How To Identify SBO: A Comprehensive Guide For Indian Companies

 1. INTRODUCTION

The Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules) enhance transparency and mitigate financial risks in Indian companies by identifying the ultimate beneficiaries of a company’s ownership and control. The Ministry of Corporate Affairs (MCA) has refined the framework for identifying Significant Beneficial Owner (SBO) and, on 15th July 2024, revised the BEN-2 format for detailed SBO reporting.

Recently, the MCA has emphasized SBO compliance through email advisories and extended the SBO framework to Limited Liability Partnerships (LLPs) via the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023, notified in November 2023.

This article explains the SBO Rules, covering key definitions, compliance obligations, and recent updates.

What is a reporting company? It means a company incorporated under the Companies Act, 2013 or any previous company law, which required to comply with the provisions of Section 90 & identify the SBO.

What is significant influence? It means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies.

2. RECENT PENALTIES FOR SBO NON-COMPLIANCE

The MCA has been actively enforcing the SBO Rules, demonstrating its commitment to transparency and accountability in corporate governance. Recent actions against high-profile entities underscore the importance of SBO compliance. These orders include actions taken against multinational corporations like Samsung and LinkedIn India for alleged non-compliance with SBO disclosure requirements. These instances highlight the MCA’s stringent approach and serve as a warning to all companies, irrespective of size or industry.

 3. WHO IS A SIGNIFICANT BENEFICIAL OWNER (SBO)?

SBO is as an individual who, acting alone or with others through various instruments like trusts or other persons, possess one or more of the following rights or entitlements in such reporting company, namely:

i. Holds directly or indirectly at least 10% of the shares of the company;

ii. Holds directly or indirectly at least 10% of the voting rights in the shares of the company;

iii. Has right to receive or participate in at least 10% of the total distributable dividends or any other distribution, in a financial year through direct or indirect holdings in the company;

iv. Has right to exercise or actually exercises, significant influence or control, in any manner other than through direct-holdings alone.

Note: If an individual holds only direct holding of shares, he shall not be considered as SBO.

How to identify if someone has direct holding? An individual has a direct holding in the reporting company if they hold shares in their name or have acquired a beneficial interest in the shares of the reporting company and made a declaration in Form MGT-5 to the reporting company.

How to identify if someone has indirect holding? An individual is considered to have an indirect holding in the reporting company if they met any of the following criteria in respect of a member of the reporting company: 

 4. ILLUSTRATIONS TO UNDERSTAND THE SBO CONCEPT

(a) Case 1: A is holding 15% shares of XYZ Limited. Whether Mr. A is an SBO or not?

Mr. A is holding 15% shares of XYZ Limited directly i.e., more than 10%. Since, there are no indirect holdings involved, therefore, Mr. A is not an SBO and is not required to give declaration in BEN-1.

(b) Case 2: A is holding 15% shares of XYZ Limited and his name is not entered into the register of members. However, on behalf of Mr. A name of Mr. B is entered into the register of members. Whether Mr. A is an SBO or not?

Mr. A is beneficial owner and Mr. B is registered owner. Mr. B is holding 15% shares of XYZ Limited on behalf of Mr. A i.e., more than 10%. Since, Mr. is not holding these shares directly, therefore, Mr. A is an SBO and is required to give declaration in BEN-1.

(c) Case 3: A is holding 5% shares of XYZ Limited, and 51% shares of PQR Limited. PQR Limited is holding 15% shares of XYZ Limited. Whether Mr. A is an SBO or not?

Mr. A is holding 5% shares of XYZ Limited directly, along with 15% shares indirectly through PQR Limited. Since Mr. A’s aggregate holding is more than 10%, therefore, Mr. A is an SBO and is required to give declaration in BEN-1.

(d) Case 4: A is holding 2% shares of XYZ Limited, and 51% shares of PQR Limited. PQR Limited is holding 7% shares of XYZ Limited. Whether Mr. A is an SBO or not?

Mr. A is holding 2% shares of XYZ Limited directly, along with 7% shares indirectly through PQR Limited. Since Mr. A’s aggregate holding is less than 10%, therefore, Mr. A is not an SBO and is not required to give declaration in BEN-1.

(e) Case 5: A is holding 60% shares of PQR Limited and PQR Limited is holding 51% shares of XYZ Limited. Whether Mr. A is an SBO or not?

