Significant Beneficial Ownership – IdentificationofBeneficialOwner#SignificantBeneficialOwner#IndividualOwner#Section90#CompaniesAct2013

Significant Beneficial Ownership – Identification of Beneficial Owners and simplification of the complex Corporate Structures (Section 90 of Companies Act 2013)

The growth of every economy is directly linked with the transparency and trust. Keeping that in view, Government of India has taken major steps in maintaining transparency and accountability of corporate players by way of introducing new laws and amending the existing ones. The emergence of laws governing Corporate Governance, Anti Money Laundering, Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 etc. are some of such major steps.

Towards the achievement of the object to provide investors with true and fair knowledge of corporate player for taking informed decision, Ministry of Corporate Affairs (MCA) took a meaningful decision and notified Section 90 of the Companies Act, 2013 (Act); and the Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules) to deal with potential abuse of corporate structure by concealing the identity of the real owners. The provision provides for the concept of Significant Beneficial Owners in line with some of the developed nations including United Kingdom, United States, Singapore, France, Germany etc. 

As per Black's Law Dictionary, “Beneficial owner is a legal term where specific property rights ("use and title") in equity belong to a person even though legal title of the property belongs to another person.”

With the above definition, it is clear that there may be situations where one person even not being a legal owner of the property has the right over the property. In corporate sense, a person without being a member of a company may enjoy the benefit associated with such membership and have substantial influence over the operation and management of the company. The structure is also used by the wrong doers for laundering of the black money into the system in the organised manner through creation of chain subsidiaries. 

Thus there arises need to identify the people who are actually having the direct or indirect influence over the Corporate Entities. 

Rationale behind introduction of section 90 under the Companies Act 2013:

·      Lifting the veil of secrecy over the people owning and controlling the corporate entities to disrupt the key vehicle for illicit financial flows;

·      Enhanced transparency and the associated trust;

·      Elimination of the corrupt practises, the laundering of the black money, and the organized crime from the system.

In the light of above rationale, introduction of a special provision under the Act for identification of beneficial ownership of a company to the level of the individual ultimately holding the control or the ownership, and course of actions to be taken for maintaining transparency associated with the ownership is an appreciable move. The idea is to identify and locate the natural person, who is an individual, who in real terms is controlling and taking operating decisions of the corporate entity, either directly or through a chain of subsidiaries or associate entities.

Analysis of the Provision (Section 90 of the Companies Act 2013)

The provision provides for every individual to submit a declaration to the company in which, whether directly or indirectly, he fulfils any of the conditions given below:

i.              holds beneficial interest of not less than 25% or such other percentage as may be prescribed, or

ii.             has right to exercise or actually exercise any significant influence or 

iii.           has any control over the company

With the above provision, it is amply clear that beneficial interest, control and significant influenceare the key determinants of Significant Beneficial Owner. So it becomes necessary to understand these terms to analyse and determine the Significant Beneficial Owner of a company.

Beneficial Interest

The term ‘Beneficial Interest’ as referred under section 90 shall mean and includes, right of a person to exercise rights associated with the shares or to receive dividend associated with such shares, whether directly or indirectly or through any contract or arrangement. The term ‘Beneficial Interest’ has been defined under sub-section 10 of section 89 of the Act.

To summarize, the ‘Beneficial Interest’ in the shares shall include:

(i)      the exercise or cause any person to exercise the rights attached to such shares in any manner, whether directly or indirectly; or 

(ii)     to receive or participate in the distribution of any dividend or other profits as attached to such shares in any manner, whether directly or indirectly.

In other words, Beneficial Interest shall mean holding interest in the rights attached to the shares of the company, whether directly or through indirect channel.

Control 

The definition of the control under the Act, though inclusive, is a very comprehensive, specifying that the term include the right to appoint majority of directors, to control the management or to control the policy decisions of the company. Such rights could be exercised either individually or through persons acting in concert. Such exercise could be either direct or indirect. The exercise of such control could be by virtue of shareholding or any agreement. The control may be either de-jure or de-facto.

