On 13thJune 2018, the Ministry of Corporate Affairs notified Section 90 of the Companies Act, 2013 (“Act“) and the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules“). Both aim to make transparent a company’s ownership by tracing the identity of the individuals who ultimately control the company.

Over six months later on 8th February, 2019, the Ministry of Corporate Affairs issued the Companies (Significant Beneficial Owners) Amendment Rules, 2019 (“Amendment Rules“). The Amendment Rules have substantially amended the SBO Rules. The Amendment Rules provide a more detailed definition of the term significant beneficial owner and several other terms such as majority stake, reporting company etc.

Who is a Significant Beneficial Owner?

Section 90 of the Act states that 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. (reduced to 10% under the SBO Rules) 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, over the company (herein referred to as “Significant Beneficial Owner“), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof.

The Act permits the government to prescribe a minimum percentage holding different from the one prescribed in the Act to determine a significant beneficial owner. The SBO Rules prescribed a lower percentage; i.e. 10% and the Amendment Rules have retained this lower percentage (10%).

Under the Amendment Rules, a Significant Beneficial Owner, in relation to a company incorporated under the Act (“Reporting Company“), is an individual referred to in sub-section (1) of Section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such company, namely:

  1. holds indirectly, or together with any direct holdings, not less than ten per cent. of the shares;
  2. holds indirectly, or together with any direct holdings, not less than ten per cent. of the voting rights in the shares;
  3. has right to receive or participate in not less than ten per cent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
  4. has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone.

The explanation to the definition of Significant Beneficial Owner provided in the Amendment Rules further states that an individual who does not hold any right or entitlement indirectly under (1) – (3) above, shall not be considered as a significant beneficial owner. Furthermore, an individual holding shares in the Reporting Company in his/her own name or an individual who holds or acquires beneficial interest in the share of the Reporting Company and has made a deceleration under Section 89 of the Act is considered to hold a right or entitlement directly.

The Amendment Rules determine who shall be considered to hold a right or entitlement directly in the Reporting Company depending on the legal structure of the member and provide that:

Member Structure Individual holding Right or Entitlement
Body Corporate (whether registered in India or outside)
  1. individual who holds majority stake in that member; or
  2. individual who holds in the ultimate holding company of that member.

Majority Stake has been defined by the Amendment Rules as (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.
Hindu Undivided Family (HUF) through Karta Karta
Partnership Entity (means a partnership firm or a limited liability partnership registered under Indian laws) through itself or a partner
  1. partner; or
  2. holds majority stake in the body corporate which is a partner of the partnership entity; or
  3. holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.
Trust
  1. the trustee in case of a discretionary trust or charitable trust;
  2. the beneficiaries in case of a specific trust;
  3. is the author or settlor in case of a revocable trust.

Duty of the Reporting Company

A Reporting Company is required to take necessary steps to find out if there is any individual who is a Significant Beneficial Owner, in relation to that Reporting Company, and if so, identify him and cause such individual to make a declaration (in Form No. BEN-1). The Reporting Company shall where its member (other than an individual), holds not less than 10% of its shares or voting rights or right to receive or participate in the dividend or any other distribution payable in a financial year, give notice to such member, seeking information in Form No. BEN-4.

Obligations of the Significant Beneficial Owner

A Significant Beneficial Owner is required to file a declaration in Form No. BEN 1 within 90 days of the commencement of the Amendment Rules to the Reporting Company in which he holds significant beneficial ownership. Any individual who subsequently becomes a Significant Beneficial Owner is required to file BEN- 1 within 30 days of acquiring such significant beneficial ownership.

Obligations of the Reporting Company

A company is required to:

  • File a return in Form No. BEN-2 with the Registrar regarding a declaration made by a Significant Beneficial Owner and regarding any change in the significant beneficial ownership thereafter;
  • Maintain a register of Significant Beneficial Owners in Form No. BEN-3 with their respective names, addresses, date of birth and ownership details;
  • Give notice to any person whom the company believes to be a Significant Beneficial Owner of the company or to have been a Significant Beneficial Owner of the company during the preceding three years and who is not registered as a Significant Beneficial Owner or to any person who may have knowledge of the identity of a Significant Beneficial Owner; and
  • Apply to the National Company Law Tribunal for an order directing restrictions be imposed on the shares if a person fails to provide the requisite information sought. These restrictions could include restrictions on the transfer of interest attached to the shares and suspension of voting and dividend rights.

Failure to file Form BEN-I is punishable with a fine ranging between Rs. 1,00,000 to Rs, 10,00,000 (for a continuing offence an additional fine of Rs. 1000 for every day the failure continues). A company that does not comply with the SBO Rules and every officer who is in default, is punishable with a fine ranging between Rs. 10,00,000 to Rs. 50,00,000 (for a continuing offence an additional fine of Rs. 1000 for every day that the failure continues). Willful suppression of material information or submission of false information is also a criminal offence under the Indian Penal Code.

The intent of the SBO Rules is clear. By tracing those who hold ‘ultimate’ control over companies, the SBO Rules seek to pierce the corporate veil surrounding complex corporate structures. Combating money laundering, benami transactions, tax evasion and terror financing – many objectives have been attributed to the SBO Rules. Their effectiveness however, will be determined over the course of time.