Declaration in respect of Beneficial Interest

ALL ABOUT THE CONCEPT OF BENEFICIAL OWNER, BENEFICIAL INTEREST AND DECLARATIONS TO BE MADE IN RESPECT OF BENEFICIAL INTEREST

Before understanding the concept of Beneficial interest it is important to understand who is a beneficial owner

As per Wikipedia: Beneficial owners is a term used in domestic and international commercial law that refers to anyone who enjoys the benefits of ownership of a security or property, without being on the record as being the owner or in other words a beneficial owner is a person who enjoys the benefits of the ownership even though the title to some form of property is in another person name.

It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction and decisions regarding a specific security, such as shares in a company.

Or

Beneficial owner is a legal term where specific property rights in equity belong to a person even though the legal title of the property belong to another person, meaning thereby beneficial owner is the individual or an entity that enjoys the benefits of owing an asset, regardless of whose name the title of the property or security is in.

Beneficial ownership can also refer to a situation where an individual or entity holds the right of ownership even if the stock is registered with another entity, such as the brokerage house. In this case the brokerage firm is actually shown as the holder of the security and the investor is the beneficial owner.

Key Points

1.      Beneficial owner means a person who enjoys the benefit of ownership even though the property or the security is not held in his name.

2.      The person in whose name the property or the security is registered is known as the registered owner.

3.      In some cases, both registered owner and the beneficial owner are the same persons.

What is a beneficial interest?

Beneficial interest refers to the interest which is enjoyed by a beneficial owner. A beneficial interest is the right to receive benefits on assets held by another party. There is basically two types of interest which is identified in section 89 one is the Legal interest which is vested with the registered owner and another interest is termed as beneficial interest which is vested with the beneficial owner.

 For the purposes of this section 89 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

For example, most beneficial interest arrangements are in the form of trust accounts, where an individual, the beneficiary, has a vested interest in the trust's assets. The beneficiary receives income from the trust's holdings but does not own the account.

One commonly observed practice while incorporation of wholly-owned subsidiary companies is subscribing the shares through a person or persons who act as the nominee of the company to fulfill the criteria of minimum number of members. Upon incorporation, the company becomes a beneficial owner and nominee becomes a registered member of the subsidiary company.

For Example M/s. XYZ Private Limited Holds 95% of shares (Holding Company) and Mr. B hold 5% of shares as a nominee of the Company in M/s. ABC Private Limited (Wholly Owned Subsidiary). Here XYZ Pvt. Ltd. is a beneficial owner for 5% shares and Mr. B is registered owner. So therefore XYZ Pvt. Ltd. being a beneficial owner will enjoy all the interest in the shares which are registered in name of Mr. B

Whenever there exits difference between the registered owner and the beneficial owner the act imposes restrictions to make declaration in respect of such holding

The provisions relating to declaration to be made by beneficial owner in respect of the beneficial interest are contained in section 89 read with rule 9 of Companies (Management and Administration) Rules, 2014

Section 89:  Declaration in respect of beneficial interest in any share

1.      Declaration by a registered owner I.e. by Mr. B

As per sub section 1 of section 89 read with sub rule 1 of rule 9 of Companies (Management and Administration) Rules, 2014 and its proviso thereof , Where the name of a person is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares (hereinafter referred to as the Registered owner), such person shall make a declaration with the Company, in Form MGT-4 within a period of 30 days from the date on which name is entered in the register of members of the Company specifying the name and other particulars of the person who holds the beneficial interest in such shares.

Provided that where any change occurs in the beneficial interest in such shares, the registered owner i.e. Mr. B shall, within a period of thirty days from the date of such change shall make a declaration to the Company in Form MGT-4.

2.      Declaration by Beneficial owner i.e. M/s. XYZ Private Limited

As per sub section 2 of section 89 read with sub rule 2 of rule 9 of Companies (Management and Administration) Rules, 2014 and its proviso thereof, Every person who holds or acquires a beneficial interest in share of a company which is not registered in his name (hereinafter referred to as “Beneficial owner”) shall file a declaration to the company disclosing the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed in Form MGT-5 within a period of 30 days from acquiring beneficial interest in the shares of the Company.

Provided that where any change occurs in the beneficial interest in such shares, the beneficial owner shall, within a period of thirty days from the date of such change, make a declaration to the company in Form MGT-5.

3. Power of Central Government to make rules

As per sub Section 4 of section 89, the Central Government may make rules to provide for the manner of holding and disclosing of beneficial interest and beneficial ownership under this section.

4.      Penalty for non-compliance by the Registered owner and by the Beneficial owner

As per sub section 5 of section 89, If Registered owner and the Beneficial owner fails, to make a declaration as required to be made under sub section 1 and sub section 2 of section 89 and respective changes thereof, without any reasonable cause, such person shall be punishable with fine which may extend to fifty thousand 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.

