Note on Amendment to Significant Beneficial Ownership Rules, 2018 By CS Arundhuthi Bose


 
Introduction
 
On the 14th of June, 2018 the Ministry of Corporate Affairs (MCA) brought in the Companies (Significant Beneficial Owners) Rules, 2018[1] (SBO Rules) in order to keep a track of the actual holders of the share capital of a corporate entity. With regard to the above, on the 7th of December, 2018 the SEBI prescribed the format of disclosure of the Significant Beneficial Ownership (SBO).[2]

In order to bring in further clarity on the matter of SBO, the MCA notified the Companies (Significant Beneficial Owners) Amendment Rules, 2019[3] (‘Amendment Notification’) on the 8th of February, 2019. These amendments to the SBO Rule has given answers to a lot of the pondering questions that have been lurking in the past couple of months following the implementation of the SBO Rules.
This Note aims at summarising the contents of the Amendment Notification for the convenience of our readers.

Amendments
 
1. Changes in the definitions: - Clause (b) to clause (i) of rule 2 of the SBO Rules have been substituted as explained hereunder.
 
a. Control: - In rule 2 of the SBO Rules the definition of ‘Control’ has been inserted in clause (b). The definition is as under:-
‘"Control" means control as defined in clause (27) of section 2 of the Act.’

                                Here, ‘Act’ refers to the Companies Act, 2013.

Re-iterating section 2(27) of the Act for convenience:-

‘"Control" shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.’

Thus, ‘Control’ includes the following aspects:-

• The right to appoint a majority of the directors
• Control the management or policy decisions exercisable
• By a person or persons acting individually or in concert, directly or indirectly
• Including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner
 
b. Form: - "form" as per rule 2 clause (c) means the form specified in Annexure to the Amendment Rules. The forms have been aligned with the amendments brought in vide the Amendment Rules.
 
c. Majority stake:- The definition of majority stake has been inserted in the SBO Rules in rule 2 clause (d), which define it 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”.

This means that holding more than 50% of the equity share capital or voting rights in the body corporate, or having the right to receive or participate in more than 50% of the distributable dividend or any other distribution by the body corporate equates to having a majority stake. This castes a wide net in taking in its ambit not only the aspect of equity shareholding per se, but also the aspect of voting rights as well as the dividend scenario. This will help in going further to finding the significant beneficial owner in real terms.

d. Partnership Entity: -
The definition of Partnership Entity has been inserted as rule 2 clause (e). This clause defines a Partnership Entity as:-

‘"Partnership entity" means a partnership firm registered under the Indian Partnership Act, 1932 (9 of 1,932) or a limited liability partnership registered under the Limited Liability Partnership Act, 2008 (6 of 2009).’
 
e. Reporting Company: - A new term ‘Reporting Company’ has been inserted in the amended definition of Significant Beneficial Ownership. This has been defined under the rule 2 clause (f) as follows:-

‘"Reporting company" means a company as defined in clause (20) of section 2 of the Act, required to comply with the requirements of section 90 of the Act.’

As per clause (20) section, 2 of the Act, a company incorporated under this Act or under any previous company law will be a Reporting Company.

f. Section: - ‘Section’ as per clause (g) of rule 2 means a section of the Act.

g. Significant Beneficial Owner (SBO):- The definition of Significant Beneficial Owner has also been amended vide the Amendment Rules. Certain terms have been inserted in the definition as well as clarified to bring out the meaning of an SBO in both words and essence. The concept of a Reporting Company has been inserted. Also, the meaning of right or entitlement (both directly and indirectly) has been given in detail. Another interesting inclusion is that of receipt of the distributable dividend. Also, the situation deemed to be acting together has been dealt with in the amended definition.

(Note:- For the convenience of our readers the major inclusions and changes have been marked as underlined in the color
red.)

SBO now means as follows:-

‘”significant beneficial owner”, in relation to a reporting company means 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 reporting company, namely:-
 
(i) holds indirectly, or together with any direct holdings, not less than ten percent. of the shares;
 
(ii) holds indirectly, or together with any direct holdings, not less than ten percent. of the voting rights in the shares;
 
(iii) has the right to receive or participate in not less than ten percent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
 
(iv) has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone:
 
Explanation I. – For the purpose of this clause, if an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner.
 
Explanation II – For the purpose of this clause, an individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely.
 