Mr. A is a holding majority stake in PQR Limited and PQR Limited is holding 51% shares of XYZ Limited. Since Mr. A’s indirect holding in XYZ Limited is more than 10%, therefore, Mr. A is an SBO and is required to give declaration in BEN-1.

(f) Case 6: A is holding 60% shares of ABC Limited, ABC Limited is holding 51% shares of PQR Limited and PQR Limited is holding 20% shares of XYZ Limited. Whether Mr. A is an SBO or not?

Mr. A is a holding majority stake in ABC Limited (ultimate holding company), which is a body corporate member of PQR Limited and PQR Limited is holding 20% shares of XYZ Limited (reporting company) i.e., more than 10%. Since Mr. A’s indirect holding in XYZ Limited is more than 10%, therefore, Mr. A is an SBO and is required to give declaration in BEN-1.

5. COMPLIANCE OBLIGATIONS UNDER SBO RULES

(a) Identification of SBO

i. Obligation: The companies are obligated to take reasonable measures to identify their Significant Beneficial Owners (SBOs).

ii. Actions:

– Request information from shareholders.

– Analyze ownership structures.

– Maintain a register of SBOs.

 iii. Notification: Issue a notice in Form BEN-4 to any person (whether or not a member of the company), who the company believes:

– is an SBO of the company; or

– has knowledge of the identity of the SBO or another person likely to have such knowledge; or

– has been an SBO of the company at any time during the immediately preceding 3 years from the date on which the notice is issued.

(b) Declaration by SBO

i. Obligation: Any individual identified as an SBO shall file a declaration with the company.

ii. Actions: File the declaration in Form BEN-1 within 30 days of acquiring significant beneficial ownership or any changes in their ownership details.

(c) Filing of Return of SBO

i. Obligation: When a company received a declaration in Form BEN-1, it is required to file a return with the Registrar of Companies (ROC).

ii. Actions: File Form BEN-2 with the ROC within 30 days from the receipt of the declaration.

(d) Register of Significant Beneficial Owners

i. Obligation: The Company shall maintain a register of Significant Beneficial Owners.

ii. Actions:

– The register of SBO shall be maintained in Form BEN-3.

– The register shall be open for inspection during business hours for at least two hours on every working day.

– The company may charge a fee not exceeding fifty rupees for each inspection.

6. ACTION AGAINST NON-DISCLOSURE

The information required by Notice in Form BEN-4 shall be given by the concerned person within 30 days from the date of receipt of such Notice.

However, where the company

i. has not received the information by the concerned person within 30 days; or

ii. finds such information not satisfactory;

The company shall apply to the Tribunal within 15 days of the expiry of the period specified in the Notice, for an order directing that the shares in question be subject to restrictions with regard to transfer of interest, suspension of all rights (such as dividend, voting) attached to the shares and other restrictions.

The Tribunal may after giving an opportunity of being heard to the parties concerned, make such order restricting the rights attached with the shares within 60 days from the receipt of application.

Further, the company or the person aggrieved by the order of the Tribunal may make an application to the Tribunal for relaxation or lifting of the restrictions, within 1 year from the date of such order.

Provided that if no such application has been filed within 1 year from the date of the order, such shares shall be transferred, without any restrictions, to the Investor Education and Protection Fund.

7. EXEMPTION FROM THE SBO RULES

These rules shall not be made applicable to the extent the share of the reporting company is held by:

(a) the authority (IEPF) constituted under sub-section (5) of section 125 of the Act;

(b) its holding reporting company:

Provided that the details of such holding reporting company shall be reported in Form BEN-2.

(c) the Central Government, State Government or any local Authority;

(d) (i) a reporting company, or

(ii) a body corporate, or

(iii) an entity,

controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments;

(e) Securities and Exchange Board of India registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by the Securities and Exchange Board of India,

(f) Investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

Conclusion: Understanding and complying with the SBO Rules is crucial for Indian companies to ensure transparency and avoid penalties. The recent updates and stringent enforcement by the MCA highlight the importance of identifying and reporting SBOs accurately.

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I hope this article has provided you with the valuable insight into the concept of Significant Beneficial Owners. In case you have any queries, or seeking professional assistance in in setting up a company, SEBI compliances, Corporate Secretarial Work and Procedural Compliances, feel free to contact me at email: [email protected] or Phone: +91 8506028288.