Significant Beneficial Owner
In India, regulations for identifying “Significant Beneficial Ownership” of a company have been implemented. The genesis and purpose of wanting to know the beneficial ownership of a company lies in the very form in which a company exists.
A company is a legal entity capable of owning properties and conducting business just like a natural person. However, in reality, it’s a group of persons who join together and pool their resources to pursue profitable business opportunities and are ultimate beneficiaries of the company and its properties and profits. The other side of the coin is that if all the benefits and accretions accrue to the individuals who own a company, then all the wrong-doings must also accrue to the same individuals as a company is not capable of doing anything on its own.
Corporate form of businesses have always been structured as multi-layer interconnected entities for numerous reasons, to manage a business division through a separate company or to form a special purpose vehicle for having arrangement with another party to pursue a business opportunity or to enter a foreign market/country. However, another reason for layering the companies may be hide behind the corporate veil and call the shots without being identified. This, unless proven otherwise, is inherently malicious, fraudulent and to circumvent the laws of the land.
Governments, regulators and inter-governmental watchdogs around the world have realised that how complex corporate structures can be exploited for money laundering, terrorist financing, tax evasions and to conduct other illegal activities.
Earlier, it was during investigations only, authorities used to lift the corporate veil to identify people who are the real owners of the company under investigation to make them face law particularly criminal proceedings (a company can only be fined and not jailed!).
The Financial Action Task Force (FATF), an inter-governmental body, with the objectives to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system for its member country’s jurisdiction, has recommendations on “Transparency and Beneficial Ownership of Legal Persons” and “Transparency and Beneficial Ownership of Legal Arrangements”. India being a member of FATF, has brought these two recommendations into the corporate regulations by Section 89 and 90 of the Companies Act, 2013 (the “Act”) and the Companies (Significant Beneficial Owners) Rules, 2018.
The law prescribes that every company shall maintain a register of its significant beneficial owners.
Understanding “Significant Beneficial Owner (SBO)” and “Beneficial Interest (BI)”
First stage in implementing the law is to identify the Significant Beneficial Owner (SBO) who have Beneficial Interest (BI) in the company.
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Definition of “Beneficial Interest (BI)” |
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“For the purposes of this section and section 90, beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to — (i) exercise or cause to be exercised any or all of the rights attached to such share; or (ii) receive or participate in any dividend or other distribution in respect of such share.” |
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Interpretation: 1. Interest in “Shares”: Beneficial interest can arise in shares of company only i.e. Equity and Preference shares; 2. “Direct” or “Indirect”: interest can arise directly through shareholding or indirectly through any agreement or arrangement between the beneficial interest owner and the company; 3. “Alone” or “Together with any other person”: Beneficial interest might arise due to individual or group holding. |
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Definition of “Significant Beneficial Owner (SBO)” |
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Section 90 (1) |
The Companies (Significant Beneficial Owner) Rules, 2018, Clause (e) |
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“Every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of section 2, over the company (herein referred to as "significant beneficial owner")……………” |
"Significant Beneficial Owner" means an individual referred to in sub-section (1) of section 90 (holding ultimate beneficial interest of not less than ten per cent.) read with sub-section [10] of section 89, but whose name is not entered in the register of members of a company as the holder of such shares, and the term 'significant beneficial ownership' shall be construed accordingly; Explanation l. - For the purpose of this clause, the significant beneficial ownership, in case of persons other than individuals or natural persons, shall be determined as under- (i) where the member is a company, the significant beneficial owner is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trusts, holds not less than ten per cent. share capital of the company or who exercises significant influence or control in the company through other means; (ii) where the member is a partnership firm, the significant beneficial owner is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trusts, holds not less than ten per cent. of capital or has entitlement of not less than ten per cent. of profits of the partnership; (iii) where no natural person is identified under (i) or (ii), the significant beneficial owner is the relevant natural person who holds the position of senior managing official; (iv) where the member is a trust (through trustee), the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with not less than ten per cent. interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership; Explanation 11. lt is hereby clarified that instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as shares' for the purpose of this clause; |
