Introduction: Significant Beneficial Ownership (SBO) rules are a crucial aspect of corporate governance, ensuring transparency in the ownership structure of companies. Under Section 90 of the Companies Act, 2013, individuals holding a significant stake in a company must declare their beneficial ownership. This concept is divided into three key parts: percentage of holding/voting power, significant influence, and control.
Section 90 of Companies Act, 2013 says “Every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of section 2, over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed:….”
Although in this Section, 25% threshold is defined for declaring an individual as SBO, however Central Government has prescribed 10% limit under the Rules. So if an individual holds director plus indirect or only indirect holding of 10% or more in a company, then only he will be counted as SBO. Any percentage less than that say 9.55% indirect holding is not required to be reported.
While ‘control’ is specifically defined under Companies Act, 2013, there is no universal definition of ‘significant influence’. Its provision wise definition is given which also points to holding at least 20% of shares/voting rights.
With that said, the basis question comes to definition of SBO on the basis of shareholding. As far as control is concerned, one can say that Managing Director has control over the company hence he is SBO although there are exceptions always as it is a subjective term.
As per point no. (h) of Rule 2 (definitions), “significant beneficial owner” in relation to a reporting company means an individual referred to in sub-section (1) of Section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:
(i) holds indirectly, or together with any direct holdings, not less than ten percent, of the shares;
(ii) holds indirectly, or together with any direct holdings, not less than ten percent, of the voting rights in the shares;
(iii) has right to receive or participate in not less than ten per cent, of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
(iv) has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone:
Explanation I – For the purpose of this clause, if an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner.
Further, direct holding is defined under Explanation II.
Under Explanation III, detailed instances such as through a company or HUF or Trust are mentioned in which indirect holding can be found.
Explanation I to the definition of Significant Beneficial Owner clearly mentions that if an individual does not have any indirect holding, he will not be counted as SBO. Hence, only direct holding will not be considered in simple cases.
However, there is a catch under Explanation IV of the said Rule 2. According to this, ‘if individual or individuals…..act with a common intent or purpose or exercise control or significant influence, pursuant to agreement or understanding, formal or informal….they shall be deemed to be acting together’.
So, if say A & B are brothers and holding shares in C Private Limited, then if they are actually acting together, having same say and acting as one literally and technically, they will be counted as beneficial owners. It does not matter that they are holding only direct shares without indirect holding. On the other hand, if they are acting alone and without each other’s influence, it will not be counted SBO.
Form BEN-2 (after receipt of Form BEN-1) has to be filed by the reporting company whenever any person becomes SBO or if any change takes place in his holding. It may be positive or negative change.
Apart from IEPF Authority, Government undertakings, investment vehicles registered with SEBI or RBI, it is also not applicable to holding reporting company. Hence, holding will only have to file the details of its subsidiary in Form BEN-2. No other details of specific persons have to be filed.
1. Holding and Subsidiary: Company A is holding 51% shares in company B. It is not considered SBO, however company B has to file form Ben-2 declaring that company A is its holding company.
2. Multiple Shareholders: Company A has 4 shareholders a, b, c and d. Each of them hold 24% shares of A. On the other hand, company B has 3 shareholders who are same – a, b and c, each holding 33.33%. In this case, A & B Company may be counted related party but there is no relation of SBO between them. Also, although shareholders are holding more than 10% each but still no SBO filing will be done if they are not acting in concert and have no control. If they have significant influence or not is a question of doubt because significant influence is not separately defined for SBO rules. However, it is often counted as no SI.
3. Diverse Shareholders: Company A has 3 shareholders- X private limited, Y HUF and Z Charitable Trust, each holding 33.33%. Now, all of them will be counted for SBO filing. We will have to check who is holding majority stake in company X private limited, who is Karta of HUF and who is trustee of a charitable trust. These persons will be counted SBO.
Conclusion: Significant Beneficial Ownership (SBO) rules are an essential part of corporate governance, promoting transparency in ownership structures. Understanding the thresholds, definitions, and reporting requirements is crucial for companies and individuals to ensure compliance with these regulations. By adhering to SBO rules, businesses can maintain transparency and accountability in their ownership structures, ultimately contributing to a more transparent and responsible corporate environment.