Significant Beneficial Ownership

Q.1 Significant Beneficial Owner! What actually we mean by this term?

Ans. Significant Beneficial Owner is an Individual or a Natural person who does not appear on the records of the Company as a holder of any genuine Interest but in reality, exercises significant influence over the Company acting alone or along with other persons.

To be more precise, SBO is a person who acting alone or in concert with others indirectly holds significant interest in the shares of the Company or the right to exercise control over the Management of the Company.

Now in the above Explanation, The word “Significant” in itself brings up a Question in our minds.

Q.2 What is the degree of holding or Control a person should exercise to be termed as a “Significant Beneficial Owner”?

Ans. The Companies Act, 2013 provides that holding of 10% or more of an ultimate Interest in a Company shall be termed as holding of Significant Interest in that Company.

(Definition explained at page 2)

The above definition can be explained with a simple graphical Illustration below:

In the above depiction, XYZ Ltd. a Limited Company holds 20% of shareholding of ABC Pvt. Ltd. On the other hand Mr. A, an individual holds 99% of the shareholding of XYZ ltd. Though Mr. A does not appear       to be holding an upfront interest in ABC Pvt. Ltd. but in actuality, he holds a significant degree of interest which is 19.8% (20% * 99%) in the total shareholding of ABC Pvt. Ltd.

Therefore, Mr. A is a Significant Beneficial Owner in ABC Pvt. Ltd.

> What are the provisions of the Companies Act, 2013 in respect of the Significant Beneficial Ownership?

As per the Section 90 of Companies Act, 2013 as amended by the Companies (Amendment) Act, 2017, provisions of which have been notified by MCA vide its notification dated June 13, 2018:-

1. Every individual, who

a. acting alone or together, or

b. 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, over the company 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 thereto.

*Definition of Control:-as per Section 2(27) of Companies Act, 2013, Control includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

> Definition of “Significant Beneficial Owner” as per the Companies Act, 2013

The Companies (Significant Beneficial Owners) Rules, 2018 notified by MCA dated June 13, 2018 defines Significant Beneficial Owner as:

“An individual referred to in sub-section (1) of section 90 (holding ultimate beneficial interest of not less than ten per cent.)read with sub-section (10) of section 89, but whose name is not entered in the register of members of a company as the holder of such shares, and the term ‘Significant Beneficial Ownership’ shall be construed accordingly.”

Section 89(10) provides that:

“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.”

As per the above definition provided by the rules framed under the Companies Act, 2013, the degree of Ultimate influence shall be 10% or more to be termed as Significant Influence over a Company. Therefore any Individual or a natural person holding an ultimate Beneficial Ownership or Interest or Control of 10% or more shall be regarded as an Significant Beneficial Owner in that Company.

> Can an Individual or a Natural Person have Significant Beneficial Interest beyond single Layers of Investment?

Yes, if an Individual holds an ultimate beneficial Interest of more than 10% in any company where the ultimate ownership in that company goes beyond single layer of investment, he will be considered as a Significant Beneficial Owner in that Company.

This can be better explained with the below graphical Illustration:-

In the above graphical illustration, Mr. C who directly holds 100% shareholding of Z Ltd. will be considered as a Significant Beneficial Owner of Y Ltd. and also X Ltd. wherein he indirectly holds an Ultimate Beneficial Ownership of 55% (i.e. 100% * 55%) &35.75% (i.e. 100% * 55% * 65%) respectively.

Though he may not be directly holding any shares in X ltd but as per the SBO Rules his interest goes beyond one layer of Investment. Therefore, he will be considered a SignificantBeneficial owner of X ltd.

Q.3 What is the real intention of law for framing the Significant Beneficial Ownership Rules 2018?

Ans.The basic intention of law framers is to bring out the identity of the persons who are actually holding a controlling interest in the Company while hiding behind the curtains.

Though Section 89 of the Companies Act, 2013 provides that where the shares of a Company are registered in the name of a person who is not the beneficial owner of those shares, then both the registered owner and the beneficial owner are required to file a declaration with the target Company which in turn shall file a declaration with the ROC disclosing such beneficial interest.

“However, the provision did not provide a mechanism to identify the ‘Significant Beneficial Owners’, which imposed difficulties on regulatory authorities to verify the identity of individuals who ultimately owned and controlled the company.”

Besides the provisions of Section 89 of the Companies Act, 2013 are meant to know the actual owners of shares in the Company i.e. primarily meant for Hindu United Families, Partnership Firms etc. which couldn’t become a member in a Company in their own name due to the provisions of the Act. Therefore those had to hold their shares in the name of other entity in the records of the Company.

> In the Illustration-2 depicted in the previous page, though Mr. C is not the registered owner of shares of Y Ltd. but he is in a position to exert significant influence over the policy or management decisions by the virtue of his shareholding in Z Ltd. which in turn holds shares in Y Ltd. Therefore Mr. C is indirectly holding a majority right to participate in the key decision making of Y Ltd.

This is the intention of the law to carve out those individuals or natural persons who alone or acting with others while hiding behind the multiple Vertical walls of Investments are able to exercise  significant influence over a Company.

Q.4 What are the reporting requirements under the Companies (Significant Beneficial Ownership Rules), 2018?

Ans. Every Significant Beneficial Owner where such person is an individual or natural person shall file a declaration in Form No. BEN-1 to the Company in which it holds Significant Beneficial Ownership within 90 days from the commencement of these Rules.

Every Natural Person as on date of Commencement of the Companies (Significant Beneficial Ownership) Rules, 2018 shall file a Declaration to each such Company in which he holds Significant Interest or Control within 90 days commencing from June 14, 2018

> Further, Every individual, who, after the commencement of these rules, acquires significant beneficial ownership in a company, shall file a declaration in Form No. BEN-1 to the company, within thirty days of acquiring such significant beneficial ownership or in case of any change in such ownership

Q.5 What is the action to be taken by a Company once it receives the declaration in Form BEN-1?

Ans. Where any declaration in Form BEN-1is received by the company, it 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 declaration by it.

Q.6 Which are the Entities outside the ambit of the SBO Rules, 2018?

Ans. These rules are not made applicable to the holding of shares of companies/body corporates, in case of pooled investment vehicles/investment funds such as Mutual Funds, Alterative Investment Funds (AIFs), Real Estate Investment Trusts(REITs) and Infrastructure Investment Trusts (InvITs) regulated under SEBI Act.

Q.7 WHAT ARE THE PENALTY PROVISIONS FOR NOT COMPLYING WITH THE PROVISIONS OF SIGNIFICANT BENEFICIAL OWNERSHIP RULES, 2018?

ANS.  ANY PERSON WHO FAILS TO MAKE A DECLARATION AS AFOREMENTIONED 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.

> Last but definitely not the least important Question that arises after going through all the aforesaid provisions of Law,

Q.8 Who shall owe the responsibility for creating the awareness among the Potential persons holding Significant Interest.?

Ans. The actual responsibility lies with the Companies as Section 90(5) of Companies Act, 2013 `provides that 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:-

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

DISCLAIMER- This write up is based on the understanding and interpretation of author and the same is not intended to be a professional advice.