SIGNIFICANT BENEFICIAL OWNERSHIP – A WAKE-UP CALL FOR THE DISCLOSURE!

INTRODUCTION

The Corporate vehicle is considered as channel by defaulters for siphoning of funds for illegitimate purposes like money laundering, tax evasion, corruption, terror financing and illegal activities. In the wake to prevent the misuse of funds & money laundering, the Financial Action Task Force (FATF), an inter-governmental organization formulated various recommendations to tap such funds and based on the same, Ministry of Corporate Affairs (“MCA”) notified revised Section 89 (10) and 90 of the Companies Act, 2013 (“the Act”) through Companies (Amendment) Act, 2017 (“the Amendment Act”) read with the Companies (Significant Beneficial Owners) Rules, 2018 (“the 2018 Rules”) which came into effect from 14.06.2018 and amended through Companies (Significant Beneficial Owners) Amendment Rules, 2019 (“the 2019 Rules”) dated 08.02.2019. Such regulatory framework brought in mainly to identify individual (natural person) who hold significant stake indirectly in reporting company and who is standing behind the screen.

This article deliberates on various provisions of the Act together with respective rules thereunder in respect of Significant Beneficial Owners (“SBO”) along with examples.

UNDERSTAND THE CONCEPT “SIGNIFICANT BENEFICIAL OWNER”

The SBO is defined under Rule 2 (h) of the 2019 Rules and in relation to a reporting company⁽¹⁾, SBO means individual who acting alone or together⁽²⁾ or through one or more person or trust, possesses one or more of following rights or entitlement in such reporting Company, namely:-

(i)   holds indirectly, or together with any direct holdings, not less than 10% of the shares⁽³⁾;

(ii)  holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;

(iii) 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;

(iv) has right to exercise, or actually exercises, significant influence⁽⁴⁾ or control⁽⁵⁾, in any manner other than through direct-holdings alone:

Various definitions connected to the concept “SBO”

⁽¹⁾"Reporting Company" means a company as defined in section 2 (20) of the Act, required to comply with the requirements of section 90 of the Act. (Rule 2 (f) of 2019 Rules)

⁽²⁾if any individual (s) 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 'acting together'. (Explanation V to Rule 2(h) of 2019 Rules)

⁽³⁾ The instruments in the form of Global Depository Receipts(GDR), Compulsorily Convertible Preference Shares or Compulsorily Convertible Debentures shall be treated as 'shares'.

⁽⁴⁾ "Significant Influence" 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 (Rule 2 (i) of 2019 Rules)

⁽³⁾"control" means control as defined in Section 2 (27) of the Act to include

a) right to appoint majority of directors or

b) to control the management or

c) 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 agreement or in any other manner. (Rule 2 (b) of 2019 Rules along with Sec 2 (27) of the Act)

The Points to be noted to become SBO:

IMPORTANCE OF “INDIRECT HOLDING OF RIGHT OR ENTITLEMENT”

It is pertinent to note that if an individual who holds any of the aforesaid rights or entitlement indirectly in the reporting company, then such individual is considered as “SBO”. Now let’s understand the concept “Indirect holding of right or entitlement”. 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.

Sl. No.	Member of Reporting Company	Who is an SBO
1	Body Corporate (whether incorporated or registered in India or abroad)	a.  An individual holds majority stake in such Body Corporate; or b.  An individual holds majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of such Body Corporate.
2	Hindu Undivided Family (HUF)	An individual who is the Karta of the HUF
3	Partnership entity (through itself or a partner)	a.  Individual who is a partner; or b.  Individual who holds majority stake in the body corporate which is a partner of such partnership entity; or c.   Individual who holds majority stake in the ultimate holding company of the body corporate which is a partner of such partnership entity.
4	Trust (through trustee)	a.  individual is a trustee in case of a discretionary trust or a charitable trust (discretionary trust means trust whose beneficiary is not known in advance); b.  Individual who is a beneficiary in case of a specific trust (Specific trust means trust whose beneficiary is known in advance); c.   Individual who is the author or settlor in case of a revocable trust.
5	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 (FATF) on Money Laundering & the regulator of the securities market in such member State is a member of the International Organization of Securities Commission (IOSC)	a.   Individual is a general partner; or b.   Individual is an investment manager; or c.   Individual is a CEO where the investment manager of such pooled vehicle is a body corporate or a partnership entity.

