Significant Beneficial Ownership Decoded

Background and Foreword

Section 89 of the Companies Act, 2013 (2013 Act) obligates every person acquiring/ holding beneficial interest in a share and the legal owner to make a declaration to the company in respect of such beneficial interest. In view of the absence of a definition of beneficial interest in a share in a company, absence of any obligation on a company to collect information on beneficial ownership, no enabling provisions to make a separate register on beneficial ownership, in the Act, the existing provisions were being considered inadequate for the purpose of mandating a register of beneficial owners of the company. Therefore, Section 90 was inserted by the Companies (Amendment) Act, 2017 and the corresponding rules were notified later.

Evolving Jurisprudence on SBO Rules

On June 13, 2018, the Ministry of Corporate Affairs (“MCA“) for the first time introduced the Companies (Significant Beneficial Owners) Rules, 2018 (the “Principal Rules“/ “SBO Rules“) which provided for a new framework relating to the concept of Significant Beneficial Owner (“SBO“).

However, soon after the SBO Rules came into effect, stakeholders started facing numerous difficulties in complying with the SBO disclosure norms, which obligated the MCA to revise the reporting norms and representation were made to MCA to issue a new Form altogether.

Thereafter basis the representation received, on February 08, 2019, MCA issued the Companies (Significant Beneficial Ownership) Amendment Rules, 2019 (“Amendment Rules“) thereby removing the ambiguities and providing a more comprehensive regime for reporting of the SBO.

The Amendment Rules provided for various changes to the extant Principal Rules, and the same have been captured in a question answer below for the sake of easy understanding:

1. What is the intention behind the SBO Rules?

The only intention behind the SBO reporting framework is to identify the ultimate beneficial owner who is exercising any indirect right or holding any indirect shareholding in the reporting company through any investment model. Hence, the intent is to identify the beneficial persons whose identity is not known to the company and obtain required necessary disclosures regarding their manner and extent of holding in the reporting company.

The real owners tend to create a chain of complex corporate structures in order to execute transaction so that their identify remains undisclosed. Keeping in mind the same, the concept of SBO was launched in India last year with an intent to curb the illegitimate activities and identify the natural persons controlling a corporate entity.

2. Who is a Significant Beneficial Owner/ SBO?

As per Rule 2(1)(h) of Significant beneficial owner or SBO in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who is 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:-

• holds indirectly, or together with any direct holdings, not less than 10% of the shares;
• holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;
• has right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
• has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone.

3. Who is a reporting company?

As per Rule 2(1)(f) of the SBO Rules, a reporting company means a company as defined in clause (20) of section 2 of the Act, required to comply with the requirements of section 90 of the Act.

4. What is meaning of the term “Significant Influence”?

The Term Significant Influence is defined under Rule 2(1)(i), which means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies.

5. What is the meaning of the term “Acting together” as used while defining SBO?

The term Acting together is defined as an explanation to Rule 2(1)(h) of the SBO Rules, which means if any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be called as ‘acting together’.

6. Who are excluded from the applicability of SBO Rules?

In terms of Rule 8 of the said rules, the SBO Rules, shall not apply to the extent of share of reporting company is held by:

• An authority constituted under sub-section (5) of section 125 of the Act (i.e. Investor Education and Protection Fund);
• Holding reporting company (however, the details of such holding reporting company are required to be reported in Form BEN-2 );
• The Central Government, State Government or any local Authority;
• A reporting company, or a body corporate, or an entity, controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments;
• Securities and Exchange Board of India registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by the Securities and Exchange Board of India;
• lnvestment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

7. What is the deciding factor that helps to determine whether an individual will be deemed to be a SBO or not?

The Amendment Rules have made it crystal clear that, in order to be a SBO, a person must have an indirect right or entitlement. Therefore, if an individual exercises direct holding in the reporting company, he/ she shall not be termed as SBO. Accordingly, the deciding factor comes out to be exercising indirect right or entitlement.

8. When an individual shall be considered to hold a right or entitlement in the reporting company directly?

In terms of the Explanation II of clause (h) of sub-rule 1 of Rule 2 of SBO Rules, an individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely.-

• the shares in the reporting company representing such right or entitlement are held in the name of the individual (e. the name of the individual is entered in the register of members); or
• 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 (i.e. a declaration in Form MGT-4 and MGT-5 has already been made by such individual).

9. When an individual shall be considered to hold a right or entitlement indirectly in the reporting company?

As far as an individual is exercising direct shareholding in the reporting company, the SBO Rules do not get triggered. However, the difficulty arises when the member or shareholder is non-individual. The SBO Rules prescribes certain criteria for determination of individual where the shares of the Reporting Co are held by person other than individuals, based on the nature or status of member/ shareholder.

