Introduction:
Many companies have received advisory notices from the Ministry of Corporate Affairs (MCA) regarding compliances of Section 90 of the Companies Act, 2013, and Companies (Significant Beneficial Owners) Rules, 2018. No need to fret. I’m here to provide you with a clear and straightforward guide to help you understand and fulfill these requirements hassle-free.
Section 90 applies universally to all companies, encompassing public and private, listed and unlisted, irrespective of size. There are no exceptions based on company type, making compliance mandatory for every entity including Section 8 entities, ensuring each company has a real person accountable for it, emphasizing transparency and responsibility. For Section 8 companies, complying with Section 90 might appear unnecessary, but there are no exceptions in the law.
How to determine whether SBO exist in a company?
1. Check if any shareholders in the company are Indirect Entities (such as Body Corporate, HUF, Partnership, LLP, Trust, or PIV).
2. If there are no Indirect Entities holding shares in a Company, no reporting is required.
“An individual is considered to “indirectly” hold a right or entitlement when they have more than 50% control over a company’s shares or voting rights, either in the company itself or in its parent company.”
3. In case Indirect Entities are there:
- Verify if an individual holds shares “indirectly” through any one or multiple entities, aggregating to 10% or more. or
- Check if an individual holds shares *“indirectly”, or together with any direct holdings, aggregating to 10% or more.
*Existence of indirect shareholding is must to be considered as SBO. However if it exists even 1%, for calculation of 10% be considered as SBO any direct shareholding is also considered.
4. Assess if the company is a subsidiary in a chain of subsidiary companies; if yes, no reporting is required for shares held by the Holding Company.
5. Check if any individual exercises significant influence or control; if yes, SBO reporting is mandatory.
Who Qualifies as an SBO?
- An individual is considered an SBO if they hold, individually or as a group:
- Indirectly “or together with any direct holding”, at least 10% of the company’s shares.
- Indirectly or directly, at least 10% of the voting rights.
- Right to receive or participate in at least 10% of the total distributable dividend or other distributions.
- Exercises significant influence or control, not only through direct holdings.
Who is Not Considered an SBO
- An individual is not an SBO if they do not hold any right or entitlement indirectly under (i), (ii), or (iii).
- An individual is not an SBO if they directly hold a right or entitlement. This occurs if:
- The shares are in their name.
- They have declared beneficial interest (MGT-6) to the reporting company (as per Section 89(2)).
Indirect Holding Criteria for (SBO):
- An individual indirectly holds a right or entitlement if they hold a majority stake (more than one-half of the equity share capital/voting rights) in that body corporate or its ultimate holding company.
- In the case of an HUF, the individual is the karta of the HUF. The karta manages the HUF’s affairs and assets.
- For partnership entities, the individual is an indirect holder if:
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- They are a partner in the partnership or LLP.
- They hold a majority stake in a body corporate which is a partner in the partnership or LLP.
- They hold a majority stake in the ultimate holding company of the body corporate that is a partner in the partnership or LLP.
- In the case of a trust, the individual is an indirect holder if they are:
- A trustee in a discretionary or charitable trust.
- A beneficiary in a specific trust.
- The author/settlor in a revocable trust.
Examples to Illustrate:
Example 1: Direct Shareholding
- Scenario: Mr. X directly owns 15% of the shares in XYZ Company.
- Status: Mr. X is not an SBO because he directly holds 15% of the company’s shares.
Example 2: Indirect Shareholding
- Scenario: Mr. Y owns 51% of ABC Pvt. Ltd., which holds 20% shares in XYZ Company.
- Status: Mr. Y is an SBO of XYZ Company due to his majority stake in ABC Pvt. Ltd., an indirect holder in XYZ Company for 20%.
Example 3: Indirect Shareholding along with direct holding
- Scenario: Mr. Y owns 51% of ABC Pvt. Ltd., which holds 8% shares in XYZ Company. Additionally, Mr. Y also directly owns 8% of shares in XYZ Company.
