The Companies Act, 2013 marked a significant shift in Indian corporate governance by introducing the concept of Significant Beneficial Owners (SBOs) through Section 90. This provision aims to identify individuals who exert substantial influence or control over a company, even if their names aren’t on the register of members.
Importance of SBOs:
- Transparency and Accountability: Identifying SBOs shines a light on the true ownership structures of companies, discouraging potential conflicts of interest and fostering better corporate practices. Stakeholders gain a clearer picture of who controls the company, leading to more informed decision-making.
- Compliance with FATF: SBO reporting aligns India with international efforts to combat money laundering and terrorist financing by identifying individuals who may be attempting to hide their involvement in a company.
Identifying SBOs: A Two-Pronged Approach
Section 90 outlines two tests for identifying SBOs:
- Objective Test (Quantitative): An individual is considered an SBO if they directly or indirectly hold at least 10% of the shares or voting rights in the company, or receive at least 10% of the dividends or other distributions.
- Subjective Test (Qualitative): This test focuses on influence or control. An individual can be an SBO if they have the right to exercise, or are currently exercising, significant influence or control over the company, even without holding a majority stake directly. This can be achieved through various means, such as controlling entities that hold significant shares, influencing management decisions, or having veto power over key transactions.
Challenges and Recent Judgements:
Despite its benefits, SBO identification faces certain challenges:
- Complex Ownership Structures: Companies with intricate webs of subsidiaries, partnerships, and trusts can make it difficult to definitively identify all SBOs.
- Defining “Significant Influence or Control”: The grey area surrounding what constitutes “significant influence or control” can lead to uncertainty and potential disputes.
Case Examples:
While there are no reported judgements solely on SBO identification yet, some recent cases shed light on the interpretation of “control” under the Companies Act:
- In the Matter of Linkedln Technology (Order for Penalty): This order from the Ministry of Corporate Affairs (MCA) highlights that exercising control doesn’t necessarily involve direct decision-making authority. In this case, the MCA considered the CEO and Managing Director of a parent company to be SBOs of the Indian subsidiary due to their significant influence over the subsidiary’s operations.
The Governing Laws of the Significant Beneficial Owners:
1. Section 89 of the Companies Act, 2013
2. Section 90 of the Companies Act, 2013
3. Companies (Significant Beneficial Owner) Rules, 2018
4. Companies (Significant Beneficial Owners) Second Amendment Rules, 2019
What is the Meaning of Beneficial Interest?
The Meaning of the term has been provided under section 89 (10) of the Act, as under:
“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.
Significant Beneficial Owner (SBO) as per Companies (Significant Beneficial Owner) Rules, 2018
The definition of Significant Beneficial Owner has been provided in (2)(h) Companies (Significant Beneficial Owner) Rules, 2018 -“significant beneficial owner” in relation to a reporting company means an individual referred to in sub-section (1) of Section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:
(i) holds indirectly, or together with any direct holdings, not less than ten percent, of the shares;
(ii) holds indirectly, or together with any direct holdings, not less than ten percent, of the voting rights in the shares;
(iii) has right to receive or participate in not less than ten per cent, of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
(iv) has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone.
As per section 90 (1) 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, over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed:
Provided that the Central Government may prescribe a class or classes of persons who shall not be required to make declaration under this sub-section.
Direct Determination of SBO
As per the revised SBO rules, an individual should be considered to hold a right or entitlement directly in the reporting Company if he satisfies any of the following criteria:
- The individual holds or acquires a beneficial interest in the share of the reporting company under sub-section (2) of section 89 and has made a declaration in this regard to the reporting company:
This means that the company must be informed about the details of such person by furnishing form MGT 4 and MGT 5 u/s 89
- The shares in the reporting company representing such right or entitlement are held in the name of the individual –
This means that the name of such person should be reflected in the register of members of the company
Indirect Determination of SBO
1. Body Corporate
where the member of the reporting company is a body corporate (whether incorporated or registered in India or abroad), other than a limited liability partnership, and the individual,
- holds majority stake in that member; or
- holds majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of that member;
2. HUF
where the member of the reporting company is a Hindu Undivided Family (HUF) (through karta), and the individual is the karta of the HUF;
3. Partnership
where the member of the reporting company is a partnership entity (through itself or a partner), and the individual, –
(a) is a partner; or
(b) holds majority stake in the body corporate which is a partner of the partnership entity; or
(c) holds majority stake in the ultimate holding company of the body corporate which is a partner of the partner of the partnership entity.
