Rules, 2023 introducing the concept of “designated person” for the purpose of the said section. The amendment has been notified and made applicable from the date of its publication in the official gazette, i.e, 27th October, 2023.
Who will be registered as a Designated person?
Sub-rule (5) of Rule 9 deals with the person qualified to be a designated person. It requires one of the following to act as a “designated person”: CS of the company, if the company is required to appoint a CS (as per section 203 of the Act), or any KMP of the company (as defined u/s 2(51) of the Act), or every director of the company, in case the company does not have a CS or other KMPs.
Therefore, a company need to pass a board resolution in this regard, designate the CS, or any of the KMPs or directors of the company to act as a designated person. If company does not pass at Board Resolution than following person shall deemed to be designated person
1. CS of the company, if the company is required to appoint a CS
2. In case a CS has not been appointed, every Managing Director or Manager of the company,
3. In the absence of both (a) and (b), every director of the company.
Responsibility of Designated person:
Furnishing, and extending co-operation for providing, information to the Registrar or any other authorised officer with respect to beneficial interest in shares of the company.
Disclosure of details of a Designated Person:
The details of the designated person are required to be disclosed in the annual return. Any changes thereof should be intimated to ROC in e-form GNL-2
Forms and Filings:
To adhere to Section 90, companies are required to file a declaration regarding their Significant Beneficial Owners using the prescribed form, typically Form BEN-1 or its equivalent.
Who don’t need to do SBO Declarations?
1. Individual holding shares directly above the threshold limit of 10%
2. Individual holding direct and indirect holding less than the threshold limit of 10%
3. Shares held by IEPF authority and any government authority (Central, State of local)
4. Shares held by SEBI registered investor vehicle viz AIFs, REITs, INViT etc.
5. Shares held by investment vehicles regulated by RBI, IRDA or PFRDA.
Conclusion:
Section 90 of the Companies Act, addressing Significant Beneficial Owners, is a crucial provision enhancing corporate governance and transparency. Navigating the complexities of compliance requires a thorough understanding of Section 90, emphasizing the importance of identifying and reporting SBOs to regulatory authorities. This commitment to transparency fosters a culture of accountability, safeguarding against opaque corporate structures that could compromise the integrity of the business landscape.
Author Bio
PQR LLP (Reporting LLP) has 2 Partners:
XYZ LTD hold 80% (Body Corporate)
Mr. L hold 20% (Individual)
XYZ LTD has 3 shareholders:
Mr. X hold 50% (individual),
Mr. A hold 1% (individual) &
ABC PVT LTD hold 49% (body corporate).
ABC PVT LTD has 2 shareholders:
Mr. X holding 99% (individual)&
Mr. M 20% (individual).
Except Mr. L all are related parties in some or the other way.
How will the provisions of LLP (SBO) Rules 2023 will be applicable in this case and what will be the percentage of beneficial interest that will be reported to the reporting LLP by XYZ LTD?