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...
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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.
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:
in SEBI circular dated March 12, 2019
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:- If fraud in question involves public interest, the term of imprisonment shall not be less than 3 years;- If the fraud involves an amount less than INR 10,00,000 (~ USD 16,000) or 1% of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud will be punishable with imprisonment for a term which may extend to 5 years or with fine which may extend to INR 50,00,000 (~USD 77,000), or both.
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.