- Status: Mr. Y is an SBO of XYZ Company due to his majority stake in ABC Pvt. Ltd. (an indirect holder in XYZ Company for 8%) and his direct holding of 8% in XYZ Company. Combined, he holds a total of 16% in XYZ Company, qualifying as a Significant Beneficial Owner.
Example 4: Indirect Shareholding through Control Over Parent Companies
- Scenario: Mr. Z holds a 60% stake in DEF Holdings, which, in turn, owns 70% shares in LMN Investments. LMN Investments owns 45% shares in XYZ Company.
- Status: Mr. Z is an SBO of XYZ Company due to his majority stake over DEF Holdings, which indirectly controls LMN Investments. His control over DEF Holdings gives him indirect control over LMN Investments and, consequently, XYZ Company. Despite not having direct ownership in XYZ Company, his influence over the parent companies makes him a Significant Beneficial Owner of XYZ Company for 45%.
Example 5: Holding Reporting Company
- Scenario: Y Ltd: A owns 100%.
A Ltd. Y Ltd holds 51%
B Ltd: A Ltd holds 51%.
C Ltd: B Ltd holds 51%.
- Status: A: Direct SBO of A Ltd.
A Ltd: Indirect SBO of B Ltd and C Ltd.
Mr. A: Files SBO declaration with A Ltd.
A Ltd: Files BEN-2, declaring Mr. A as SBO.
B&C Ltd.: Files BEN-2 with the details declaring A Ltd as Holding Reporting Company.
Example 6: Exercising Direct Rights- declaration u/s 89 is filed
- Scenario: Mr. A: Beneficiary of Trust A, holds 15% in B Ltd.
Direct Holding: Mr. A holds an additional 2% in B Ltd.
- Status: Section 89: A files a declaration u/s 89 for his ownership of 15% in B Ltd.
SBO Status: Mr. A is not considered an SBO; he’s a direct owner of 17%.
Example 7: Partnership Entity
- Scenario: Ms. Z is a partner in LMN Partnership, which holds 12% in XYZ Company.
- Status: Ms. Z is an SBO as she is a partner in the partnership entity, an indirect holder in XYZ Company for 12%.
Example 8: Trust
- Scenario: Dr. A is a trustee in a charitable trust that holds 15% shares in XYZ Company.
- Status: Dr. A is an SBO due to his role as a trustee in the charitable trust, an indirect holder in XYZ Company for 15%.
Example 9: HUF
- Scenario: Kumar is the karta (head) of a Hindu Undivided Family (HUF) named “Kumar HUF.” Kumar HUF collectively owns 14% of the shares in XYZ Company.
- Status: As Kumar HUF owns more than 10% of the shares in XYZ Company, Mr. Kumar, in his role as the karta, qualifies as a Significant Beneficial Owner (SBO) for 10%. He exercises substantial control and influence over the HUF’s shares in the company.
These examples help illustrate how an individual can be considered a Significant Beneficial Owner in a reporting company under various ownership scenarios.
*Holdings of relatives are combined and reported as “persons acting in concert,” unless otherwise is proved.
Responsibility of the Reporting Company:
Upon Receiving Form BEN-1 Declaration:
1. File a return in Form BEN-2 with the ROC within 30 days from the date of receiving the declaration in Form BEN-1.
2. If the Reporting Company is a subsidiary, provide details of the Holding Company in Form BEN-1.
3. Enter the details from BEN-1 into the register of Significant Beneficial Owners (SBO) to be maintained in Form BEN-3.
Notice in BEN-4 to SBO
Following Section 90(5), a Reporting Company must send a notice using Form BEN-4 to anyone (whether a member or not) if the company knows or reasonably believes that the person:
- Is a significant beneficial owner of the company,
- Has information about the identity of a significant beneficial owner or someone likely to have such information,
- Was a significant beneficial owner in the company at any time during the past three years,
- Is not registered as a significant beneficial owner with the company as required under this section but following the SBO Rule.
Additionally, this notice is sent to a member of the reporting company (excluding individuals) who holds at least ten percent of:
- Shares,
- Voting rights,
- Rights to receive dividends or any other distribution in a financial year.
