The Ministry of Corporate Affairs (MCA) recently imposed a fine of Rs. 27,10,800 on the world’s largest professional networking platform, LinkedIn Technology, its directors, and beneficial owners, including Satya Nadella and Roslanky, for incorrect disclosures made by the company under Section 89 and for the non-disclosures under Section 90 of the Companies Act, 2013 (Act). MCA’s action highlights the increased scrutiny on disclosure requirements and underscores the need for a robust mechanism to ensure accurate disclosures.
The company has recently filed form MGT-6 under section 89 of the Act, wherein it reported LinkedIn Ireland as a beneficial owner and LinkedIn Technology as registered holder of the company and date of creation of beneficial interest was incorrectly reported as 11.01.2024 whereas the actual date of beneficial interest predates the reported date and had already been noted in the annual returns filed since FY 2014-15.
Beneficial Interest
Beneficial interest is the right to receive benefits on shares held by another party as opposed to legal title to that thing.
In major instances, registered owners/legal owner are the nominee shareholders appointed by the beneficial owners such as –
- Promoters – to fulfil minimum shareholders requirement.
- HUF, Partnership Firm – who directly cannot purchase the shares.
- Holding Companies of Wholly Owned Subsidiary.
It can be inferred from the above instances, that the ultimate benefits in the nature of control, financial interests, participant in dividends etc. attached to the shares of the company are actually derived by the beneficial owners of the company and not the legal owners. Therefore, it is important that ROC and various other authorities are aware about the actual beneficiary of the shares.
A declaration of beneficial ownership acts as a pre-cursor for the Government to examine benami transactions. In fact, the legislative object was to ensure that all benami holdings of shares are reported. Also, unless the beneficial owner ensures public declaration of his beneficial ownership in shares by filing of return with the ROC, no such beneficial ownership can be enforced in court.
Analysis of section 89 – Declaration in respect of beneficial interest in any share
As per the provisions, if any person who has been registered as the shareholder in the register of members of the company, does not hold the beneficial interest in such shares, such registered owner shall make a declaration to the company in Form MGT-4 within 30 days from the date of registration.
Whereas the beneficial owner, the person holding the beneficial interest in the shares of the company are required to make a declaration to the company in FORM MGT-5 within 30 days from the date of acquisition of beneficial interest.
On receipt of the aforementioned disclosures, the company is required to file an intimation under Form MGT-6 within 30 days of receipt of declaration with MCA.
Also, any change in the interest is required to be disclosed in accordance with manner provided above.
Further, every company in its Annual Return designates a person who is responsible for furnishing the necessary information relating to the beneficial interest to the ROC and other authorities. The company generally designates a CS or any of its KMP or director as designated person.
Adjudication of penalty under Section 89
LinkedIn’s plea to withdraw the erroneous e-form was not allowed by the MCA and it was held that since the declarations made by the registered and beneficial owners of the company have failed to abide by the requirements as to the timelines for the form and date of creation of beneficial interest was also erroneously mentioned, a fine of Rs. 2,80,400 each was slapped on the registered and beneficial owners of the company.
It is imperative to note that the detailed adjudication of compliance under Section 89 of the act led to the identification of the non-compliance under Section 90 which further led to the imposition of a fine of Rs. 21,50,000 on the company and its beneficial owners, including Satya Nadella and Roslanky, and 7 others. A detailed analysis of the non-compliance under Section 90 will be addressed in a separate article.
The LinkedIn case underscores the necessity for heightened vigilance in making disclosures and emphasizes the importance of consistency and accuracy in corporate reporting to ensure compliance with legal requirements and maintain transparency.
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