Significant beneficial ownership in a company

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Significant beneficial ownership in a company

Introduction

The Ministry of Corporate Affairs has issued the Companies (Significant Beneficial Ownership) Amendment Rules, 2019 (Amendment Rules) to amend the provisions of the Companies (Significant Beneficial Ownership) Rules, 2018 (Principal Rules ).
The Amendment Rules seek to identify the natural persons who are the owners of a company. Additionally, the Amendment Rules have also brought in clarity in respect of the compliances to be undertaken by individuals and companies vi z – à -vi z significant beneficial ownership held in a company.
This update highlights the amendments brought about by the Amendment Rules.

New definitions

The Amendment Rules have introduced the following new definitions:

  1. Reporting company: means a company incorporated under the Companies Act, 2013 or under any of the previous company laws, which is required to comply with the requirements of section 90 (Register of Significant Beneficial Owners in a Company) of the Companies Act, 2013 (Act).
  2. Majority stake: means: (i) holding more than one-half of the equity share capital in the body corporate; or (ii) holding more than one-half of the voting rights in the body corporate; or (iii) having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate.
  3. Significant influence: means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company, but does not necessarily mean control or joint control of those policies.

Amended definition of significant beneficial owner (SBO)

The definition of an SBO has been amended by the Amendment Rules as follows:

An SBO in relation to a reporting company means every individual, who acts alone or together, or through one or more persons or trust, including a trust and person who resides outside India:

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

The Amendment Rules specifically provide that no individual will be an SBO only by holding direct stake in a company. Accordingly, if an individual does not have an indirect holding in a company, such individual shall not be considered as an SBO.

Additionally, the term “shares” include global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures.

Determination of direct holding

The Amendment Rules provide that an individual will be considered to hold a right or an entitlement directly in the reporting company, if the following criteria are met:

  • shares of the reporting company are held in the name of the individual, i.e., individual’s name is reflected as a “shareholder” in the register of members of the company; or
  • the individual holds or acquires a beneficial interest in the shares of the reporting company, which has been declared in the terms of section 89 of the Act.

Determination of indirect holding

The Amendment Rules provide that an individual will be considered to hold a right or entitlement indirectly in the reporting company:

  • In case the member of the reporting company is a body corporate (other than an LLP), such individual holds (a) majority stake in that member; or (b) majority stake in the ultimate holding company of that member.
  • In case the member of the reporting company is a Hindu Undivided Family (HUF), such individual is the karta of the HUF.
  • In case the member of the reporting company is a partnership entity (through itself or through a partner), such individual is (a) a partner; or (b) holds majority stake in the body corporate which is a partner of the partnership entity; or (c) holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.
  • In case the member of the reporting company is a trust (through trustee), such individual is (a) a trustee in case of a discretionary trust or a charitable trust; or (b) a beneficiary in case of a specific trust; or (c) an author or a settlor in case of a revocable trust.
  • In case the member of the reporting company is a pooled investment vehicle or an entity controlled by the pooled investment vehicle, based in the member state of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member state is a member of the International Organization of Securities Commissions, such individual in relation to the pooled investment vehicle is (a) a general partner; or (b) an investment manager; or (c) a chief executive officer, where the investment manager of such pooled vehicle is a body corporate or a partnership entity.

Reporting requirements of SBO

  • Every individual who was an existing SBO in a reporting company (as on the date of coming into force of the Amendment Rules) was required to file a declaration to the reporting company in Form BEN 1 within 90 days from the date of the Amendment Rules, i.e., by 08 May 2019.
  • Every individual, who subsequently becomes an SBO or a part of the change in the significant beneficial ownership, is required to file Form BEN 1 to the reporting company within 30 days of becoming an SBO or any change therein.

Reporting requirements of the reporting company

  • Every reporting company is required to take steps to identify individuals who are significant beneficial owners and can cause such individuals to make a declaration in Form BEN 1. For this purpose, every reporting company is required to give notice to its members in Form BEN 4 seeking information regarding significant beneficial ownership, where its members (other than individuals) hold not less than 10% of the shares, voting rights or right to receive or participate in the dividend or any other distribution payable in a financial year.
  • Further, every reporting company, on receipt of FORM BEN 1 from SBO, is required to file a return in Form BEN 2 with the Registrar of Companies, within a period of 30 days from the date of receipt of such declaration from the SBO.

Non-applicability of the Amendment Rules

The following are excluded from the applicability of the Amendment Rules:

  1. Investor Education and Protection Fund;
  2. holding reporting company of the reporting company;
  3. central government, state government or any local authority;
  4. a reporting company or a body corporate or an entity controlled by the central or any state government, or partly by the central and party by one or more of the state governments;
  5. all investment vehicles registered with Securities and Exchange Board of India;
  6. investment vehicles regulated by Reserve Bank of India or Insurance Regulatory and Development Authority of India or Pension Fund Regulatory and Development Authority.

Conclusion

The Amendment Act is a welcome change since it has resolved various ambiguities that existed in the old SBO regime. However certain complexities still remain in the definition of an SBO which may require a detailed analysis of direct and indirect holdings for appropriately identifying an SBO and consequent disclosure requirements in a reporting company.

The stricter disclosure requirements for a reporting company and the SBO brought about by the Amendment Rules might lead to transparency in the shareholding structures and may help the authorities identify and prevent prohibited activities.