Various definitions connected to the concept “Indirect holding of right or entitlement”

"majority stake" means;-

·   holding more than one-half of the equity share capital in the body corporate; or

·   holding more than one-half of the voting rights in the body corporate; or

·   having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate;(Rule 2 (d) of 2019 Rules)

"Partnership Entity" means a partnership firm registered under the Indian Partnership Act, 1932 or a limited liability partnership registered under the Limited Liability Partnership Act, 2008. (Rule 2 (e) of 2019 Rules)

 

Figure I

Mr. N has to give disclaration as to SBO in realation to M/s. ABC Limited which is reporting Company.

ESTABLISHING “DIRECT HOLDING OF RIGHTS OR ENTITLEMENT”

An individual who hold rights or entitlements directly in reporting Company, the concept of SBO will not attract. We can now determine the concept of “direct holding of rights or entitlement”. 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.

INTERPRETATION OF “BENEFICIAL INTEREST” UNDER SEC 89

There are 2 different concepts under the Sec 89 ie. REGISTERED OWNER (legal owner) and BENEFICIAL OWNER. Registered owner means a person whose name is entered in the Register of Members of the company as the holder of shares in that company but who does not hold the beneficial interest in such shares whereas Beneficial owner means a person holding and exempted from furnishing declaration or acquiring a beneficial interest in shares of a company not registered in his name. Let us take an example to understand the concept. Suppose a public company (“Holding Company”) is holding 100% investment in a subsidiary company and to comply with minimum legal requirement of members under the Act, the holding company appoints 6 nominees (registered owner/ ostensible owner) in the reporting company. For the purposes of Sec 89 and 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.

The Concept was first introduced under Sec 187 C of the Companies Act, 1956 through companies (Amendment) Act, 1974 came into effect from 01.02.1975. The main purpose of this provision is to ensure that all benami holding of shares has to be reported by the Benamidar and beneficial owner.

As per Sec 89 (1) of the Act, a registered owner shall file a declaration (including changes whenever occurred in beneficial interest) in Form MGT-4 with the company, within a period of 30 days from the date on which his name is entered in the Register of Members of such company.

The duty to make declaration under the section arises only in the case where holder of shares accepts/ competent court finds that he is only a nominee holder on behalf of some other person. Where a company given money to another person to enable the latter to invest the money in shares and latter was not to hold any beneficial interest in such shares, the Company’s refusal to register such shares on the ground that the declaration under the Section was not made was held to be justified. The declaration had to be made only after register. The question of declaration arises only when the name of the buyer was entered in the register of members. (Hemangini Finance & Leasing P Ltd V. Tamilnad Mercantile Bank Limited)

As per Sec 89 (2) of the Act, a beneficial owner shall file a declaration (including changes whenever occurred in beneficial interest) disclosing such interest in Form No. MGT 5 with the company within 30 days after acquiring such beneficial interest in the shares of the company.

As per Sec 89 (6) of the Act, where any declaration under the section, is received by the company, the company shall make a note of such declaration in the Register of Members and shall file a return in e-form MGT-6 with RoC within a period of 30 days from the date of receipt of declaration by it

Exemption under Sec 89:

1.    a trust which is created, to set up a Mutual Fund or Venture Capital Fund or such other fund as may be approved by the SEBI.

2.    Government Company (Notification dated June 5, 2015)

3.    Specified IFSC Public Company - In Sub-section (6) of section 89, for the words “thirty days” read as “sixty days”. (Notification Date 4th January, 2017)

4.    Specified IFSC Private Company - In Sub-section (6) of section 89, for the words “thirty days” read as “sixty days”. (Notification Date 4th January, 2017)

5.    Sec 9 (2) of Depositories Act, 1996, provisions of Sec 89 of the Act shall not apply to securities held by a depository on behalf of beneficial owners.

