Amendment to Section 89 and 90 is one of the key amendments proposed in Companies (Amendment) Act, 2017 (Amendment Act). While, the Amendment Act is being enforced in phases, stakeholders were given the option to provide the public comments on the draft rules[1] in relation to Significant Beneficial Ownership (SBO), which was issued by MCA on Feb 2, 2018. Thereafter, on June 14, 2018, MCA vide its Notification, has enforced the provisions of amended Section 90 of the Companies Act, 2013 and also issued the Companies (Significant Beneficial Interest) Rules, 2018[2] (‘Final Rules’) in relation to SBO. This is one of the most onerous provision rolled out by MCA. The purpose of this Section is to ask companies ‘Parde ke peeche kaun hai? Saamne aao!’. The present Article explains the provisions of the amended Section 90 and the Final Rules.

Identification of Ultimate Beneficial Owner (UBO) is not a new concept. SEBI provided guidelines for identification of Beneficial Ownership in 2013[3]. Further, RBI also incorporates the thresholds for determining UBO under Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016. However, the thresholds prescribed in each of above is higher than that prescribed in Final Rules.

Meaning of Significant Beneficial Ownership (SBO)

As per the amended Section 90 of the Companies Act, 2013 (‘Act’), SBO is referred as-

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 of the Act.

As per the definition provided in the Act, the government is empowered to prescribe other holding percentage even for the determination of the SBO. Accordingly, the Final Rules provides the following definition as –

“significant beneficial owner means an individual referred to in sub-section (1) of section 90 (holding ultimate beneficial interest of not less than ten per cent.) read with sub-section (10) of section 89, but whose name is not entered in the register of members of a company as the holder of such shares, and the term ‘significant beneficial ownership’ shall be construed accordingly;”

Further, for the said definition, the Final Rules provides the following explanation:

The significant beneficial ownership, in case of persons other than individuals or natural persons, shall be determined as under:

 significant beneficial ownership

The concept of lowering the limit to 10 % might have been adopted from the proposal of the European Commission’s 5th Anti-Money Laundering Directive. However, the same was limited only for higher risk entities. However, it is pertinent to note the Regulators in India such as SEBI and RBI, have also prescribed higher materiality threshold prior to the issuance of the Final Rules.

Meaning of beneficial interest

The meaning of the term has been provided in clause (iii) of Section 21 of the Amendment Act, which provides as under-

In section 89 of the principal Act,— 

(iii) after sub-section (9), the following sub-section shall be inserted, namely:— 

(10) For the purposes of this section and section 90, beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

(i) exercise or cause to be exercised any or all of the rights attached to such share; or

(ii) receive or participate in any dividend or other distribution in respect of such share.”

However, it is pertinent to note that the said provision has not been enforced by MCA. Therefore, to give a clear picture of amended Section 90, the enforcement of the amended Section 89 (10) shall be awaited. 

Declaration of beneficial interest by SBO

Every significant beneficial owner is required to file a declaration in Form No. BEN-1 to the company in which he holds the significant beneficial ownership:

(a) on the date of commencement of the Final Rules within ninety days from such commencement; and

(b) within thirty days in case of any change in his significant beneficial ownership.

Further, every individual, who, after the commencement of these rules, acquires significant beneficial ownership in a company is also required to file a declaration in Form No. BEN-1 to the company, within thirty days of acquiring such significant beneficial ownership or in case of any change in such ownership.

Filing of return of  Significant Beneficial Ownership (SBO)

The declaration of beneficial interest received by the company, is required to be filed in Form No. BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of declaration by it.

Register of Significant Beneficial Ownership (SBO) Rules in a company

Every company is required to maintain a register of SBOs in Form No. BEN-3.

Also, this register shall be open to for inspection during business hours, at such reasonable time of not less than two hours, on every working day as the board may decide, by any member of the company on payment of such fee as may be specified by the company but not exceeding fifty rupees for each inspection.

Notice seeking information about Significant Beneficial Ownership

A company is required to give notice seeking information in accordance with under sub-section (5) of section 90, in Form No. BEN-4.

Company’s onus to ensure compliances

The onus of ensuring compliance is on the companies as they have to seek information from the person whom the company knows or has reasonable cause to believe to be:

a) to be a significant beneficial owner of the company;

b) to be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or

c) to have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued,

and who is not registered as a significant beneficial owner with the company as required under this section.

Exemptions provided from Significant Beneficial Interest Rules, 2018

The rules shall not apply to the holding of shares of companies/body corporates, in case of pooled investment vehicles/investment funds such as Mutual Funds, Alterative Investment Funds (AIFs), Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (lnvlTs) regulated under SEBI Act.

The draft rules provided exemption from compliance under the said section where the registered owner was a body corporate whose equity shares were listed on any stock exchange or was a wholly-owned subsidiary of such body corporate. Foreign listed companies were also proposed to be exempted. The Final Rules withdrew the exemption.

Format of Form/ e-Form under Significant Beneficial Interest Rules, 2018

The format of the Forms BEN-1, BEN2, BEN-3 and BEN -4 has been provided, the electronic version of the same is still awaited. The contents of the forms are same as provided in the draft rules, the only change is in numbering of the forms. 

Conclusion

While the Final Rules and forms seem simple and easy to understand, the real test will be for the companies to ensure compliance of the same. It will be interesting to witness how the companies implement the provisions of the Final Rules. Further, with the lowered threshold limit for determining the ownership, the compliance burden of the companies will increase drastically.

[1] https://taxguru.in/company-law/draft-companies-beneficial-interest-significant-beneficial-interest-rules-2018.html

[2]  https://taxguru.in/company-law/companies-significant-beneficial-owners-rules-2018.html

[3] https://taxguru.in/sebi/sebi-guidelines-identification-beneficial-ownership.html 

Author –

CS Vinita Nair, vinita@vinodkothari.com

CS Nikita Snehil, nikita@vinodkothari.com

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3 responses to “MCA raises curtain on Significant Beneficial Ownership (SBO) Rules- Notifies final rules with several changes”

  1. vswami says:

    ADD-on

    Not to leave the comment displayed incomplete, and serve the intended purpose for the ‘common good’- in its profound sense- suggest to look up , if so care and mind to, the published critique on the cited SC Judgment. Also, if so inspired and really concerned, for getting a grip of the not-so-obvious intricacies the referred novel concepts entail, suggest to look through similar published Articles on this very website, available for open viewing, through a diligent Google search !

  2. Bhanu says:

    50,000 equity shares [15% of share capital] is held by Mr. Rajat (Registered Owner) as the nominee of ABC Company Ltd. (Beneficial Owner), now in this case who is required to file BEN-1 ?

  3. vswami says:

    https://taxguru.in/compan…/mca-raises-curtain-sbo-rules.html

    To call it a ‘significant ‘ – nay Progressive Or Convoluted- development / Reform may possibly have been nagging, in anyone’s hard thinking MIND ?!

    To instantly Recall: “BENEFICIAL” ownership- as opposed to “LEGAL” ownership – is a new concept of quite a recent origin. And, that significantly came to be mooted and seriously discussed,- and is being pursued for different purposes, relentlessly, rightly or wrongly . The Judicary was called upon to adjudicate a closely-related / no-distinct tax issue in the case of ‘Podar Cement’. The dispute, as expected to be known, has been settled by the SC Judgment . For its Report , look up, –
    https://indiankanoon.org/doc/518414/

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