Significant Beneficial Ownership- Lifting Corporate Veil

Background

Complex structures and chains of corporate vehicles are being used to hide the real owner behind transactions. To counter it, jurisdictions world over, have been putting in place mechanisms to identify the natural person controlling a corporate entity.

Companies (Amendment) Act, 2017 (the Amendment Act) passed on 3 January 2018 has made several changes to the Companies Act, 2013 (2013 Act). One of the crucial amendments introduced by the Amendment Act is disclosure related to Significant Beneficial Ownership (SBO).

Companies Act, 2013 Act merely provided for the investigation into the Beneficial Ownership of the company by the central government (CG), if it deems fit. However, section 22 of the Amendment Act contains completely revamped provisions relating to SBO

Section 90 of the Companies Act 2013 (2013 Act) has been amended by Companies (Amendment) Act, 2017. It requires disclosures to be made:

To the company by individuals holding “significant beneficial interest” in shares of the company; and

By the company to the Registrar of Companies (RoC).

The amended section 90 of the 2013 Act and Companies (Significant Beneficial Owners) Rules, 2018 (Rules) are effective from 13 June 2018 and are aligned with FATF recommendations.

Section 90 has been notified with the intent of identify Significant Beneficial Owner in a company. The concept of identifying Ultimate Beneficial Owner/ Significant Beneficial Owner is not a new concept. The requirement has already been prescribed by following:

• SEBI under Guidelines on Identification of Beneficial Ownership2;
• RBI under Reserve Bank of India (Know Your Customer (KYC)) Directions, 20163;
• Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 20054;
• Jurisdictions world over have been putting in place mechanisms to identify the natural person controlling a corporate entity.

The global move to identify natural persons is the realization that artificial legal entities continue to proliferate; while these entities are owned by natural persons at end of the spectrum; however, the entities are owned through a complex web of holdings and cross-holdings, such that in most cases, the ownership of the entities is opaque. Artificial legal entities are often used for illicit purposes including global crime. It is important to identify individuals behind companies so as to keep tab on the individuals and hold them accountable.

In essence, companies are inanimate; their brain and brawn are natural persons. The idea of identification of the natural persons is to associate companies with natural persons.

There may not be immediate implications of identification of SBOs- for example, the concepts of an officer in default, promoter, related party, etc do not refer back to SBOs. However, it may be expected that the jurisprudence at some stage will start holding SBOs responsible for deeds of companies.

Key Highlights of section:

“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:

• exercise or cause to be exercised any or all of the rights attached to such share; or
• receive or participate in any dividend or other distribution in respect of such share.

MCA issued Notification regarding Corrigendum8 to the commencement notification of the Companies (Amendment) Act, 2017 to the effect that in MCA’s notification dated 13.06.2018, regarding commencement of certain provisions of Companies Amendment Act, 2017, enforcement of Section 22 should be read as “Section 21(iii) and Section 22”. Section 21(iii) is based on the definition of “beneficial interest” as per Section 89 (10) of the Companies Act, 2013. Accordingly, the same has been enforced as per the corrigendum issued to the MCA notification dated 13.06.2018.

“Shares” under 2013 Act means a share in the share capital of the company and includes stock. Under the SBO Rules, it is clarified that “share” includes instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures.

“SBO” means every individual who acting alone or together with one or more persons or Trust, including a Trust and persons resident outside India, holds beneficial interests, of at least 10%, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in section 2(27) of 2013 Act, but whose name is not entered in register of members of a company as the holder of such shares.

Therefore, now the threshold limit for determination of SBO has been reduced to 10 %.

Applicability

The provisions are applicable to all companies without exception – i.e., pubic as well as private companies, listed as well as unlisted companies, small as well as large companies.

The compliance with the SBO identification may be perfunctory in case of OPCs. It may also seem unnecessary in case of Sec 8 companies. However, the law does not seem to make any exception at all.

The intent is to identify natural persons who may hold shares through persons resident outside India as well. Therefore, there is no reason for the company to exclude shareholders that are companies incorporated outside India from identifying the natural persons and providing declaration to the companies from such persons.

where a company has shareholders who are individuals/ natural persons and their names reflect in register of members for such shareholding and holding the beneficial interest in relation to such shares, such company is not required to identify SBOs under Section 90.

The Section becomes applicable where a company has shareholders, other than natural persons/ individuals, holding beneficial interest as per the thresholds Or, alternatively, the section applies when the natural persons holding significant beneficial interest are beneficial owners, without their names being entered into the register of members

SBO related provisions do not apply to holding of shares of companies/body corporates by pooled investment vehicles/ investment funds such as Mutual Funds, Alternative Investment Funds (AIF), Real Estate Investment Funds (ReIT), Infrastructure Investment Trust (InvIT) regulated under SEBI Act, 1992

Determination of SBO

where the member is 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 at least 10% of share capital of the company or who exercises significant influence or control in the company through other means

where the member is 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 at least 10% of capital or has entitlement of at least 10% of profits of the partnership.

where no natural person is identified in case of a member being a company or a partnership firm, the SBO is the relevant natural person who holds the position of senior managing official A principal officer or compliance officer is identified/ designated to ensure compliance under particular rules/ regulations eg. principal officer for the purpose of PMLA or compliance officer under SEBI (PIT) Regulations or Listing Regulations. They are not the ones who take strategic decisions.Therefore they cannot be identified as SBO

where the member is a Trust (through trustee), the identification of SBO shall include identification of the author of the Trust, the trustee, the beneficiaries holding at least 10% interest in the Trust and any other natural person exercising ultimate effective control over the Trust through a chain of control or ownership

But, In case of a public charitable trust, the beneficiaries cannot be identified. Similarly, in case of discretionary trust i.e. a trust in which the share of each beneficiary are not fixed by the settlor in the trust deed, but at the discretion of the trustees, the beneficiaries cannot be regarded as SBO. Accordingly, the beneficiaries can be identified only in case of non-discretionary, determinate trusts.