The Section 89 and 90 are separate provisions. If we are complying with Sec 89, the adherence of Sec 90 of the Act will not come as the latter section attracts only if there is an individual who is holding any of the rights or entitlements indirectly in the reporting company.

OBLIGATION OF SBO UNDER SEC 90 (Rule 3)

a.    SBO shall file a declaration in Form No. BEN-1 to the reporting company within 90 days from such commencement.

b.    Every individual, who subsequently becomes a SBO or where his SBO undergoes any change shall file a declaration in Form No. BEN-1 to the Reporting Company, within 30 days of acquiring such SBO or any change therein.

OBLIGATION OF REPORTING COMPANY UNDER SEC 90 (Rule 4)

·      Upon receipt of declaration under rule 3, the reporting company shall file a return in Form No. BEN-2 with the RoC in respect of such declaration, within a period of 30 days from the date of receipt of such declaration by it, along with the fees as prescribed in the respective rules.

Clarification

As per MCA General Circular No. 07/2018 dated 06.09.2018, the time limit for filing the e-form BEN-2 would be 30 days from the date of deployment of such e-form on the MCA-21 portal and no additional fee shall be levied if the same is filed within 30 days from the date of deployment of the said e-form.

·      Every reporting company shall take necessary steps to find out SBO and cause such individual to make a declaration in Form No. BEN-1.

·      A company shall give notice seeking information 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 SBO of the company;

b.  to be having knowledge of the identity of SBO or another person likely to have such knowledge; or

c.  to have been a SBO 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 SBO with the company as required under section 90 (5), in Form No. BEN-4. (Sec 90 (5) read with Rule 6)

·      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.

REGISTER OF SBO (Rule 5)

The company shall maintain a register of SBO in Form No. BEN-3 and shall be open for inspection during business hours on every working day as the board may decide on payment of such fee which shall not exceeding Rs. 50 for each inspection. 

APPLICATION TO THE NCLT (Rule 7)

The reporting company shall apply to the NCLT within 15 days of expiry of period as specified in notice,

i.    Where any person fails to give the information required by the notice in Form No. BEN-4, within a period of not exceeding 30 days of the date of the notice; or

 ii.  Where the information given is not satisfactory.

CONSEQUENCE OF TRIBUNAL ORDER

The Tribunal may order directing that the shares in question be subject to restrictions as follows:

a.  restrictions on the transfer of interest attached to the shares in question;

b.  suspension of the right to receive dividend or any other distribution in relation to the shares in question;

c.  suspension of voting rights in relation to the shares in question;

d.  any other restriction on all or any of the rights attached with the shares in question.

NON-APPLICABILITY OF 2019 RULES (Rule 8)

These rules shall not be made applicable to the extent the share of the reporting company is held by,

(a)  IEPF Authority constituted under Section 125 (5) of the Act;

(b)  its holding reporting company:

Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.

(c)  the Central Government, State Government or any local Authority;

(d)  (i) a reporting company, or

(ii) a body corporate, or

(iii) an entity,

controlled by the Central Government or by any State Government (s) or partly by the Central Government and partly by one or more State Governments;

(e)  SEBI 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,

(f)   lnvestment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

ADDITIONAL COMPLIANCE IN CASE OF LISTED COMPANIES

SEBI vide Circular No SEBI/HO/CFD/CMD1/CIR/P/2018/0000000149 dated 07.12.2018 (‘SEBI Circular’) required every listed entities to disclose the details pertaining to SBO in the format prescribed in the said Circular while submitting the shareholding pattern for the quarter ended March 31, 2019.

CONCLUDING REMARKS

The disclosures submitted in the regard are expected to bring transparency of shareholding and at same time help the government recognize the benami transactions and prevent money laundering activities.

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