Significance of Declaration related to Significant Beneficial Owners

 ‘Significant Beneficial Owner’

In the process of justifying its election manifesto regarding strengthening of leash on money laundering, Modi Government has yet again come up with a subtle yet effective regulation. The motive in the instance is to identify the ‘Significant Beneficial Owner’ running the show behind the veil of corporations/ partnership firms/ trusts, etc.

Ever since it has become a part of the Financial Action Task Force from 2010, India has initiated its fight against money laundering and financing of terrorism, and subsequent modifications and alterations have therefore introduced in the existing legislative scheme.

The introduction of Prevention of Money Laundering Act, 2002 along with its consequent amendments; the amendment on the existing Benami Transactions (Prohibition) Act, 1988; the Black Money (Undisclosed Foreign Income and Assets and Imposition of Tax) Act, 2015 have all been brought with the intention to unearth what was hidden behind layers of corporate structures.

The Companies Act, 2013 (‘the Act’) has also been modified and updated at regular intervals to give effect to the legislative intent to curb the menace caused by deriving benefits through corporate veil.

The introduction of Companies (Restriction on number of layers), 2017 effective vide September 20, 2017 can therefore be seen as the first step in the process of mandating companies to come forward on their own and accept the authority of the actual Natural Person running the show through layers of subsidiaries.

Vide Companies (Significant Beneficial Owner) Rules, 2018, (‘Rules’) effective from June 14, 2018, responsibility has been now been casted on the ‘Significant Beneficial Owner’ as well as the company to disclose the identity of the actual ‘Natural Person’ exercising ‘control’ over the affairs of the company to the Registrar.

‘Significant Beneficial Owner’ (‘SBO’) has been meant to include an individual holding ultimate beneficial interest of not less than 10%, but whose name is not entered in the register of members of the company as the holder of such shares.[1]

‘Beneficial interest’, for the purposes of the Act includes the right or entitlement of a person alone or together with any other person to exercise or cause to be exercised any or all of the rights attached to such share, or receive or participate in any divided or other distribution relating to such share, either directly or indirectly, through any contract, arrangement or otherwise.[2]

Vide simplified explanations to the said Rules, the intention has further been made clear that:

1. In case the shareholding is held by a company, the SBO is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trusts, holds not less than ten per cent of the share capital of the company or who exercises significant influence or control in the company through other means;

2. In case the shareholding is held by a partnership firm, the SBO is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trusts, holds not less than ten per cent of capital or has entitlement of not less than ten per cent of profits of the partnership;

3. In case the shareholding is held by a person where no natural person is to be identified under the above mentioned heads, the relevant natural person who holds the position of senior managing official;

4. In case the shareholding is held by a trust through trustee, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with not less than ten per cent interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.

The provision shall also treat Global Depository Receipts, Compulsorily Convertible Preference Shares or Compulsorily Convertible Debentures as ‘Shares’ for calculating the total stake.

Section 90 of the Act, read with the Rules, therefore requires the companies to do the following:

• To maintain a register[3] of the interest declared by such individuals and changes therein which shall include the name of individual, his date of birth, address, details of ownership in the company and such other details as may be prescribed.
• To file a return[4] of significant beneficial owners of the company and changes therein with the Registrar containing names, addresses and other details as may be prescribed within such time, in such form and manner as may be prescribed.
• To give notice[5] to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe—

1. to be a significant beneficial owner of the company;

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

3. 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.

• To apply to the Tribunal within a period of fifteen days of the expiry of the period specified in the notice, for an order directing that the shares in question be subject to restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other matters as may be prescribed:

1. where that person fails to give the company the information required by the notice within the time specified therein; or

2. where the information given is not satisfactory

The Tribunal may, after giving an opportunity of being heard to the parties concerned, make such order restricting the rights attached with the shares within a period of sixty days of receipt of application or such other period as may be prescribed.

• In case a company fails to maintain the register and file the details of the same with the Registrar or denies inspection as provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than ten lakh rupees but which may extend to fifty lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.

The onus on the SBO can be summarised as under:

• Declaration[6] to be given to the company stating the particulars of the shares in which the significant beneficial interest is held, particulars of the SBO, particulars of the registered owner, details of the significant beneficial interest including the reason for not registering the shares in the SBO’s name, as well as particulars of the person from whom the significant beneficial interest is acquired.
• Where the SBO does not by itself make the declaration, the same shall be asked by the company through notice given in this regard, and the same shall be replied within a period not exceeding thirty days of the date of the notice.
• If any person fails to make a declaration as required under the provision, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.
• If any person willfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under this section, he shall be liable to action under section 447.

Exemption however is granted to Government Companies;[7] holding of shares of companies or body corporate in cases of pooled investment vehicles or investment funds in the nature of Mutual Funds, Alternate Investment Funds, Real Estate Investment Trusts and Infrastructure Investment Trusts regulated under SEBI Act.

Time Limit for the declaration to be made by the SBO is within ninety days from the commencement of the Rules, and further within thirty days in case of any change post first declaration.

Takeaway

Whilst the introduction and enforcement of the provisions are being co-ordinated efficiently, the efficacy of the law shall be tested only on two grounds:

• Number of SBOs coming forth and declaring their interests;
• Effective use of this information by the Registrars.

It remains to be seen what role does the information gathered through the forms under the Rules play, in the light of fugitive offenders fleeing the country with meagre, if not none resources to pay back the debts owed by them through corporate vehicles.

[1] Rule 2 (e) of the Rules.

[2] Section 89(10) of the Act (Yet to be enforced)

[3] In Form No. BEN-3

[4] In Form No. BEN-2

[5] Format as in Form No. BEN-4

[6] In Form No. BEN-1

[7] Exemption Notification to Government Companies dated June 05, 2015