The concept of beneficial ownership has emanated from FATF recommendations, Panama Paper Case, PMLA Rules, Prohibition of Benami Transactions and myriad other factors. Under the FATF Recommendations, 2012 and 2023, the member states are required to collect and scrutinize the data of companies for prevention of money laundering, counter terrorist financing. Under PMLA Rules, 2015, the banks are required to check KYCs of the clients. In India, there have several attempts to refine and amend the Significant Beneficial Ownership under Section 89/90 and the rules made thereunder.
Let us start to explore the concept /compliance:
1. Beneficial Owner: It simply means that owner who takes the benefits or has beneficial interest in share of a company.
Beneficial interest as explained in Section 89 (10) includes:
- It is a right or entitlement of a person in a share or right to receive or participate in any dividend or other distribution.
- Mechanism can be through contract or arrangement or any other mode; direct or indirect; that person alone or together with any other person.
2. Compliance for Beneficial Owner under Section 89: Compliance needs to be done by the reporting company, its officer and the beneficial owner.
- Beneficial owner to declare its/his interest or any change to the reporting company within 30 days.
- Reporting company shall maintain and update the Register of Beneficial Owner and file return within 30 days to the ROC.
- Reporting Company shall designate a CS/KMP to update ROC regarding beneficial interest.
3. Individual as Significant Beneficial Owner: Section 90 and SBO Rules are relevant here. In simple terms, there must be certain threshold (a critical level) beyond which a beneficial owner would become a Significant Beneficial Owner (SBO).
- If a person holds more than 25% beneficial interest or other prescribed percentage, then he is a SBO, as per Section 90 (1)
- However, SBO Rules has lowered this percentage to 10% under Rule 2(1)(h).
Please note that there is difference of threshold as per Section 90 and Rule 2 (1)(h) of SBO Rules
- So, SBO is an individual (not other person) who holds 10% of shares or 10% of voting rights or has rights over 10% of distributable dividend or has right of significant influence or control.
- Here, the instruments like GDR, CCPS and OCD shall also be treated as shares.
4. Legal Entity as Significant Beneficial Owner:
If member of the reporting company is legal entity, there are separate yardsticks to identity SBO:
| Legal Entity as member | SBO | Conditions |
| Body Corporate | Individual | Holding majority stake in the member or who holds majority stake in ultimate holding company |
| HUF | Individual | Karta of HUF |
| Partnership | Individual | (i) Partner or
(ii) Holder of majority stake in the body corporate which is a partner in the partnership or (iii) Who holds majority stake in the ultimate holding company of the body corporate which is partner of the partnership entity. |
| Trust | Individual | – Who is trustee of a discretionary trust or charitable trust
– Who is beneficiary of a specific trust – Who is author or settler of a revocable trust. |
| Pooled Investment Vehicle or controlled entity | Individual | CEO- in case of body corporate or partnership or individual General Partner
Or Individua Investment manager |
5. Compliance Requirements for SBO:
1. SBO Action: He must declare beneficial interests within 30 days in Form BEN-1.
2. Reporting Company Action:
-
- It must file return in Form BEN-2.
- Maintain a register of significant beneficial owners in Form BEN-3.
- Company issues notice in Form BEN-4 if SBO not identified.
- May apply to NCLT for putting restrictions on share/transfer.
6. Consequences for the non-compliance of SBO:
- Non-declaration by an individual under Section 90(1) incurs a penalty of INR 50,000 plus Rs. 1000/- every subsequent day subject to Rs. 2 lakhs
- Companies failing to maintain registers face a penalty of INR 1 lakh plus Rs. 500/- per subsequent day subject to maximum of Rs. 5 lakhs
- Officers in default may be penalized up to INR 25,000 plus Rs. 200 per subsequent day subject to Rs. 2 lakhs.
- Willful furnishing of false information may lead to legal action under Section 447. (for Fraud)
7. Exemptions from SBO Rules:
- Exemption for shares held by authority under Section 125(5).
- Holding company shares exempt (reported in Form BEN-2).
- Central/State Govt. and local authorities are exempt.
- Entities controlled by Govt. are exempt.
- SEBI, RBI, IRDAI, PFRDA-regulated entities are exempt.
In conclusion, the concept of SBO is ever evolving and may soon reach to the level of Ultimate Beneficial Ownership. Meanwhile, the companies need to be very careful and must ensure the compliance.
In case you have any concern and queries or need any support in compliance/Company Law/NCLT, you may like to contact us.
Abhinarayan Mishra, FCA, FCS; Managing Partner, KPAM & Associates, Chartered Accountants, Dwarka, New Delhi; +9910744992, ca.abhimishra@gmail.com
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