OBJECTIVE OF SECTION 89 & 90 OF COMPANIES ACT, 2013 IN RESPECT OF ‘BENEFICIAL INTEREST’
Although both the provisions are based on two concepts ‘beneficial interests’ & ‘beneficial owner’. Both these terms are to be understood in respect of both the Sections and although both sections are based on these two expressions, yet both the sections have a distinction between them.
Notably, the professionals were in a dilemma as what amounts to “beneficial interest”, the fact that who shall be “beneficial owner” was clear from the time when Section 89 has been enforced i.e 1st April, 2014, “beneficial owner” will be the person where “beneficial interest” is vested, yet there was lot of ambiguity as to what amounts to “beneficial interest” and on what grounds we can say that the “beneficial interest” lies with a person, not being a person whose name is registered in the Register of Members.
A new sub-section (10) was inserted to Section 89 through Companies (Amendment) Act, 2017 to define “beneficial interest” w.e.f 13th June, 2018, simultaneously, Section 90 was also substituted for identification of SBO. Till 13th June, 2018, Section 90 was titled “Investigation of beneficial ownership of shares in certain cases” and further on reading the section, the Central Government was empowered to investigate the “beneficial interest” in line with Section 216 which empowers the Central Government to “investigate the ownership in any Company”.
With new Section 90, the Central Government certainly shifted its burden to investigate ownership to the companies, further, the Central Government has ensured that all companies and SBOs report actual ownership in terms of the Companies (Significant Beneficial Owners) Rules, 2018 (which were further amended on 8th February, 2019 by MCA to make it par with the existing global practice in various developed nations for reporting Significant Beneficial Owners and also threshold for SBO has also been reduced to 10% to make it at par with global threshold of 10% Voting Power)
The objective differs in the following sense:
1. Section 89 has an objective as to check that where does the “beneficial interest” lies, irrespective of the quantum of “beneficial interest”, if any person whose name is registered in respect of particular shares doesn’t have any beneficial interest in those shares shall declare to Company in MGT-4 and person who has been vested with such beneficial interest declare in MGT-5 and subsequently, the Company shall file e-Form MGT-6 to RoC.
2. It may not be necessary every time when company receives declaration of MGT-4 & MGT-5 may be having any malafide intention, sometimes, the registered owner holds shares for the benefit of another person for the shares registered in his name. Section 89 places an obligation to disclose the beneficial interest if not held by the registered owner.
3. For an example, it may be possible that few persons associated and formed trust and the trust holding shares in any company for the benefit of the persons who are ultimate beneficiaries of the trust. Hence, Section 89 shall not only be applicable where it is suspicious that beneficial owner is some different person. So, the interpretation has to be widened while applying Section 89. The only grounds on which the applicability stood is the “placing of beneficial interest”, if it is vested in person otherthan the registered owner then this Section is triggered, irrespective of the intention of the beneficial owner and registered owner.
4. Now, the very important discussion is what amounts to beneficial interest and how to ascertain that “beneficial interest” lies with another person. As discussed, the expression “beneficial interest” was not defined in the Act, on 13th June, 2018, through Companies (Amendment) Act, 2017, the expression was defined as follows:
“(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—
The definition gives a ground for locating the “beneficial interest” that any contract or arrangement vesting “rights or entitlements” arising out of a share to the person apart from the person who is registered as holder of that share. Also this definition is wide enough to cover the manner in which rights, the wordings “exercise or cause to be exercised” clearly mean that the right exercised in any manner.
5. After ascertaining that the beneficial owner and registered owner are two different persons then process of reporting the same in Form MGT-4, MGT-5 & e-Form MGT-6 shall be followed.
6. Section 90 on the otherside is slightly distinctive in nature in comparison with Section 89, initially when the SBO concept was introduced in Companies (Amendment) Act, 2017 the distinction was not identifiable as the SBO Rules prior to the amendment Rules, was applied parallel to the Section 89, as the initial definition of SBO in previous Rules had stipulated that an SBO holding “beneficial interest” at least 10%. Now there was a confusion that while in compliance of Section 89 in which no threshold for the quantum of “beneficial interest” was given, then it was understood that compliance of Section 89 shall be made even where the quantum of “beneficial interest” exceeds 10%, let’s say even where a person alone or together with one or more other persons enjoys beneficial interest about 100% then also Section 89 is triggered or the quantum is 1% then also Section 89 is triggered.
7. Now, the question was that a person having beneficial interest of 20% has to comply with Section 89 and also the SBO Rules, right from the date on which beneficial interest was acquired or whenever there is any change in beneficial interest, now that will result in duplicacy of reporting of beneficial interest. Further, the previous SBO rules was restricted to the two level hierarchy for identifying SBO as the Rules put a check upto the immediate member of the “reporting company”.
8. The new SBO Rules notified on 8th February, 2019, changed the perspective of SBO concept, first, the concept was made more practicable and new rules stand in distinction with Section 89 clearly there’s no case there where there will be duplicacy in reporting beneficial interest. Secondly, the new rules seek to pierce the various layers of bodies/entities and identify the ultimate individual who can be identified as an SBO if the provisions of Explanation III to Rule 2(h) are triggered. Secondly, if any individual, if he satisfies any ONE or MORE criteria in Explanation III shall be treated to be an SBO and shall give BEN-1, through this the concept of “beneficial owner” has been extended to the ultimate individual who is falling in criteria of Explanation III “may or may not hold the beneficial interest in the shares of the reporting company. That’s a very surprising factor in determining SBO that the story of SBO was started on the grounds of “beneficial interest” now it stands to include any person falling under SBO Rules irrespective the SBO “may or may not” have beneficial interst.
9. Section 89 has been harmonized in a manner that if any individual having “beneficial interest” in any shares not registered in his name and has declared in Form MGT-5 to the Reporting Company shall be treated to have rights or entitlements in the shares “DIRECTLY”. [Explanation II to Rule 2(h)]