Disclosure Of Significant Beneficial Ownership In Indian Companies – Need Of The Hour!
The SBO disclosure essentially mandates identification of the natural person who effectively controls or has substantial ownership in a companyGlobally, most nations today are committed to curbing money-laundering, terrorist financing, corruption and tax evasion through a complex web of corporate structures by enhancing transparency in control and ownership of companies. In fact the concept...
The SBO disclosure essentially mandates identification of the natural person who effectively controls or has substantial ownership in a company
Globally, most nations today are committed to curbing money-laundering, terrorist financing, corruption and tax evasion through a complex web of corporate structures by enhancing transparency in control and ownership of companies. In fact the concept of ultimate beneficial owner (UBO)/ significant beneficial owner (SBO) is not new internationally, and was first recommended way back in 1990 by the Financial Action Task Force (FATF), an inter-governmental body established to set standards and promote effective implementation of policies for combating money-laundering, terrorist financing and other related threats to the integrity of the international financial system. The international trends have since then been marching towards implementation of beneficial ownership disclosures in most countries, including UK, USA, European Union, Singapore, Hong Kong, to name a few. The SBO disclosure essentially mandates identification of the natural person who effectively controls or has substantial ownership in a company.
Genesis of SBO laws in India
As far as India is concerned, the concept of significant beneficial ownership has been part of several other legislations in India, such as prevention of money laundering rules and know your customer directions prescribed by the Reserve Bank of India (RBI), Income Tax laws, Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2018 and guidelines on identification of beneficial ownership prescribed by SEBI, etc.
In order to bring in corporate transparency and comply with India's commitment towards FATF's mandate, Section 90 was introduced under the Companies Act, 2013 (CA 2013) dealing with disclosure of significant beneficial owners of a company and compliances thereunder. There have been several changes to Section 90 and rules thereunder so far.
The Companies (Amendment) Act, 2017 (2017 Amendment) had amended the erstwhile Section 90 introduced under CA 2013 substantially. The new Section 90 along with the Companies (Significant Beneficial Owners) Rules, 2018 (2018 SBO Rules) became effective from June 14, 2018. However, due to several ambiguities that remained under 2018 SBO Rules, the Ministry of Corporate Affairs (MCA) vide its circulars dated September 6, 2018 and September 10, 2018, suspended the prescribed filings in respect of SBOs indefinitely. Meanwhile, the Companies (Amendment) Ordinance, 2019 (2019 Ordinance) also introduced certain changes in Section 90. Finally, on February 8, 2019, the MCA brought out the Companies (Significant Beneficial Owners) Amendment Rules, 2019 (2019 SBO Amendment Rules), which revamped the 2018 SBO Rules substantially, and became effective from February 8, 2019. A timeline graph of Section 90 is provided below:
Compliances required by all Indian companies and their SBOs | May 2019 and thereafter on an on-going basis
| S.No. | Onus | Form
| Timeline
|
|---|---|---|---|
| 1. | Declaration by existing SBOs to the company | Form BEN-1 | Within 90 days of commencement of 2019 SBO Amendment Rules (i.e. 8 February 2019) |
| 2. | Declaration by subsequent SBOs or any change therein, to the company | Form BEN-1 | Within 30 days of acquiring beneficial ownership or any change therein |
| 3. | Declaration by an individual becoming SBO within 90 days of commencement of 2019 SBO Amendment Rules, or any change therein during this period | Form BEN-1 | Within 30 days of expiry of 90 days of commencement of 2019 SBO Amendment Rules (i.e. 8 February 2019) |
| 4. | Declaration by company with the Registrar of Companies (ROC) | Form BEN-2 | Within 30 days of receipt from SBO |
| 5. | Company to maintain return of SBO, which will be open for inspection by all members | Form BEN-3 | On-going |
| 6. | Company to give notice to seek information on SBOs**** **** where the person fails to provide information or the information is not satisfactory, the company may approach the National Company Law Tribunal for directing the shares in question to be subject to restrictions, such as on transferability, right to receive dividend or other distribution, voting rights, etc. | Form BEN-4 | On-going |
| 7. | Companies to take necessary steps to find the SBOs, and cause such individuals to make a declaration in Form BEN-1. Further, every company is now required to give a notice to every member (other than an individual), who holds 10% or more of shares/voting rights/right to receive dividend or other distribution in a financial year, in a company to provide information on their holdings in Form BEN-4. | Form BEN-1 & Form BEN-4 | On-going |
| 8. | SBO disclosure by all listed companies in India | Format prescribed in SEBI circular dated March 12, 2019 | Quarter ended June 30, 2019 |
Penalties and Consequences
| S.No. | Onus | Offense | Consequence |
|---|---|---|---|
| 1. | Individual/SBO | Failure to make SBO disclosure in Form BEN-1 | - Imprisonment of term up to 1 year; and/or - Fine not less than INR 100,000 (~ USD 1600), which may extend up to INR 10,00,000 (~ USD 16,000); - Additional fine of INR 1,000 (~ USD 16) per day in case of continuous default |
| 2. | Reporting Company & every officer-indefault | - Failure to maintain return of SBO in Form BEN-3; - Failure to file Form BEN-3 with the ROC; - Denies inspection of register of SBO to members | - Fine not less INR 10,00,000 (~ USD 16,000), which may extend up to INR 50,00,000 (~USD 77,000); - Additional fine of INR 1,000 (~ USD 16) per day in case of continuous default |
| 3. | Any person (including SBO or reporting company) | Willfully furnishes any false or incorrect information or suppresses any material information that he is aware of | - Liable for fraud under Section 447 of CA 2013; - Any person found guilty of fraud involving an amount of at least INR 10,00,000 (~ USD 16,000) or 1% of the turnover of the company, whichever is lower, will be punishable with imprisonment for a term of not be less than 6 months, which may extend to 10 years, and also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: |
Key Takeaways
Identification of SBO for a company means piercing the corporate veil and could be a tricky task given the complexity of corporate structures today. While the 2019 SBO Amendment Rules have brought in much-needed clarity, each case will involve a detailed analysis to identify SBOs. The concepts of 'control' and 'significant influence' are subjective and will be tested with times. Also, it remains to be seen if cross-holding of an individual across the group structure would be factored in for determining his/her SBO holding in a reporting company. Further, the SBO disclosures under CA 2013 should be aligned with the disclosures required under other Indian laws to avoid any disparity in disclosures and questioning from different regulators in India. The penalties and the consequences for non-compliance both on an individual as well as companies are quite onerous. Therefore, corporates should assess their structures at the earliest since the May 2019 deadline is fast approaching.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.