Challenges surrounding significant beneficial ownerships in often complex and multi-layered ownership structures of corporate entities have been hard to fix for the Department of Corporate Affairs, Government of India (DCA) thus far. The real individual owners have been difficult to identify in the maze of multiple entities in the holding structures, making them practically untraceable. Each...
Challenges surrounding significant beneficial ownerships in often complex and multi-layered ownership structures of corporate entities have been hard to fix for the Department of Corporate Affairs, Government of India (DCA) thus far. The real individual owners have been difficult to identify in the maze of multiple entities in the holding structures, making them practically untraceable. Each time a structure is unlocked, the DCA has been trying to clarify and close the loop aggressively in order to identify the real individual owners. In a step in that direction, the DCA has again recently amended the applicable law to add more clarity to significant beneficial ownerships in order to further strengthen transparency and compliance in this space.
The Ministry of Corporate Affairs has issued the Companies (Significant Beneficial Owners) Rules, 2018 ("New SBO Rules") dated 8th February 2019 under Section 90 of the Companies Act, 2013 ("Act") and has provided for mandatory disclosure compliance from the date of notification.
This paper seeks to highlight the salient aspects of these New SBO Rules as follows:
The New SBO Rules provide a new definition of 'significant beneficial ownership' to mean such an individual, who, acting alone or together, or through one or more persons or trusts:
(i) holds indirectly, or together with any direct holdings, not less than 10% of the shares/voting rights in the shares in an Indian company; or
(ii) has right to receive or participate in not less than 10% of distributable dividend through indirect holdings alone or together with any direct holdings; or
(iii) has right to exercise or actually exercises significant influence or control in any manner other than direct holdings alone.
Further, even the term 'Significant Influence' has been
defined to mean the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not in control or joint control of those policies.
The term 'Control' has been given an inclusive definition i.e. to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons, acting individually or in concert, such rights are derived on account of shareholdings or management rights or through shareholders agreements or voting agreements or in any other manner and whether such rights are exercised directly or indirectly
Additionally, (i) where an individual is holding shares in an Indian company in his or her name or (ii) if he or she holds or acquires a beneficial interest in the shares of an Indian company and has made a declaration under Section 89 of the Act, such holding, right or entitlement is to be treated as direct holding.
A 'Beneficial Interest' in a share under the New SBO Rules includes the right or entitlement of a person (without being a registered owner of such a share) to (i) exercise or cause to be exercised any or all the rights attached to the share; or (ii) receive or participate in any dividend or other distribution in respect of such a share. Further, the definition also provides that such rights may indirectly arise as well i.e. out of any contract, arrangement or otherwise and may be exercised by such a person directly or indirectly, either alone or together with any other person.
An individual holds rights or entitlement through body corporates, Hindu Undivided Family, Partnership Entities, Trusts, Pooled Investment vehicles in the following situations, such rights or entitlements shall be said to be indirectly held:
(i) Where a shareholder is a Body Corporate - if the individual holds majority stake (more than 50% of shares/voting rights/dividend rights) in that Body Corporate or its ultimate holding company.
(ii) Where shareholder is a Hindu Undivided Family - if the individual is the karta.
(iii) Where shareholder is a partnership entity (under the Partnership Act or Limited Liability Partnership Act) - if the individual is a partner or holds majority stake in Body Corporate Partner or its ultimate holding company.
(iv) Where shareholder is a Trust through trustee - if the individual is a trustee in case of discretionary trust or charitable trust / a beneficiary in case of specific trust / an author or settlor in case of revocable trust.
(v) Where shareholder is a Pooled Investment Vehicle or an entity controlled by it based in the country which is a member of the Financial Action Task Force on money laundering and that country's securities market regulator is a member of the International Organization of Securities Commissions - if the individual is a general partner or investment manager, or Chief Executive Officer (where investment manager of such pooled vehicle is a body corporate or partnership entity). In other case, theprovisions in (i), (ii), (iii) or (iv) above will apply.
It is pertinent to note that Section 90 of the Act empowers the Central government to investigate beneficial ownership of shares or class of shares and that in such a case the provisions of Section 216 of the Act shall apply to such investigation.
Section 216 further empowers the Central Government to investigate to determine the true persons who are or have been financially interested in the success or failure of a company or who are or have been able to control or to materially influence the policy of a company. The section also enables such an investigation under the directions of the National Company Law Tribunal, in the course of any proceedings before in. It is pertinent to note that the scope and ambit of Section 90 read with Section 216 does not envisage mandatory disclosure compliance as now stipulated under the New SBO Rules. The New SBO Rules, therefore, reflect an enlargement of the ambit of Section 90 and 216 of the Act which is beyond the mandate of the said provisions of the Act.
Further, the New SBO Rules come into play only in cases where an individual holds rights or entitlements indirectly, whether or not, together with his direct holdings of rights or entitlements. Therefore, in cases where an individual only has direct holdings of rights and entitlement, the compliances under the New SBO Rules will not be attracted as is evident from the use of terms such as 'indirectly, or together with direct holdings' and 'in any manner other than direct holdings' in the definition of significant business ownership.
Therefore, an individual holding significant beneficial ownership under the New SBO Rules, is required to file a declaration with the said Indian company within 90 days from the commencement of the New Rules in the prescribed form. The time period commences from 8th February 2019 and extends to about 8th May 2019. Thereafter, such Indian company is required to record such disclosures made by a significant business owner and to file such details with the Registrar of Companies in addition to maintaining a register of such disclosures. The filings made with the Registrar of Companies will form part of the public records. Additionally, the New SBO Rules also require Indian Companies to identify such individuals who fall within the definitions of significant beneficial ownerships and require such individuals to file the said declarations, respectively. In the event of failure by such individuals to comply with the requirements to files respective declarations as discussed above, the Indian Company can move the National Company Law Tribunal for directions to restrict transfer of interest and suspend any or all rights attached to such shares.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.