Decoding Significant Beneficial Ownership in India

1. Background

The Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”), were notified by the Ministry of Corporate Affairs (“MCA”) on June 14, 2018 and were further amended by the MCA on February 8, 2019, to ensure that adequate, accurate and timely information is made available on beneficial ownership and control of companies incorporated in India, and to provide clarity on the reporting requirements associated with the declaration of the beneficial ownership and control of companies in India. This article provides for a brief of: (a) the process involved in identification of beneficial owners and others who are in control of companies; (b) reporting requirements and obligations of such persons; (c) penalties and punishments in case of non-compliance; and (d) other matters in this regard.

 2. What is significant beneficial interest or control?

Simply put, significant beneficial owners or persons in control, refers to those individuals who are the ultimate beneficiaries of the interest owned in the companies registered in India.

3. Who is a significant beneficial owner (“SBO”)?

Every individual, who acting alone or together, or through one or more persons, possesses one or more of the following rights or entitlements in a company shall be deemed to be an SBO:

• holds indirectly, or together with any direct holdings, not less than 10% of the shares of such company;
• holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares of such company;
• has right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in a financial year of such company, through indirect holdings alone, or together with any direct holdings; and
• has right to exercise, or actually exercises, significant influence or control over such company, in any manner other than through direct holdings alone.

It is pertinent to note that only indirect holding or indirect holding along with direct holdings require disclosure under the SBO Rules. Therefore, any person having direct beneficial interest in the company is not treated as SBO in terms of SBO Rules and is not required to make any self-disclosures in form BEN 1, unless such direct holding is clubbed together with any indirect holdings of such person in the company.

4. How to identify SBO in case of a legal person?

SBO Rules provide that in the event the shareholder of a company is not an individual but a company, corporation, partnership firm/ LLP, Hindu undivided family or a trust, identification of whether such shareholder is SBO or not, would be based on the following criteria:  

Classification of memberIn case of Body CorporateIn case of Partnership Firm or Limited Liability Partnerships (“LLP”)In case of a Hindu Undivided FamilyIn case of a Trust Following individuals shall be treated as SBO: (a) holding majority stake in such body corporate; or (b) holding majority stake in the ultimate holding company of such body corporate. Following individuals shall be treated as SBO: (a) who is a partner of such firm of LLP; or (b) who holds majority stake in the partner (being body corporate) of such firm or LLP; or (c) who holds majority stake in the ultimate holding company of the partner (being body corporate) of such firm or LLP. The karta of such entity shall be treated as SBO. Following individuals shall be treated as SBO: (a) who is trustee of a discretionary trust or charitable trust; or (b) who is a beneficiary in case of a specific trust; or (c) who is an author or settlor in case of a revocable trust.

  5. Reporting Obligations

In terms of Section 90 of the Companies Act, 2013 (“Act”), every SBO:

• holding 25% (twenty-five per cent) or more in shares of a company; or
   
• who holds the right to exercise significant influence or control as defined in clause (27) of Section 2 of the Act, over the company,
  
   

shall make a declaration to such company (“Reporting Company”), specifying the nature of his interest and other particulars, in Form BEN 1, (a) within a period of 90 (ninety) days from the date commencement of the SBO Rules; and (b) within a period of 30 days of acquiring/ change in such status. Upon receipt of form BEN 1, the Reporting Company is required to intimate the Registrar of Companies (“RoC”) the details such individuals who hold significant beneficial ownership or control over such company, in form BEN 2, within a period of 30 (thirty) days from the date of receipt of such information. The above reporting obligations are described as below:

6. Non-compliance and penalties

Any non-compliance with the provisions of Section 90 of the Act or the SBO Rules, results in severe penalties, which may also include imprisonment.  

OffencePunishment Failure to make disclosure in form BEN 1 Imprisonment for a term which may extend to 1 (one) year orwith fine which may extend to Rs. 10,00,000/- (Rupees Ten Lakh only)or with both. Failure to file form BEN 2 The company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 50,00,000/- (Rupees Fifty Lakh only). Failure to maintain form BEN 3 Failure to issue form BEN 4 Continuing defaults A further fine, which may extend to Rs. 1,000/- (Rupees One Thousand only) for every day after the first day during which the failure continues. Furnishing false or incorrect information or supressing material information Action under Section 447 (Fraud) of the Act shall be taken.

7. What are the obligations of a company for identification of SBOs?

The SBO Rules provide that, every company, incorporated in terms of the Act, shall seek information about potential SBO from its members holding at least 10% of its shares, voting rights or right to receive or participate in the dividend or other distributions declared by such company, in form BEN 4. The Company may also seek information about the potential SBO from any person if it has reason to believe that the said person has:

• significant beneficial interest in such company; or
• knowledge of a person having significant beneficial interest in the company; or
• knowledge of another person likely to have information on a person having significant beneficial interest in the company; or
• been SBO of the company at any time during the 3 (three) years immediately preceding the date on which the notice is issued, and who is not registered as a SBO with the company.

In the event the company seeks information on the potential SBO in form BEN 4 and the person from whom such information is requested, fails to furnish such information within the specified time; or where the information given is not satisfactory, the company may apply to the National Company Law Tribunal within a period of 15 (fifteen) days from the date of expiry of the specified period, for an order directing that the shares in question be subject to restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other matters as may be prescribed in this regard.

8. Conclusion

While the erstwhile Companies Act, 1956 dealt with the process of identifying the beneficial owners of the shares, it was silent on the layers up to which the disclosure was required to be made by the beneficial owners and their nominees. Also, there were large number of companies, who were not following the reporting requirements, as the fines and penalties provided by the Act for non-compliance of such provisions were meagre. The SBO Rules in terms of the Act, is focused on (a) identifying the indirect and significant beneficial interest in the companies in India; and (b) unveiling the ultimate beneficiaries; and (c) involves severe penalties for non-compliances. However, there still persists ambiguity around the interpretation of Section 90 and the SBO Rules whereby investors/ owners are unable to ascertain whether they fall under the ambit of SBO in terms of the Act or not.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal Hyderabad.