Analysis of Companies (Significant Beneficial Owners) Rules, 2018 by CS Minal Dudeja


MCA raises curtains on Significant Beneficial Owner (SBO) rules – notified rules with several changes

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.

Amendments in Section 89 & 90 was one of the major amendments brought in by the Companies (Amendment) Act, 2017 after considering the practical challenges in these Rules amended the provisions of SBO Rules through its notification dated February 8, 2019through notification, has enforced the amended provisions of Section 90 of the Companies Act, 2013and has introduced the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”). This is one of the most onerous provisions rolled out by MCA. The purpose of this Section is to ask companies ‘Pardekepeechekaunhai? Saamneaao!’The present Article explains the provisions of the amended Section 90 and the amended Rules.

Meaning of SBO

As per the amended Section 90 of the Companies Act, 2013 (‘Act’), SBO is referred as-

“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 of the Act.

As per the definition provided in the Act, the government is empowered to prescribe other holding percentage even for the determination of the SBO. Accordingly, the amended Rules provides the following definition as –

“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.

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:

  1. has an indirect holding of not less than 10% of shares in a company;
  2. has an indirect holding together with any direct holdings of not less than 10% of shares in a company;
  3. has an indirect holding of not less than 10% of the voting rights in the shares of a company;
  4. has an indirect holding together with a direct holding of not less than 10% of the voting rights in the shares of a company;
  5. 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;
  6. 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;
  7. has the right to exercise, or actually exercises, significant influence or control, in any manner other thanthrough direct holdings alone.

SBO not considered: - 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:

  1. 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
  2. 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:

  1. In case the member of the reporting company is a body corporate (other than an LLP), such individual holds.
    • Majority stake in that member; or
    • Majority stake in the ultimate holding company of that member.
  2. In case the member of the reporting company is a Hindu Undivided Family (HUF), such individual is the Karta of the HUF.
  3. 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.

  1. 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.

  1. 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.

Declaration of beneficial interest by SBO

Every Significant Beneficial Owner (SBO) is required to file a declaration in Form No. BEN-1 to the company in which he holds the significant beneficial ownership:-

  • On the date of commencement of the Amendments Rules within ninety days from such commencement; and
  • Within thirty days in case of any change in his significant beneficial ownership.

Further, every individual, who, after the commencement of these rules, acquires significant beneficial ownership in a company, is also required to file a declaration in Form No. BEN-1 to the Company, within thirty days of acquiring such significant beneficial ownership or in case of any change in such ownership.

Reporting requirements of the reporting company

  1. 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. 

  1. 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 (RoC), within a period of 30 days from the date of receipt of such declaration from the SBO.

Register of SBO in a company

  1. Every company is required to maintain a register of SBO in Form No. BEN-3.
  2. Also, this register shall be open to for inspection during business hours, at such reasonable time of not less than two hours, on every working day as the board may decide, by any member of the company on payment of such fee as may be specified by the company but not exceeding fifty rupees for each inspection.

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.

Format of Forms/ e-Forms

The format of the Forms BEN-1, BEN-2, BEN-3 and BEN-4 has been provided; the electronic version of the same is still awaited. The contents of the forms are same as provided in the draft rules, the only change is in numbering of the forms.

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.

Click here to read the disclaimer


Write a Comment