(i) the shares in the reporting company representing such right or entitlement are held in the name of the individual;
 
(ii) the individual holds or acquires a beneficial interest in the share of the reporting company under sub-section (2) of section 89, and has made a declaration in this regard to the reporting company.
 
Explanation III. – For the purpose of this clause, an individual shall be considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company, namely: -
 
(i) where the member of the reporting company is a body corporate (whether incorporated or registered in India or abroad), other than a limited liability partnership, and the individual,-
 
(a) holds a majority stake in that member; or

(b)holds a majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of that member;
 
(ii) where the member of the reporting company is a Hindu Undivided Family (HUF) (through karta), and the individual is the Karta of the HUF;
 
(iii) where the member of the reporting company is a partnership entity (through itself or a partner), and the individual-
 
(a) is a partner, or

(b) holds a majority stake in the body corporate which is a partner of the partnership entity; or

(c)holds a majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.
 
(iv) where the member of the reporting company is a trust (through trustee), and the individual,-
 
(a) is a trustee in case of a discretionary trust or a charitable trust;

(b) is a beneficiary in case of a specific trust;

I is the author or settler in case of a revocable trust.
 
(v) where the member of the reporting company is,-
 
(a) a pooled investment vehicle; or
 
(b) an entity controlled by the pooled investment vehicle,
 
based in 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, and the individual in relation to the pooled investment vehicle,-
 
(A) is a general partner; or

(B) is an investment manager; or

(C)is a Chief Executive Officer where the investment manager of such a pooled vehicle is a body corporate or a partnership entity.
 
Explanation IV. Where the member of a reporting company is,
 
(i) a pooled investment vehicle; or
 
(ii) an entity controlled by the pooled investment vehicle,
 
based in a jurisdiction which does not fulfill the requirements referred to in clause (v) of Explanation III, the provisions of clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation III, as the case may be, shall apply.
 
Explanation V. – For the purpose of this clause, if any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be ‘acting together’.
 
Explanation VI. – For the purposes of this clause, the instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as ‘shares’.

The above definition of an SBO has been tabulated below for better understanding:-

1.       

SBO in relation to a reporting company

(i) holds indirectly, or together with any direct holdings, not less than ten percent. of the shares;

 

(ii) holds indirectly, or together with any direct holdings, not less than ten percent. of the voting rights in the shares;

 

(iii) has the right to receive or participate in not less than ten percent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;

 

(iv) has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone

2.       

If an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii) of rule 2 (h)

 

 

 

 

 

He shall not be considered to be a significant beneficial owner

3.       

Holding a right or entitlement directly in the reporting company by an individual

 

 

(i) the shares in the reporting company representing such right or entitlement are held in the name of the individual; Or

 

(ii) the individual holds or acquires a beneficial interest in the share of the reporting company under sub-section (2) of section 89, and has made a declaration in this regard to the reporting company.

 

4.       

Holding a right or entitlement indirectly in the reporting company by an individual

 

Body corporate

 

(whether incorporated or registered in India or abroad),

 

other than a limited liability partnership

 

(a) holds a majority stake in that member; or

 

(b)holds a majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of that member;

Hindu Undivided Family

 

(HUF) (through Karta)

 

The individual is the Karta of the HUF

Partnership entity

 

(through itself or a partner)

The individual

 

(a) is a partner; or

 

(b) holds a majority stake in the body corporate which is a partner of the partnership entity; or

 

(c)holds a majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.

Trust

 

(through trustee)

The individual,-

 

(a) is a trustee in case of a discretionary trust or a charitable trust;

 

(b) is a beneficiary in case of a specific trust;

 

(c) is the author or settler in case of a revocable trust.

a)  a pooled investment vehicle; or

 

b) an entity controlled by the pooled investment vehicle,

 

based in 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

The individual in relation to the pooled investment vehicle,-

 

(A) is a general partner; or

 

(B) is an investment manager; or

 

(C) is a Chief Executive Officer where the investment manager of such a pooled vehicle is a body corporate or a partnership entity.

 

Note:-

 

(i) a pooled investment vehicle; or

 

(ii) an entity controlled by the pooled investment vehicle,

 

based in a jurisdiction which does not fulfill the requirements referred to in clause (v) of Explanation III, the provisions of clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation III, as the case may be, shall apply.

5.       

 

Deemed to be ‘acting together’

 

If any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust.

 

6.       

Shares to include

The instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as ‘shares’.