4. Trust
where the member of the reporting company is a trust (through trustee), and the individual, –
(a) is a trustee in case of a discretionary trust or a charitable trust;
(b) is a beneficiary in case of a specific trust;
(c) is the author or settlor in case of a revocable trust.
5. Pooled investment Vehicle
where the member of the reporting company is,-
(a) a pooled investment vehicle; or
(b) an entity controlled by the pooled investment vehicle
based in member State of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member State is a member of the International Organization of Securities Commissions, and the individual in relation to the pooled investment vehicle, –
is a general partner; or
is an investment manager; or
is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.
Section 90 of the Companies Act, 2013
90 (2): The company shall maintain a register of significant beneficial owners in Form No. BEN-3.
90(3): The register maintained under sub-section (2) shall be open for the inspection.
90 (4): Every company shall file a return of significant beneficial ownership and changes therein with the registar.
90(4A): Every Company shall take steps to identify the individual who is the SBO.
90(5) A company shall give notice, in the prescribed manner, to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe—
(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.
90(6): The information required by the notice under sub-section (5) shall be given by the concerned person within a period not exceeding thirty days of the date of the notice.
90(7) The company shall, —
- where that person fails to give the company the information required by the notice within the time specified therein; or
- where the information given is not satisfactory, 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.
RULE 2A: Duty of the Reporting Company
1. Every reporting company shall take necessary steps to find out if there is any individual who is a significant beneficial owner, as defined in clause (h) of rule 2, in relation to that reporting company, and if so, identify him and cause such individual to make a declaration in Form No. BEN-1.
2. Without prejudice to the generality of the steps stated in sub-rule (1), every reporting company shall in all cases where its member (other than an individual), holds not less than ten per cent of its;-
(a) shares, or
(b) voting rights, or
(c) right to receive or participate in the dividend or any other distribution payable in a financial year, give notice to such member, seeking information in accordance with subsection (5) of Section 90, in Form No. BEN-4
Rule 3 Declaration of the SBO
On the date of commencement of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, every individual who is a significant beneficial owner in a reporting company, shall file a declaration in Form No. BEN-1 to the reporting company within ninety days from such commencement.
Every individual, who subsequently becomes a significant beneficial owner ,or where his significant beneficial ownership undergoes any change shall file a declaration in Form No. BEN-1 to the reporting company, within thirty days of acquiring such significant beneficial ownership or any change therein.
Rule 4: RETURN OF SBO IN SHARES
Upon receipt of declaration under rule 3, the reporting company shall file a return 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 such declaration by it, along with the fees as prescribed in Companies (Registration offices and fees) Rules, 2014.
The Companies Act, 2013 introduced Significant Beneficial Owner (SBO) reporting, a positive step towards strengthening transparency and accountability in Indian corporations. This initiative fosters better decision-making by stakeholders through a clearer understanding of who controls the company, ultimately reducing potential conflicts of interest. Furthermore, SBO reporting aligns India with global standards for combating financial crimes, attracting investors who value transparency in ownership structures and contributing to a more robust investment climate. While navigating SBO identification in complex structures can be challenging, the government can address this by issuing clear and concise guidelines, particularly for intricate corporate structures. Additionally, collaborative efforts between stakeholders and the government, along with utilizing technology-driven solutions, can streamline the process and ensure efficient implementation. By focusing on these improvements, India can leverage SBO reporting to not only enhance transparency and investor confidence but also position itself as a leader in adopting best practices for corporate governance.
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