Non-Receipt or Unsatisfactory BEN-1:
- If the Reporting Company does not receive Form BEN-1 as required or is not satisfied with the reasons for its non-submission, or if the company believes an individual is an SBO, an application must be filed with the Tribunal.
- The application, filed within 15 days after the deadline for seeking information in Form BEN-4, aims to obtain necessary orders related to:
- Restrictions on transferring shares in question.
- Suspension of the right to receive dividends or any other distribution concerning the shares in question.
- Suspension of voting rights associated with the shares in question.
- Any other restrictions on the rights attached to the shares in question.
Responsibilities of Significant Beneficial Owners (SBOs):
- Any individual who is a Significant Beneficial Owner in a Reporting Company must declare their status using Form BEN-1.
- Individuals acquiring significant ownership in a company must submit a declaration within 30 days from the acquisition date using Form BEN-1.
- If there is a change in significant beneficial ownership, the Reporting Company must be informed promptly about these changes.
Note: According to the current SBO Rules, any alterations in significant beneficial ownership require reporting to the Reporting Company. This includes any changes in rights or entitlements, whether held directly or indirectly within the Reporting Company. However, it remains unclear whether notification is necessary when an individual ceases to be an SBO. Legally, a declaration is required upon becoming an SBO, and a corresponding declaration should logically be made if this status ceases.
Exemptions from Applicability:
The rules outlined herein are not applicable under specific circumstances.
- The rules do not apply to shares held by the IEPF authority constituted under sub-section (5) of section 125 of the Act.
- Shares held by the reporting company’s holding reporting company are exempt. However, the details of such holding reporting companies must be reported in Form No. BEN-2.
- The rules do not apply to shares held or controlled by the Central Government, State Government, or any local Authority.
- Investment vehicles regulated by the Securities and Exchange Board of India (SEBI), Reserve Bank of India, the Insurance Regulatory and Development Authority of India, or the Pension Fund Regulatory and Development Authority are also exempt.
Other important points
- Nominee shareholders’ holdings are considered to be the holdings of the nominator, whose name is already listed in the register of shareholders under Section 88. Therefore, these holdings are not taken into account for determining Significant Beneficial Owners (SBOs).
- When determining Significant Beneficial Owners (SBOs) based on control, only indirect control is considered. Direct control, which is evident in the company’s register of members as the holder of the majority stake, does not require reporting in BEN-1 and BEN-2. Reporting is necessary only for indirect control scenarios.
- A minor cannot be considered a Significant Beneficial Owner (SBO) because a minor is always represented by a guardian. However, if the minor has any direct holdings, those should be combined with the guardian’s indirect holdings, if any. If the guardian is not an SBO, the guardian should declare in BEN-1 along with a statement that the shareholding belongs to the minor.
Conclusion: Rest assured; your journey through complying with Section 90 and the Companies (Significant Beneficial Owners) Rules, 2018, just got simpler. This guide is your go-to resource, offering easy-to-understand insights and assistance. Remember, I’m here to simplify the process, making sure your company complies effortlessly and efficiently.
Your support is vital; kindly consider liking, sharing, and commenting to enhance its reach. Let’s tackle this together with ease and confidence.
About Author: Author is a Qualified Company Secretary, with over five years of comprehensive experience and knowledge in navigating complex Act, Rules and Regulations, including but not limited to The Companies Act, 2013, FEMA, LODR, PIT, SEBI ICDR and more. With a strong passion for law and ongoing pursuit of an LLB degree, possess a comprehensive understanding of legal principles and practices. Author can be connected at malhotrabhuvesh@gmail.com.
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Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. For legal advice, please consult with a Qualified Company Secretary familiar with the relevant laws and regulations. I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the article or the information contained in it.
Author Bio
If Mr. A holds 70% shares in B Ltd. and Mr. B holds 10.50% in B Ltd. A Ltd is wholly own subsidiary of B Ltd.
Ques:1. Does SBO rule apply to wholly own subsidiary?
Ques:2. If it apply then Mr. A having significance influence in A Ltd. so Mr. A is SBO but what about Mr. B?