Illustration 1:

A company named XYZ Ltd has following Shareholders:

Mr. A

Mr. B

Company C Ltd

 For Company XYZ Ltd

As per the definition of SBO, name of Mr. A and Mr. B reflect in the register of members. Therefore, they need not be regarded as SBO.

Company XYZ will evaluate if there is any natural person holding 10% in Company C Ltd and identify such natural person as SBO. If no natural person identified behind Company C Ltd, the senior managing official of Company X will be regarded as SBO.

Illustration 2:

Company A holds 80% in Company B

Company B holds  60% in Company C

Company Y holds 20% in Company B and 40% in Company C

Shareholders of Company A:

Mr P : 50%

Mr Q: 50%

Shareholders of Company Y

Mr P : 50%

Mr R: 25%

Mr. S: 25%

Here, If we try to find SBO of Company C, we need to examine shareholding of Company B and Y and for Shareholding of Company B, we need to examine shareholding of Company A and Y.

Therefore, SBO of Company B are:

Holders	Calculation	Effective Holding	SBO
Mr. P	(50%*80%)+(50%*20%)	50%	Yes
Mr. Q	(50%*80%)	40%	Yes
Mr. R	(25%*20%)	5%	No
Ms S.	(25%*20%)	5%	No

And SBO of Company C are:

Holders	Calculation	Effective Holding	SBO
Mr. P	(50%*60%)+ (50%*40%)	50%	Yes
Mr. Q	(40%*60%)+	24%	Yes
Mr. R	(5%*60%)+(25%*40%)	13%	Yes
Ms S.	(5%*60%)+(25%*40%)	13%	Yes

The definition of SBOs refers to 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. Therefore, for computing threshold of 10%, the combined holding of the person along with the holding of such other persons having common interest shall also be considered.

Declarations and Disclosures

• SBO to make a declaration to the Company in Form BEN-1:

‒ within 90 days from 13 June 2018; and

‒ within 30 days in case of fresh acquisition or any change in his ownership thereafter.

While section 89 talks about disclosure of nominal and beneficial interest thereby providing duality / dichotomy of ownership, section 90 indicates to the magnitude of holding

Therefore, it cannot be inferred that with the identification of the SBO the existing beneficial owner(s) (member which is a company/ firm/ trust/ another natural person) become registered holder (s). The SBO, in the declaration provided in Form BEN No. 1, however, has to disclose details of registered holder and the reasons for not holding shares in his/her own name.

• The Company shall intimate Registrar of Companies (ROC) in Form BEN-2 within 30 days of receipt of the declaration in Form BEN-1.
• Every company is required to maintain a register of SBO in Form BEN-3 Also, this register shall be open to 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..

• Company shall give notice seeking information in in accordance with Section 90 (5) of the Act in Form No.BEN-4

It is a logical way to ensure compliance under this Section. It is a collaborative exercise which the Company and the SBO has to ensure.

One option is that the Company waits for its shareholders holding beyond the threshold, to submit declaration in Form Ben No.1.

Alternatively, the Company may identify the shareholders, other than natural persons, holding more than 10% of shares (equity + CCPS+CCDs+ GDRs) or exercising significant influence or control as on June 13, 2018 and seek information from them in Form No. BEN -4. This will mandate the shareholders to identify the natural person and obtain declaration from the said natural person in Form No. BEN-1 and submit to the Company within 30 days of receipt of the letter seeking information.

Powers of Company

Companies are empowered to seek information about SBO from any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe

‒ to be a SBO of the company; or

‒ to be having knowledge of the identity of a SBO or another person likely to have such knowledge; or

‒ to have been a SBO of the company at any time during the 3 years immediately preceding the date on which the notice is issued.

 In case of failure to get a response or if the response is not satisfactory, the company may approach NCLT to provide directions such as freezing / suspension of rights related to shares etc.

Penalty Prescribed

On the SBO:

• For failure to make declaration –fine ranging from INR 1,00,000 to INR 1 million and with a further fine of INR 1,000 per day in case of a continuing default.

On the Company and every officer-in-default:-

• For default in maintenance of register, filing return with RoC or allowing inspection to members –fine between INR 1 million to INR 5 million and with a further fine of INR 1,000 per day in case of a continuing default.
• For not issuing notice under section 90(5) –residual penalty under section 450 of the 2013 Act, i.e. fine of up to INR 10,000 and a further fine of INR 1,000 per day in case of a continuing default.
• For furnishing false / incorrect information or suppression of material information in his knowledge –penalty for fraud under section 447 of the 2013 Act, i.e.
• For a fraud involving an amount of at least INR 1 million or 1% of the turnover of the company, whichever is lower -imprisonment for at least 6 months which may extend to 10 years and fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud.
• For a fraud involving an amount less than INR 1 million or 1% of the turnover of the company, whichever is lower, and does not involve public interest –imprisonment for a term which may extend to 5 years or with fine which may extend to INR 2 million or with both.