 

 
h. Significant influence:- Significant influence has been defined in rule 2 clause (i) to mean:-

‘The power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies'.

2. Substitution of rule 3 and rule 4 in the SBO Rules:-
 
a. 2A. Duty of the reporting company:- (Insertion of new clause)

(1) Every reporting company shall take necessary steps to find out if there is any individual who is a significant beneficial owner, as defined in clause (h) of rule 2, in relation to that reporting company, and if so, identify him and cause such individual to make a declaration in Form No. BEN-1.
 
(2) Without prejudice to the generality of the steps stated in sub-rule (1), every reporting company shall in all cases where its member (other than an individual), holds not less than ten percent. of its:-
 
a. shares, or
b. voting rights, or
c. 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 accordance with sub-section (5) of section 90, in Form No. BEN-4.
 
b. Declaration of significant beneficial ownership under section 90:- [Rule 3]
 
i. Filing of declaration in BEN-1 (On commencement of Amendment Rules):- On the date of commencement of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, every individual who is a significant beneficial owner in a reporting company, shall file a declaration in Form No. BEN-1 to the reporting company within ninety days from such commencement.
 
ii. Filing of declaration in BEN-1 (Subsequent to the commencement of Amendment Rules):- Every individual, who subsequently becomes a significant beneficial owner/ or where his significant beneficial ownership undergoes any change shall file a declaration in Form No. BEN-1 to the reporting company, within thirty days of acquiring such significant beneficial ownership or any change therein.

Explanation.- Where an individual becomes a significant beneficial owner, or where his significant beneficial ownership undergoes any change, within ninety days of the commencement of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, it shall be deemed that such individual became the significant beneficial owner or any change therein happened on the date of expiry of ninety days from the date of commencement of said rules, and the period of thirty days for filing will be reckoned accordingly.
 
c. Return of significant beneficial owners in shares (BEN-2):- [Rule 4]

Upon receipt of the declaration under rule 3, the reporting company shall file a return in Form No. BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of such declaration by it, along with the fees as prescribed in Companies (Registration offices and fees) Rules, 2014.
 
3. Application to the Tribunal:- [Rule 7]
 
In the following rule prior to the amendment the situation wherein the application to the Tribunal could be made was not specified.
 
“The reporting company shall apply to the Tribunal: -
 
(i) where any person fails to give the information required by the notice in Form No. BEN-4, within the time specified therein; or
 
(ii) where the information given is not satisfactory,
 
in accordance with sub-section (7) of section 90, for an order directing that the shares in question be subject to restrictions, including –
 
(a) restrictions on the transfer of interest attached to the shares in question;
 
(b) suspension of the right to receive the dividend or any other distribution in relation to the shares in question;
 
(c) suspension of voting rights in relation to the shares in question;
 
(d) any other restriction on all or any of the rights attached with the shares in question.”
 
4. Non-Applicability: -
 
The non-applicability net has been made clearer and more specific and wider considering the difficulties in determining the SBO in such situations. Besides the entities excluded earlier, Authority constituted under section 125(5) and its holding reporting company has been exempted. A reporting company, or a body corporate, or an entity, controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments have also been excluded from the applicability of the SBO Rules.
 
These rules shall not be made applicable to the extent the share of the reporting company is held by:-
 
(a) the authority constituted under sub-section (5) of section 125 of the Act;
 
(b) its holding reporting company:
 
Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.
 
(c) the Central Government, State Government or any local Authority;
 
(d)
(i) a reporting company, or
 
(ii) a body corporate, or
 
(iii) an entity,
 
controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments;
 
(e) Securities and Exchange Board of India registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by the Securities and Exchange Board of India, (lnvestment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.”
 
5. Substitution of forms BEN-1, BEN-2, BEN-3, BEN-4:- The forms BEN-1, BEN-2, BEN-3, BEN-4 have been modified accordingly to align with changes made vide the Amendment Rules.
Conclusion
 
The framing of Amendment Rules has been aimed at bringing in clarity in the implementation of the SBO Rules in a better and more effective manner. A lot of the terms have been redefined to be more specific. Also considering the difficulty in tracing the SBO in certain situations, the net of the non-applicability has been cast wider, but not defying the purpose of the Rules as such.

This Note is a part of the knowledge resource of Mamta Binani & Associates and any form of plagiarism will not be entertained. This document is only for knowledge sharing purpose and is not to be construed in any other manner whatsoever.

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