In terms of Explanation III of clause (h) of sub-rule 1 of Rule 2 of SBO Rules, an individual shall be considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company, namely:

S. No.	Particulars of Member	Criteria for individual
1.	Where the member of the reporting company is a body corporate (whether incorporated or registered in India or abroad), other than limited liability partnership	An individual who: 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.	Where the member of the reporting company is a Hindu Undivided Family (HUF) (through karta)	An individual who is Karta of such HUF
3.	Where the member of the reporting company is a partnership entity (through itself or a partner)	An individual who is: a partner; or holds majority stake in the body corporate which is a partner of the partnership entity; or holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.
4.	Where member of the reporting company is a trust (through trustee)	An individual who is: a trustee in case of a discretionary trust or a charitable trust; a beneficiary in case of a specific trust; the author or settlor in case of a revocable trust.
5.	Where the member of the reporting company is: a pooled investment vehicle or an entity controlled by the pooled investment vehicle, based in a 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 Organisation of Securities Commissions	An individual in relation to pooled investment vehicle who is: a general partner; or an investment manager; or a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity
6.	Where the member of a reporting company is a pooled investment vehicle or an entity controlled by the pooled investment vehicle, based in a jurisdiction other than that specified in clause (5) above.	An individual who belongs to any of the clauses in (1) to (4) above.

10. What is the meaning of the term “Majority Stake”?

In term of Rule 2(1)(d) of SBO Rules, “Majority Stake” means-

• holding more than 50% of the equity share capital in the body corporate; or
• holding more than 50% of the voting rights in the body corporate; or
• having the right to receive or participate in more than 50% of the distributable dividend or any other distribution by the body corporate.

11. Are there any reporting requirements under the said SBO Rules?

There are certain reporting requirements under the SBO Rules and the same have been captured below:

Reporting by SBO	Initial Reporting: The Amendment Rules provide that 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 90 days from the commencement of the said rules. Subsequent Reporting: 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 30 days of acquiring such significant beneficial ownership or any change therein.
Reporting by Company	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. MCA clarification on BEN-2: MCA vide its Circular dated 06.09.2018 had clarified that the time limit for filing e-form BEN-2 would be 30 days from the date of its deployment on the MCA portal. Recently, MCA on 01.07.2019 has notified the deployment of Form BEN-2 on its portal. Accordingly, the same has to be filed within a period of 30 days thereof.
Maintenance of Register of SBO by reporting company	The company shall maintain a register of significant beneficial owners in Form No. BEN-3. The said register shall be open 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.
Duty of reporting company	The Amendment Rules have imposed a duty on reporting company to find out whether any individual is significant beneficial owner in the company and in case, if there is any such individual, then he/ she is required to make a declaration in Form BEN-1. Further, every reporting company is required to give notice to any member (other than individual), in Form BEN-4, who holds atleast 10% of shares or voting rights or right to receive or participate in the dividend or any other distribution payable in a financial year in the company.

12. On whom does the onus to identify a SBO lie?

The onus lies with the reporting company to identify a SBO  and cause such SBO to make a declaration in the prescribed Form.

13. On whom does the onus to declare significant beneficial interest lie?

It is the duty of the SBO to declare his beneficial interest to the reporting company. In turn, the reporting company is required to file the said disclosure with the Registrar after receiving the same from SBO.

14. Whether the reporting company is required to file form in case there is no SBO?

In case there is no SBO in the company, the requirement to file form shall not apply.

Conclusion 

Corporate sector is akin for misuse of corporate vehicles for the purposes of tax evasion and money laundering for illegitimate purposes. There are various companies having a complex shareholding structure. The real owners tend to create a chain of complex corporate structures in order to execute transaction so that their identify remains undisclosed. Keeping in mind the same, the concept of SBO was launched in India last year with an intent to curb the illegitimate activities and identify the natural persons controlling a corporate entity. Ever since the commencement of section 90 under the Companies (Amendment) Act, 2017, the concept of SBO and reporting requirements under the SBO Rules has gained much popularity. The Amendment Rules seek to break through the shell and identify the ultimate owners exercising indirect shareholding in the company, thereby shifting the onus on the SBO to provide declaration to the reporting company in case the SBO is exercising any significant beneficial interest in the company and in case of failure to supply the required information, apply sanctions in the form of suspension of rights against the beneficial interests subject to adequate safeguards.