Concept of beneficial ownership

The legal concept of beneficial ownership is where specific property rights in equity belong to a person even though legal title of the property belongs to another person.

Financial Action Task Force (FATF) an inter-governmental body established in 1989 by more than 35-member countries including India with objective of combating money laundering, terrorist financing and other related threats to the integrity of the international financial system has issued detailed guidelines in connection with beneficial ownership.

As per FATF, beneficial ownership is the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

Registered Owner Vs Beneficial Owner

Registered Owner is the person whose name is entered in the Register of Member of the Company, as the owner of the shares. The Registered Owner is authorized to attend & vote at a meeting, to receive dividends and to exercise all the rights of a shareholder in the Company.

Beneficial Owner is the true or real owner of the shares which are held in the name of registered owner. The Beneficial Owner is the person, who enjoys all the benefits of being shareholder in a company through another person.  It is on the directions of the beneficial owner these registered owner acts.

Like for example in lot of companies peons, drivers etc., in an organization are being appointed as shareholders and directors of the company while the funds are invested and control is exercised by the true owners. These true owners are actually the persons who avail the benefits arising from these shares through illegal payments.

Significant Beneficial Owner under Section 90 of the Companies Act, 2013

In wake of suggestions of the Companies Law Committee and other developments, the Ministry of Corporate Affairs (MCA) has revamped the existing section 90 of the Act 2013 and introduced altogether a new provision for reporting of significant beneficial ownership in respect of companies registered in India.

As per Section 90 of the Act 2013, every significant beneficial owner is required to disclose the nature of his interest and other particulars within the prescribed period of time to the Company, which in turn will inform the same to the Registrar of Companies. In the said connection, MCA has issued Companies (Significant Beneficial Owners) Rules, 2018 (“SBO”), which deals with identification and reporting in connection with SBO.

1. Definition of Significant Beneficial Owner

   In terms of Rule 2(1)(h) of the SBO Rules, the term ‘Significant Beneficial Owner’ (SBO) is defined as an individual who—

   1. acting alone or together, or
   2. through one or more persons or trust,

   possess one or more of the following rights or entitlements in the Reporting Company (i.e. the company in respect of which SBO declaration is required to be filed)—   

   1. holds indirectly or together with direct holdings not less than 10% of the shares of the Reporting Company; or
   2. holds indirectly or together with direct holdings not less than 10% of the voting rights in the shares of the Reporting Company
   3. has a right to participate or receive 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; or
   4. has a right to exercise or actual exercise significant influence or control, in any manner other than through direct holding alone.

   In simple terms, SBO is an individual who either alone or together with other individuals or trust, exercises rights or entitlements in the Reporting Company by way of holding 10% shares or 10% voting rights or right to receive 10% or more dividend, both indirect and direct holdings or right taken together or such individual exercise significant influence or control, indirectly or along with direct holding in the Reporting Company.

2. Understanding Rights or Entitlements

   As discussed herein before, an individual or individuals(s) to be treated as SBO must exercise any of the following rights or entitlements.

   1. holds indirectly or together with direct holdings not less than 10% of the shares of the Reporting Company;

      An individual or individuals acting together, who holds either indirectly or directly and indirectly both 10% or more of the shares of the Reporting Company shall be treated as SBO for the % shares held in the Reporting Company.

      Shares for the purpose of SBO shall include equity shares, Global depository receipts, Compulsorily Convertible Preference Shares (“CCPS”) and Compulsorily Convertible Debentures (“CCD”).  Kindly take note that convertible instruments are not required to be converted into equity shares for the purpose of calculating the limit of 10% or more. Further limit of 10% or more shall be out of numbers of equity shares, CCPS and CCD in aggregate.

   2. holds indirectly or together with direct holdings not less than 10% of the voting rights in the shares of the Reporting Company.

      An individual or individuals acting together, who holds either indirectly or directly and indirectly both 10% of more of the voting rights in shares of the Reporting Company shall be treated as SBO for the % voting rights held in the Reporting Company. 

