SBO: Interpretation of Significant Beneficial Ownership undergoes any change (Part 2 of 3) By CS Brajesh Kumar

This article is in continuation of our previous article on Significant Beneficial Ownership which explains about this new concept.

If you have missed reading the first article, click here to read the Part 1.

Rule 3(2) of SBO Rules provide that every individual, who subsequently becomes a SBO, 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.Upon receipt of declaration in Form BEN-1 from SBO, 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.

The SBO Rules does not define the word “change”, it is still unclear in the rules that whether we have to consider every change in significant beneficial ownership or to consider major increase or decrease in shareholding (i.e. specified % of increase or decrease in shareholding). So,there arise an issue i.e. when an individual consider the SBO undergoes any change.The MAC should clarify in this regard. In this article, we tried to explain an aspect of the interpretation of the words used in the Rule 3(2).

Before understanding the change, we should understand the meaning of significant beneficial ownership? The significant beneficial ownership means a right or entitlement exercise through indirect or direct with indirect holding of not less than ten per cent of the shares/voting right/dividends/significant influence or control in Reporting Company.For better understanding of the significant beneficial ownership concept, visit our previous article.

“Change” means any change in the rights or entitlement (irrespective of change of % holding) held directly and indirectly in the Reporting Company. The Change may arise due to further issue of shares, buy back of shares, transfer of shares, change in holding at any layer, exercising ESOP option, conversion on entity into another one, becoming holding Subsidiary Companies, change in Karta of HUF, change in trustee/beneficiary/author, Admission/Resignation/Retirement/Removal of partner in LLPand death of existing SBO etc.Due to change in Significant Beneficial Ownership, an existing SBO can lose its status as SBO and ceased to be SBO.

For better understanding, let’s discussed some situations:

Mr. X is holding majority stake (51%) in ABC Limited and ABC limited is holding 10% in XYZ Limited. In this case, Mr. X is SBO for XYZ Limited.

 Situation No. 1: Changes in capital structure of XYZ Limited i.e. Reporting Company (RC)

The capital structure of RC can be change due to issue of shares, conversion of convertible security into equity shares, conversion of loan into equity shares and buyback of shares etc. then shareholding of ABC Limited in XYZ Limited i.e. Reporting Company can be increase or decrease. In this case, declaration in Form BEN-1 by Mr. Xis required even in case when he loses its status as a SBO.

Situation No. 2: Changes in capital structure of ABC Limited i.e. body corporate member of Reporting Company and transfer of shares by ABC Limited

If shareholding of Mr.X in ABC Limited is change due to above mentioned reasons given in situation 1 then shareholding of Mr.X in ABC Limited i.e. body corporate member reporting Company can be increase/decrease. In this case, declaration in Form BEN-1 by Mr. Xis required.

If ABC Limited transfers its shares resulting in decrease in shareholding of ABC Limited and the shareholding will become less than 10%, then Mr.X is no longer be a SBO for XYZ Limited. In this case, declaration in Form BEN-1 by Mr. X is required because Mr.X cease to be SBO for XYZ Limited.

Situation No. 3: Changes in holding of individual who is SBO

The shareholding of Mr.X can be change due to transfer of shares and allotment of shares etc. which may results in increase or decrease in his shareholding. In this case, declaration in Form BEN-1 by Mr. Xis required even he sold his entire shareholding.

Situation No. 4: XYZ Limited become subsidiary of ABC Limited

If XYZ Limited become a subsidiary of ABC Limited then SBO rules shall not applicable on the XYZ Limited provided ABC Limited is a Holding Reporting Company i.e. ABC Limited is Reporting Company which is required to comply with SBO Rules and is required to file Form BEN-2.  

Although this is a change but Mr.X is not required to give Form BEN-1 to RC because of non-applicability of SBO Rules.

Situation No. 5: XYZ Limited converted into XYZ LLP

If XYZ Limited converted into XYZ LLP then SBO Rules shall not apply to that LLP and Mr.X is not required to give Form BEN-1.

Situation No. 6: Death of Mr.X

If Mr.X died, then he ceased to be as SBO and there is no requirement to give declaration in Form BEN-1 by the descendants of Mr. X in such case.

Other article on SBO:

1. Significant Beneficial Ownership
2. Illustrations for Understanding Significant Beneficial Ownership


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