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Interpretation: 1. BO has to be a Individual; 2. Beneficial Owner (BO) is person who has Beneficial Interest in Shares; 3. BO can act alone or together with others; 4. “Significance” of Beneficial Ownership has threshold of 25% or more; 5. Mode of Beneficial ownership may through – a. Significant Influence b. Control as define in 2 (27);
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Interpretation: 1. BO has to be a Individual whose name is not in the register; 2. Beneficial Owner (BO) is person who has Beneficial Interest in Shares, GDRs, CCPS, CCD; 3. BO can act alone or together with others; 4. “Significance” of Beneficial Ownership has threshold of 10% or more; 5. Mode of Beneficial ownership may through – a. Significant Influence; b. Control as define in 2 (27); 6. Beneficial Ownership has to be “Ultimate”; 7. SBO in case person other than natural persons – a. SBO is Company: natural person who holds share capital of 10% or more or has significant Influence or exercise Control; b. SBO is Partnership: natural person who holds capital or entitlement of profits of 10% or more; c. SBO is Company/Partnership: where no person identified in (a) and (b), Senior Managing Official of the company; d. SBO is Trust: Trust Author, Trustee, Beneficiaries not less than 10% interest or who has ultimate effective control over the Trust. |
After identification of quantum of beneficial interests and “ultimate” significant beneficial owners, disclosure shall be made by the natural persons having Ultimate Beneficial Interest (UBI).
Difficulties in Identification of SBOs
Subsidiaries of Foreign Entities
It would be difficult for the companies to identify SBOs where SBO shareholders are foreign entities. The Indian companies trying to get declarations may also face disparity between the laws of other countries.
Companies with Government Investment
Also, consider a company which has government investment of less than 51% (not a government), from whom would they get the declaration, secretaries of respective departments or respective minister or the Prime Minister or the President of India.
Investments of Foreign Investment Portfolios (FPIs)
In case of FPIs, it would be difficult to the take such disclosures from the fund contributors in the FPIs.
Ambiguity of Significant Influence and Control
The second part of the definition talks about “significant influence and control through other means”. It is really difficult to identify the significance influence by which most of the companies are in trouble, due to requirement of disclosures under Section 90 of the Act.
The scope of “significant influence or control through other means” is wide. It may include the Investors through Investment Agreements where they hold reserved rights on major decisions. If we look at investments in Startups with this view, the impact of SBO rule is so huge.
Confusion for “Senior Managing Official”
Where no natural person UBIs are identified, the Senior Managing Official shall be considered as such. However, the it is not further explained about the Senior Managing Official and difficulty to identify the Senior Managing Official continue i.e should that be MD or CEO or CS or Director and so on. And why being employee sitting on such position, should one make such disclosure where UBI is not even known.
In respect to Indian Corporate scenario, most such employees would forced to make such disclosures rather than to comply in spirit.
Gist of Discussion
SBO shall be a natural person having Ultimate Beneficial Interest of not less than 10% in the Company.
With a view to prevent the misuse of legal arrangements for money laundering or terrorist financing, the law has been enacted. However, implementation is full of doubts and apprehensions for both, the company and persons being identified as SBOs.
WRITTEN BY
Ghazali Shadab
Company Secretary
(LinkedIn)
Shantanu Srivastava
Company Secretary
(LinkedIn)
UPDATE:
- Ministry of Corporate Affairs vide General Circular No. 07/2018 has eased the date of filing of the Form BEN-2 for transition period. As per the circular, 30 days shall start from the deployment of form BEN-2 on the website of Ministry. However, the deadline for 90 days for submitting the disclosure in form BEN-1 by the SBO to the Company, is remain same.
No further clarification has been made by the MCA;
- Ministry of Corporate Affairs vide General Circular No. 08/2018 has made it clear that the industry is facing certain issues with form BEN-1. Accordingly, the revised form BEN-1 to be notified shortly and MCA has requested the Stakeholders to take such disclosure in the revised form only. Considering to due, it is mentioned that to adhere with the timeline which would be mentioned in the revised form BEN-1. However, there is no clear extension given or amendment in rules.
- Ministry of Corporate Affairs has issued Companies (Significant Beneficial Owners) Amendments Rules, 2019 vide Notification dated February 8, 2019. The said amendment rules has brough signicant changes in the original rules.
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