5.       Declaration to be filed by the Company

 As per sub section 6 of section 89, Where any declaration under section 89 is received by the company, the company shall make a note of such declaration in the register of members and shall file, within thirty days from the date of receipt of declaration by it a return in the Form MGT-6 with the Registrar in respect of such declaration with such fees or additional fees as may be prescribed.

6.       Penalty for non-compliance by the Company

As per sub section 7 of section 89, If a company which is required to file a return under sub-section (6) of section 89, fails to do so before the expiry of the 30 days from the date of receipt of Declaration by the registered owner or by the beneficial owner, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than five hundred rupees but which may extend to one thousand 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.

7.      Non enforceability of the right in respect of the shares

As per sub section 8 of section 89, In case of any failure on the part of the beneficial owner to make the declaration as required to be made as per section 89 will dis entitle him to claim for any right in respect of such shares. Such rights shall be not enforceable by him or by any person claiming through him.

8.      Obligation of the company shall not be prejudiced

As per sub section 9 of section 90, nothing in section 89 shall be deemed to prejudice the obligation of a company to pay dividend to its members under this Act and the said obligation shall, on such payment, stand discharged.

9.      Exemption in certain cases

According to proviso to sub-rule (3) of Rule 9, inserted by the Companies (Management and administration) Rules, Second amendment rule 2014 which came into force on 24th July, 2014, nothing contained in this rule shall apply in relation to 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 Securities and Exchange Board of India.

For example, when shares of a mutual fund are held by a custodian bank or when securities are held by a broker in street name, the true owner is the beneficial owner, even though, for safety and convenience, the bank or broker holds the title. In both these cases, compliance with respect to section 89 read with rule 9 Companies (Management and administration) Rules, 2014 are not required to be made.

RELEVANT TEXT OF THE BARE ACT FOR READY REFERENCE OF SECTION

89 AND RULE 9 COMPANIES (MANAGEMENT AND ADMINISTRATION) RULES, 2014

Section 89: Declaration in respect of beneficial interest in any share

89. (1) Where the name of a person is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares, such person shall make a declaration within such time and in such form as may be prescribed to the company specifying the name and other particulars of the person who holds the beneficial interest in such shares.

(2) Every person who holds or acquires a beneficial interest in share of a company shall make a declaration to the company specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed.

(3) Where any change occurs in the beneficial interest in such shares, the person referred to in sub-section (1) and the beneficial owner specified in sub-section (2) shall, within a period of thirty days from the date of such change, make a declaration to the company in such form and containing such particulars as may be prescribed.

(4) The Central Government may make rules to provide for the manner of holding and disclosing beneficial interest and beneficial ownership under this section.

(5) If any person fails, to make a declaration as required under sub-section (1) or sub-section (2) or sub-section (3), without any reasonable cause, he shall be punishable with fine which may extend to fifty thousand 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.

(6) Where any declaration under this section is made to a company, the company shall make a note of such declaration in the register concerned and shall file, within 2&3[thirty days] from the date of receipt of declaration by it, a return in the prescribed form with the Registrar in respect of such declaration with such fees or additional fees as may be prescribed 4[Omitted].

(7) If a company, required to file a return under sub-section (6), fails to do so before the expiry of the time specified 5[therein], the company and every officer of the company who is in default shall be punishable with fine which shall not be less than five hundred rupees but which may extend to one thousand 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.

(8) No right in relation to any share in respect of which a declaration is required to be made under this section but not made by the beneficial owner, shall be enforceable by him or by any person claiming through him.

(9) Nothing in this section shall be deemed to prejudice the obligation of a company to pay dividend to its members under this Act and the said obligation shall, on such payment, stand discharged.]

[(10) 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.]

Rule 9 of companies (Management and Administration) rules, 2014

(1) A person whose name is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares (hereinafter referred to as "the registered owner"), shall file with the company, a declaration to that effect in Form No.MGT.4 2[Omitted], within a period of thirty days from the date on which his name is entered in the register of members of such company:

Provided that where any change occurs in the beneficial interest in such shares, the registered owner shall, within a period of thirty days from the date of such change, make a declaration of such change to the company in Form No.MGT.4 3[Omitted].

(2) Every person holding and exempted from furnishing declaration or acquiring a beneficial interest in shares of a company not registered in his name (hereinafter referred to as "the beneficial owner") shall file with the company, a declaration disclosing such interest in Form No. MGT.5 4[Omitted], within thirty days after acquiring such beneficial interest in the shares of the company:

Provided that where any change occurs in the beneficial interest in such shares, the beneficial ownr shall, within a period of thirty days from the date of such change, make a declaration of such change to the company in Form No.MGT.5 5[Omitted].

(3) Where any declaration under section 89

is received by the company, the company shall make a note of such declaration in the register of members and shall file, within a period of thirty days from the date of receipt of declaration by it, a return in Form No. MGT.6 with the Registrar in respect of such declaration with fee.

1[Provided that nothing contained in this rule shall apply in relation to 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 Securities and Exchange Board of India]