Similarly, the term, ‘Significant Influence’, though is not defined under the Act, but the reference may be drawn from the provisions of Accounting Standard 18 (‘AS 18) which explains: Significant influence may be exercised in several ways, for example, by representation on the board of directors, participation in the policy making process, material inter-company transactions, interchange of managerial personnel, or dependence on technical information. Significant influence may be gained by share ownership, statute or agreement. 

Significant Beneficial Owner

The term ‘Significant Beneficial Owner’ as defined under section 90 has further been explained under the Rules. It states that aSignificant Beneficial Owneris an individual as referred under section 90 and holding not less than 10% of the share capital of the company but whose name is not entered into the register of the members of the company.

Explanation to definition further describes the Significant Beneficial Owner, where the shareholders of the company are corporate or other entities in the following manner:

(i)             where a member is a company, the significant beneficial owner is the natural person who holds not less than ten percent of the share capital or exercises significant influence or control over the member company, in any manner whether directly or through any indirect means or whether alone or together with any other person;

Example 1- Holding individually

In the above example, 20 % of share capital of the company A is held by another company i.e. company B. Mr. X and Mr. Y individually holding more than 10 % of share capital of the company B will be treated as significant beneficial owner of company A.

Example 2- Acting in concert

Mr. X and Mr. Y acting together are holding more than 10 % of share capital of the company B will be treated as significant beneficial owner of company A.

(ii)           where member is a partnership firm, the significant beneficial owner is the natural person who holds not less than ten percent of the capital or the entitlement of the profits in the partnership firm, in any manner whether directly or through any indirect means or whether alone or together with any other person;

In the above example, Mr. X (Partner of firm) holding 10% of the capital/ profit contribution over the firm will be treated as significant beneficial owner of the company A.

(iii)          where a member is a company or a partnership firm as above, but no natural person holding not less than ten percent of the capital or exercising significant influence or control is identified, then the senior managerial person of such member company or the partnership firm shall be considered as the significant beneficial owner;

If no ultimate natural person (i.e .X or Y) having beneficial interest or significant influence or control over the company is identified, the senior managerial person will be treated as significant beneficial owner.

(iv)          where a member is a trust through trustee, the significant beneficial owner is a natural person whether author of the trust or trustee or beneficiary holding not less than 10% interest in the trust or exercising ultimate effective control, in any manner whether directly or through any indirect means or whether alone or together with any other person.

In the above example, X being the beneficiary of Trust holding substantial interest in the company will be treated as significant beneficial owner of company A.

The provisions of section 90 of the Act also provides for the actions and activities on part of the company to identify its significant beneficial owners and undertaking necessary compliances and reporting’s. It provides that the company shall give notice to any person whom it has reasonable grounds to believe, to be a significant beneficial owneror having knowledge of the significant beneficial owneror have been significant beneficial owner of the Company during the three years immediately preceding the date of notice, and has not been registered with the Company as member as required.

The person in receipt of the notice shall, within 30 days of the receipt of such notice, be required to provide information on the significant beneficial ownership to the company. In the event, no such information or unsatisfactory information is provided to the company within such period of 30 days, the company shall within a period of 15 days of the expiry of such 30 days approach to the National Company Law Tribunal (‘Tribunal’) for an order directing the shares in question to be subject to restrictions with regard to suspension of all rights to receive dividend, suspension of voting rights, or restriction on the transfer of the interest attached to such shares.                                   

Compliance Actions and Public Disclosures

1.     Beneficial Owner Register: 

The company is required to maintain a register of beneficial owner of interest declared by significant beneficial owners containing following details:

·       Name of Significant Beneficial Owners

·       Date of birth

·       Address

·       Details of ownership.

Further the company is also required to incorporate any change in significant beneficial ownership from time to time.

The register ofbeneficial owner ofinterest shall be open to inspection on every working day for minimum of two hours by any member of the company on payment of such fees as may be prescribedbut not exceeding rupees fifty for each inspection.

