Significant Beneficial Owners (SBO) Key Amendments & Implications by CS Aditi Dalmia


INTRODUCTION

With the constant amendments and substitutions in the Companies Act, 2013, one of the significant changes is the introduction of the Companies (Significant Beneficial Owners) Rules, 2018 and further amendments thereon. 

Introduction of the said Rules hasn’t only led to an increment in the Compliances but also highlighted the importance of the term ‘Significant Beneficial owner, i.e. SBO’. 

This article will discuss the relevant sections, rules, its implications and the process to ensure the correct Compliance of it. However, before going forward let’s see what all sections and rules are associated with it.

SECTIONS/ RULES COVERED

 

FREQUENTLY USED TERMS

  • “Beneficial Interest” as described in section 89(10) means the right to exercise any right s attached to such share or to participate in respect of such shares.

  • Control” includes the right to appoint a majority of the directors or 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.

  • “Majority Stake” means holding more than one-half of the equity share capital or voting rights or having the right to receive or participate in more than one-half of the distributable dividend or any other distribution in the body corporate.

  • “Reporting Company” means a company required to comply with the requirements of section 90 of the Act.

  • “SBO” in relation to a reporting company, means an individual referred to in section 90(1) of the Act, 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:

    • holds indirectly, or together with any direct holdings, not less than 10% of the shares;

    • holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;

    • 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 alone, or together with any direct holdings;

    • has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone.

  • “Significant Influence” 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.

WHO IS SBO?

The SBO Rules endeavour to identify the natural person who holds a beneficial interest in a company by laying down the multi-layered criteria for determining who is an SBO in relation to a company. To determine the SBO, an individual must qualify the definition of SBO as stated above and should hold rights or entitlements indirectly in the reporting Company. An individual shall be considered to hold a right or entitlement indirectly in the reporting company, if any of the following criteria, in respect of a member of the reporting company are satisfied:

Sl. No.

Situations

Criteria

1

Member of the reporting company is a partnership entity (through itself or any partner)

An individual who:

(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

2

Member of the reporting company is a Hindu Undivided Family (HUF)

An individual who is a Karta of that HUF

3

Member of the reporting company is a body corporate (whether incorporated or registered in India or abroad), other than an LLP

An individual who:

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

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

4

Member of the reporting company is a trust (through the trustee)

An individual who:

(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 settlor in case of a revocable trust

5

Where the member of the reporting company is a pooled investment vehicle or an entity controlled by the pooled investment vehicle, based in a 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

An individual in relation to the pooled investment vehicle, who – (a) is a general partner; or (b) is an investment manager; or (c) is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity

6

Where the member of a reporting company is a pooled investment vehicle or an entity controlled by the pooled investment vehicle, based in a jurisdiction other than mentioned in clause (5) above

An individual who belongs to any of the clauses mentioned in (1) to (4) above

 

 KEY CONCEPTS CLARIFICATION

Constant amendments and various interpretations have made the definition of SBO a slippery-slope to understand. While the theoretical terms used in Acts and Rules are although understandable but when it comes to its applicability in different company’s scenarios, that’s when real challenge kicks in. From a general and a layman point of view, the prime intent is to figure out who is the ultimate owner of any Company and to figure that out first we need to eliminate those holders who are holding only directly in any company. Now, once you eliminate the direct holders, the next step should be to identify only non-individual holders and to then apply the definition of SBO.

However, it’s not that plain and vanilla, so we will check out a few examples on how the definition of SBO will apply in a general shareholding of any company:

 

                                 

Let’s take a scenario as mentioned above, XYZ Ltd. is a Company in which Mr. A holds 2% and his HUF holds 8%. Now, being Mr. A’s HUF, A holds indirectly 8% in XYZ Ltd and directly 2% of which totally comes to 10%.

Now, if we will check the definition of SBO, it states indirectly or together with any direct holdings at least 10%. In this scenario, Mr. A directly (2%) + indirectly (8%) = 10%. Therefore, Mr. A is SBO of XYZ Ltd.

 

Now, in this scenario, XYZ Ltd. is an organization in which Mr A holds directly 10% and ABC Ltd. holds 20 % of its shareholding and Mr. A also holds 79% (Majority stake) in ABC Ltd. As described in the 2nd SBO Rules, since Mr A has the majority stake in ABC Ltd. which further is a member of XYZ Ltd., Mr A indirectly holds 15.8% in the reporting Company via ABC Ltd. and directly 10%. Therefore total holding will be 25.8%, hence, an SBO.

There can be indefinite situations or Capital structure of any Company but the basis of the determination of SBO will remain the same.

COMPLIANCE PROCESS

Once the concept is clear, the next step comes the implication of it. Now, as stated in the sub-rule 3 of the 1st SBO Rules that “Every significant beneficial owner shall 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 these rules within ninety days from such commencement and within thirty days in case of any change in his significant beneficial ownership.

However, in the sub-rule 2A of the 2nd SBO Rules states that “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.” 

The language seems to be tricky in defining the onus of filing BEN-1. Is it the responsibility of the Individual to file BEN-1?

Yes! But having said that in the 2nd SBO Rules, it has been shifted on the shoulders of the organization to get the filing and submission of BEN-1 done from the SBO. Therefore, ultimately it’s the responsibility of the Company itself to ensure the SBOs have submitted duly filed BEN-1.

Once, BEN-1 is signed, the next process comes the filing of BEN-2 in which all the details of the member of the reporting company as well as the SBO details are filled. BEN-2 requires all the general details, nothing rocket science. Once, BEN-1 is done, technically BEN-2 is half done anyway. 

Now, the thing to note here is that in most of the Indian companies, majority shareholding is in the control of a family itself. Hence, in many cases, there are common SBOs in different group Companies. Therefore, once you upload the form BEN-2, an SBO ID is generated w.r.t. the particular SBO and if the same Individual is SBO in another group company, you need to first mention the SBO ID in the form itself before uploading.

Post Compliances require maintaining a register by the Company in BEN-3 and if the Company is in the view that a particular Individual is an SBO then it can give notice seeking information in accordance with under sub-section (5) of section 90, in Form No. BEN-4.

EXCEPTIONS

SBO Rules are not applicable to the extent the shares of the reporting company are held by – 

  1. An authority constituted by the Central Government for the administration of the Investor Education and Protection Fund. 
  2. Holding a reporting company where the details of such company are provided in the prescribed Form. 
  3. Central Government, State Government or any local authority. 
  4. A reporting company, 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. 
  5. Securities and Exchange Board of India registered investment vehicles such as mutual funds, alternative investment funds, real estate investment trusts, and infrastructure investment trust. 
  6. Investment vehicles regulated by the Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

CONCLUSION 

While this is not one of the easiest Compliances introduced so far, clearly it encourages transparency in the functioning of the Companies. The intent is to identify those individuals who are hiding behind the curtains of their indirect control without being legally responsible. Also, it has highlighted Section 89 and 90 which has been kept dormant for quite some time in the Act. Although despite the efforts of the Government, the definition of SBO remains complex and needs detailed evaluation for appropriate identification and disclosure.

Click here to read the disclaimer


Write a Comment