How to calculate Significant beneficial ownership in complex corporate structure

Well in today’s world the corporate vehicles are being for illicit purposes such as corruption, tax evasion, money laundering etc.

Further to promote corporate transparency and as a practice of good corporate governance, it is the responsibility of us as company secretaries to identify the significant beneficial ownership in company.

There are legal provisions(section 89 and 90) under companies Act 2013 as well as The Companies (Significant Beneficial Owners) Rules,2018 ?which deals with SBO.

How to calculate the direct and indirect holding as required by law?

I am really confident that once we go through the calculations explained in article below, we can easily decode any complex corporate structure.

How do we calculate beneficial ownership holdings?

But before starting with the awesome calculation part, we need to understand what a SBO mean:

As per The Companies (Significant Beneficial Owners) Rules,2018,

“Significant beneficial owner”?means an individual referred to in sub-section (1) of?Section 90, who 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:

(i) holds indirectly, or together with any direct holdings, not less than ten percent, of the shares;

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

(iii) has right to receive or participate in not less than ten per cent, 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?or?control, in any manner other than through direct-holdings alone.

The calculation of SBO is simple in case of direct holding but where there is indirect holding the calculation becomes tricky.

But the reporting requirements of SBO is not only in India but in several countries including South Africa, Middle east etc.

For example, in South Africa, The Companies And Intellectual Property Commission (CPIC) defines Ultimate Beneficial owner as follows:

?An individual/ natural person who, directly or indirectly, ultimately owns 5% and more of a company or exercises effective control of a company.

Since the words used are “direct” and “indirectly” and the thresholds are mentioned, as a company secretary we need to determine two things:

a.???? How much do they have direct holding in my company.

b.???? How much do they have indirect holding in my company.

Now in small private companies, generally the corporate structure is like given below:

Here,

Person 1(Tommy): -He is the direct owner of main company holding 48% stake.

Person 2 (Rocky): -Though apparently it looks like Holding company is the owner of main company however person 2 is holding indirect ownership of 52% in main company.

Do you know simple indirect holding structure?

In the diagram below, is what I call the simple indirect holding structure where the main company is 100% subsidiary of holding company and below it are the shareholders who are holding indirectly the respective shares in main company as follows:

The 100% shareholding is by holding company 1 which further has shareholders namely :

Mukesh=33% of (holding company’s share in main company ) i.e. 33% of 100% is 33%

Bill=27% of (holding company’s share in main company ) i.e. 27% of 100% is 27%

Elon=20% of (holding company’s share in main company ) i.e. 20% of 100% is 33%

Jack=20% of (holding company’s share in main company ) i.e. 20% of 100% is 20%.

Now this is the ideal situation but as? Company secretaries, we all know that for MNC groups this chart is not that simple.

So below is the example of a complex holding structure.

So how to calculate beneficial ownership for the same?

Now the structure above is quite complex.

Here the main company is the company of whose UBO/SBO we are calculating.

Now the direct shareholding of main company is divided into four shareholders where:

a.The listed company holds 25% and the shareholding of listed company is held 30% by general public and 70% by Gautam.

b.20% shareholding of Main company is by holding company 1 which further has shareholders namely Mukesh, Elon, Bill, and Jack with 23%,20%,14% and 43% holding in it respectively.

c. The 45% shareholding of main company is by a private company which is a wholly owned subsidiary of Holding company 1.

d. Mr Mukesh is directly holding 10%.

Now let’s get started with the fun part i.e. indirect holding:

a.?Public Shareholders indirect holding in main company:-Holding 30% of shareholding in listed company which holds 25% in main company.

??=30% of 25%

=7.5%

b.?Gautam’s indirect holding in main company:-Holding 70% of shareholding in listed company which holds 25% in main company.

=70% of 25%

=17.5%

Now comes my favorite calculation part.

But before moving forward, did you notice this thing?

The holding company in totality owns 20% stake in Main company right?

NO! the answer is there is more hidden holding.

The Holding company’s total holding in Main company(Direct as well as indirect):-

= 20% Direct holding in Main company and 100% holding in private company which holds 45% in Main company.

= [20% + (100% of 45%)]

= 20% +45%

=65%

Now once we understand calculation of Mr Mukesh total holding and the above calculation, then I am confident that we can decode any corporate structure.

Mr Mukesh’s total holding in Main company= 23% holding in holding company which in totality holds 65% in Main company + 10% of direct ownership in main company

=(23% x 65%) + 10%

=14.95% +10%

=24.95%

So the real holding of Mr Mukesh in main company is not just 10% but actually 24.95%.

Now the calculation of rest of shareholders is easy:

Mr Elon’s holding(direct as well as indirect)= holding 20% of shareholding in? holding company which holds in totality 65% in main company.

=20% of 65%

=13%

Mr Bill’s holding(direct as well as indirect)= holding 14% of shareholding in? holding company which holds in totality 65% in main company.

=14% of 65%

=9.1%

Mr Jack’s holding(direct as well as indirect)= holding 43% of shareholding in? holding company which holds in totality 65% in main company.

=43% of 65%

=27.95%

?Hope you found the article useful. Do let me know your comments in the comments section below.

With warm regards,

Keep Smiling,

Saeed Shaikh

FOOTNOTES

1.https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks.html#