2.    Return:

The Company is required to file a return of Significant Beneficial Owners with the registrar of companies within a period of thirty days from the date of receipt of declaration and changes thereof.

3.    Notice for information: 

The company shall give notice to the following person whose name has not been registered as its member and whom the company has reasonable cause to believe:

i.              to be asignificant beneficial owner;or 

ii.             having knowledge of the of a significant beneficial owner;or 

iii.           have been significant beneficial owner of the Company during the three years immediately preceding the date of notice 

Consequently if any person fails to give required information/ declaration to the company within the specified time, or information given is not satisfactory, the company shall apply to the Tribunal within fifteen days of the expiry of specified period as mentioned in the notice, for an order directing to restricting and to suspend all rights attached to the shares and such other matters.

Penal Provisions

To achieve the defined object, the provision provides for the imposition of the high penalties for any non-compliance. The provisions provides for the following penalties: 

A.     Any Person other than Company

The provisions states that where any person who is required to make declaration of significant beneficial ownership but fails to make such declaration he shall be punishable with a fine:

i.              not be less than 1 Lakh but which may extend to 10 Lakhs,

ii.             in case of continuing default, INR 1000 per daytill the default continues

B.    Company

The provision states that every company that fails to maintain a register of beneficial owners as or does not file a return of significant beneficial owner to registrar or denies inspection of register of beneficial owners, then the company and every official of the company who is in default shall be punishable with fine:

i.              not less than INR 10 Lakhs which may extend to INR 50 Lakhs, and

ii.             in case of continuing default, INR 1000 per day till the default continues.

Non-Applicability of SBO Rules:

SBO Rules are not applicable on:

1.    Mutual Funds;

2.    Government Companies;

3.    Alterative Investment Funds (AIFs), Real Estate Investment Trusts(REITs) and Infrastructure Investment Trusts (InvITs) regulated under SEBI Act.

Challenges

1.     Where there is chain of corporate ownership, identifying ultimate natural beneficial owners is a challenging task. Further, in case of foreign corporate shareholders there may be contradiction with the governing laws of host company and its foreign corporate shareholder, as the concept of ultimate natural beneficial owner may not be globally accepted. Hence obtaining declaration from foreign shareholders may be challenging task for the host companies;

2.     The prescribed timeline of 15 days is too short for the companies for making an application to the National Company Law Tribunal in case the person fails to provide the required/satisfactory information; 

3.     The prescribed time limit for obtaining information of the individual holding significant beneficial interest where there is a chain of corporate entities is too short and the consequent penal provisions are very high.

4.     Calculation criteria provided for identification of the significant beneficial owner is ambiguous and seems to be in contradiction with the principle provision defining the Significant Beneficial Owner as holder of the 10% of the beneficial interest. For instance, as per the explanation, where shareholder of a company is a corporate shareholder, then the individual holing 10% or more in such corporate shareholder is considered as the significant beneficial holder of the company, which shall not be in line with the object of the provision in all events, for example where such individual is holding only 20% in the corporate shareholder who is also holding 20% in the company, then as per the explanation such individual is the significant beneficial owner of the company, however  if we calculate the actual indirect holding or control of the individual in the company, the same will arrive at 4% (20% of the 20% held by the corporate shareholder in the company). The provision thus needs to be reviewed.

Conclusion

In the light of above provisions, we can say that enactment of section 90 in the Companies Act 2013, is truly remarkable step taken by the Ministry of Corporate Affairs in order to bring transparency and accountability in the working of corporates through adequate disclosures. On one hand, Section 90 mandates every individual to disclose their significant influence or control over the company, and on the other hand it has also made it responsibility of the company to take necessary actions to identify significant beneficial owner, maintaining their record and intimate the same to the Registrar. However, the provisions shall be required to be reviewed in light of the calculated matrix of significant beneficial ownership as explained in the provisions and also the timelines prescribed for obtaining such information.