Significant Beneficial Owner – Lifting of Corporate Veil by CS Dhaval Gusani Founder of DVG & Associates


Introduction
 
In India, People using various means for hiding their real identity and remain in the back door for various ill motives. Government are now actively focusing on illicit usage of trusts, corporate and non-corporate forms, for money laundering, terror financing and parking of black money by individuals who are behind those trusts and other forms.
 
On June 14, 2018, MCA issued the Companies (Beneficial Interest and Significant Beneficial Interest) Rules 2018 and enforced section 90 of the Act. On Feb 8, 2019, MCA has notified the revised rules on SBO. The sole objective of these rules is ‘to identify the ultimate beneficial individual or group of individuals who have control or ownership of the reporting company disregarding the intermediate shareholding by non-individual persons.’
 
Govt. made clear that any individual holding any significant beneficial interest need to come out and disclose his/her holdings. Prima facie, responsibility lies with the individual who is holding beneficial interest and failure on the part of beneficial owner attracts fine as well as imprisonment also. Only few offences of Companies Act, 2013, are now non-compoundable and punishable with imprisonment and violation of SBO rules in one of them!!
 
Section 90(10) of the Companies Act, 2013 provides that If any person fails to make a declaration, he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 10 lakh or with both and where the failure is a continuing one, with a further fine which may extend to Rs. 1000/- for every day after the first during which the failure continues.
 
Who is Significant Beneficial Owners?
 
Significant Beneficial Owner in relation to a reporting company means an individual, who acting alone or together or through one or more persons or trust, possesses one or more of the following rights or entitlements in reporting company, namely:-
 
  • Holds indirectly, or together with any direct holdings, more than 10% of the shares;
  • Holds indirectly, or together with any direct holdings, more than 10% of the voting rights in the shares;
  • Has right to receive or participate in more than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
  • Has right to exercise or actually exercises, directly or indirectly, 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, he shall not be considered to be a significant beneficial owner. Therefore, a person must have an indirect right or entitlement (whether alongwith direct or only indirect) in order to be a SBO. This is mainly because the provisions have been framed to identify the ultimate beneficial owners who are hiding their real identity.
 
"Significant Influence" – Need clarification!
 
It means 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.
 
Now, Startup incubators, Venture Capital Investors, P.E Founds etc. are participating in financial and operation decisions, appoints nominee directors etc. by virtue of Investment Agreement. Will they are also SBO? This questions needs to be addressed by the Govt.
 
Who could be SBO?
 
There are following types of persons that can be in member list of reporting entity.
 
  1. Individual Shareholders
 
Whether individual shareholders are also SBO?
 
No. In order to be a SBO, a person must have an indirect right or entitlement and his/her name is not entered in the register of members. Where the person has only direct holding, he shall not be termed as the SBO.
 
Whether individual shareholders holding direct as well as indirect also needs declaration?
 
Yes. In this case, individual’s direct holding is clubbed with indirect holding and if it is more than 10%, s/he is considered SBO.
 
  1. Body corporate shareholder holding more than 10% (Other than LLP)
 
Any individual holding, directly or indirectly, 51% or more in that body corporate shareholder, then s/he is treated as a SBO.
 
  1. HUF holding more than 10%
 
Karta of that HUF is a SBO.
 
  1. Partnership firm including LLP holding more than 10%
 
All Partners are SBO. If Partnership firm has body corporate as a partners, then individual holding majority stake in that body corporate is a SBO.
 
  1. Trust holding more than 10%
 
  • Trustee (In case of charitable trust) is a SBO
  • Beneficiary (In case of a specific trust) is a SBO
  • Settler (In case of revocable trust) is a SBO
 
  1. Pooled investment vehicle or an entity controlled by the pooled investment vehicle holding more than 10%
 
Partner or Investment Manager or Chief Executive Officer of an entity is a SBO.
 
Steps to Comply this provisions by Reporting Company
 
  1. The Reporting Company first check whether there are any non-Individual member holding more than 10% of shares or voting or dividend rights in the company.
  1. If reporting company has reason to believe that individual is SBO, Send notices to such Individual or Promoters or Directors or any other officer of non-individual members in Form No. BEN-4 seeking information of SBO.
  1. Receiving Form No. BEN-1 from the Significant Beneficial Owner within 90 days from the commencement of these rules and within 30 days from any change in holdings.
  1. Filing of E-form No. BEN-2 with ROC by the Company within 30 days from the date of receipt of declaration in Form No. BEN-1 from the SBO.
  1. Maintaining Register of all SBOs in Form No. BEN-3.
 
Exemptions
 
These rules shall not be made applicable to the extent the share of the reporting company is held by,
 
  • The authority constituted under sub-section (5) of section 125 of the Act;
  • Its holding reporting company:
Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.
  • The Central Government, State Government or any local Authority;
  • 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;
  • 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;
  • investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.
 
Issues need to be addressed
 
Start-up Investment
 
Whether investment made by the private equity funds and venture capital investors, who are not registered with the regulators can fall into this framework. If yes, it is very difficult to find SBO.
 
What would be the extent of the ‘participation in financial and operating policy decisions’ to qualify as ‘significant influence’? It is common for private equity and venture capital investors to have nominee directors, some rights on financial and operating policy decisions of a company as per their investment agreement.
 
Test of Persons acting together
 
The rules cast obligation on companies to ‘take necessary steps to find out’ their significant beneficial owners, especially where persons are ‘acting together’. How can company know whether persons are acting individually or together?
 
Conclusion
 
The spirit of the Amendment Rules is to bring in more clarity and is in alignment with the government’s drive to inculcate transparency and accountability in the corporate set-up. The disclosures relating to SBO are expected to lead to transparency of shareholding structures and help the government identify benami transactions and prevent money laundering activities.

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