In an effort to curb the funding of illicit activities and benami transactions that may be concealed in the form of shareholding or control over the activities of a company, the Ministry of Corporate Affairs (MCA) vide its notification dated June 13, 2018 enacted the Companies (Significant Beneficial Owners) Rules, 2018 (SBO rules) pursuant to the amendment to Section 90 of the Companies Act, 2013 (Act).
The SBO rules now require inter-alia, all persons holding significant beneficial interest in a company, i.e. persons holding at least 10% beneficial shareholding or the right to exercise or are actually exercising ‘significant influence’ or ‘control’ in a company, to make a declaration of the nature of their interests with the company.
Beneficial Ownership vs Significant Beneficial Ownership
Section 89 of the Act requires every person (including foreign shareholders) to make a declaration of their beneficial ownership held in a company in the prescribed form(s).
The declaration should specify the nature of interest held in the company and particulars of the person who is registered with the company as holder of the shares.
Additionally, every individual who holds shares but is not the ultimate holder of ‘beneficial interest’ in the company, is required to make a declaration disclosing the name of such ultimate beneficial owner.
Any holding of beneficial interest in the shares of a company includes rights attached to such shares and entitlement to receipt or participation in dividends or other distributions in respect of the shares.
The SBO rules go a step further and stipulate that every individual holding ‘significant beneficial interest’ in a company is also required to disclose the foregoing information.
Section 90 is specifically aimed at individuals or natural persons, in contrast to Section 89 that obligates only persons or legal entities to make the relevant disclosures.
The SBO rules provide that significant beneficial interest in a company may be held (by natural persons either resident in or outside India):
(i) By holding at least 25% shares of a company or any other percentage as may be prescribed (which is now, as prescribed by SBO Rules, 10% of the shareholding in a company);
(ii) By holding the right to exercise significant control in the affairs of a company; or
(iii) By actually exercising significant control in the affairs of a company.
If a beneficial owner meets any of the above mentioned criteria, he is required to make a declaration of the nature of beneficial interest held in the company, within 90 days of the SBO rules being notified.
The company itself must then disclose this information to the Registrar of Companies, within 30 days of receipt of such disclosures.
The SBO rules also state that a company may send a notice to any person who the company knows or has reason to believe to be holding significant beneficial interest in the company or has knowledge of the identity of such significant beneficial owner.
Where the person to whom notice has been served fails to provide relevant information, the company will be entitled to approach the National Company Law Tribunal to investigate further into the matter.
Uncovering Benami Structures
Section 89 and the SBO rules aim at unearthing the shareholding of structures that involve companies, firms, trusts and / or individuals holding beneficial interest in shares of a company exceeding the (reduced) threshold limit of 10% of the share capital or who exercise significant control or influence in the company through other means, through benami holdings.
Henceforth, all identifiable natural persons who, either directly or along with others (including through intermediate holding companies or trusts), hold 10% or more shareholding of a company, or who exercise ‘significant influence’ or ‘control’ in a company, are required to make a declaration of the nature of their interests to the company together with particulars of instruments embodying the transfer or acquisition of beneficial interest.
Failure to comply with this requirement or suppression of any material information would attract both monetary and penal consequences.
Further, the onus has been placed on the companies to ensure that the relevant persons make the required disclosures, if the company believes such persons are required to do so under the SBO rules.
In doing so, companies must identify shareholders who hold, individually or with others, more than 10% shares of a company, as well as those who directly or indirectly exercise control or significant influence in a company.
Further, each company is required to give notice to any person whom the company knows or has reason to believe is an SBO or to have been an SBO during the preceding three years and who is not registered as such with the company.
Some Looming Questions
The ambiguous language used in the SBO rules raises a question as to how effective these attempts shall be.
For example, the term “significant influence” and “control” have not been comprehensively defined to clarify how and the extent to which they would be relevant to trigger the disclosure requirements for an individual.
Further, it remains to be understood whether the threshold of 10% shall apply to only equity shares or to all classes of shares that may be held by an SBO.
The far-reaching provisions of the SBO rules evince that the law attempts to combat all possible strategies through which beneficial holding in a company may be structured or concealed – and ensure maximum transparency of a company’s holding structure.
However, this conflicts with the basic tenet of company law, i.e. that a company is an independent corporate personality and has a separate juristic nature. It will be interesting to see how these compliance requirements shall play out practically, in the coming months!
Anuj Shah is partner and Virja Dange associate at Khaitan & Co.