      Please take note that voting rights on only equity shares will be considered for this purpose, as CCPS and CCD don’t have voting rights.  Voting rights acquired by holders on redeemable preference shares or optionally convertible preference shares will not be considered.

   3. has a right to participate or receive 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;

      An individual or individual acting together, who receives or has a right to receive 10% of total distributable dividend of the Reporting Company on holding in Reporting Company either indirectly or directly and indirectly both shall be treated as SBO for the % dividend rights held in the Reporting Company. 

      While the term “other distribution” as used aforesaid is not defined but it seems that it is used in sense of interest declared on CCD’s.

   4. has a right to exercise or actual exercise significant influence or control, in any manner other than through direct holding alone.

      An individual or individual acting together, who exercise significant influence (‘SI’) or control over a Reporting Company otherwise through his/her direct holding alone, will also be treated as SBO.

      Please take note in general sense SI or control are exercise either by way of shareholding or by way of any agreement. Since holding by way of 10% or more is already a criteria for determination of SBO, therefore SI or control must be exercised by way of any agreement or written understanding

      For the purpose of SBO Rules, SI and Control shall mean the following—

      1. Significant influence shall mean power to participate directly or indirectly in the financial and operating policy decision of a reporting company but is not control or joint control of those policies.
      2. Control shall include the right to appoint 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.
3. An SBO shall exercise of rights or entitlements either indirectly or directly and indirectly both

   It is important to remember that individual or group of individuals acting together must exercise rights or entitlements except those related to SI or control, either indirectly or directly and indirectly both.

   Indirect exercise of rights or entitlements is mandatory for the purpose of treating any individual(s) as SBO. If an Individual hold 15% of equity shares of the Company, he/she will not be treated as SBO, since the shares are held directly.

   Direct Exercise

   An individual shall be deemed to be exercising rights or entitlements in the Reporting Company directly, if any of the following is satisfied—

   1. Name in Statutory records: Any shares in the Reporting Company representing such rights or entitlement are held in the name of Individual i.e. name of person is appearing in the register of member maintained by the Reporting Company
   2. Declaration of Beneficial Interest u/s 89:  Where an Individual’s name has been disclosed as an owner of beneficial interest under Section 89(2) in respect of the shares of the Reporting Company, then such and has made a declaration to the said effect.

   Indirectly Exercise

   An individual or group of individuals acting together, can exercise rights or entitlements indirectly, only when they hold such right or entitlement through any other person. The SBO Rules provides the manner to identify the individual(s), who holds rights or entitlements indirectly through the following.

   • Body Corporate excluding LLP
   • Partnership/LLP
   • HUF
   • Trust
   • Pooled Investment Vehicle

   Body Corporate

   An individual shall be deemed to be exercising rights or entitlements in the Reporting Company indirectly, where the member of the Reporting Company is a Body Corporate (whether incorporated or registered in India or abroad) and

   1. such Individual holds majority stake in such Body Corporate.
   2. such Individual holds majority stake in Ultimate Holding Company (“UHC”) of such Body Corporate

   Please take note that Body Corporate, shall include entities incorporated outside India.

   HUF

   The Individual Karta shall be deemed to be exercising rights or entitlements in the Reporting Company indirectly, where the member of the Reporting Company is a HUF

   Partnership/LLP

   An individual shall be deemed to be exercising rights or entitlements in the Reporting Company indirectly, where the member of the Reporting Company is a Partnership (registered) or LLP and

   1. such Individual is a partner of the Partnership/LLP
   2. such Individual holds majority stake in the body corporate which is the partner of such partnership
   3. such Individual holds majority stake in the UHC of body corporate which is the partner of such partnership

   Trust

   An individual shall be deemed to be exercising rights or entitlements in the Reporting Company indirectly, where the member of the Reporting Company is a Trust and

   1. such Individual is a Trustee, in case of discretionary trust or charitable trust
   2. such individual is a beneficiary in case of specific trust
   3. such individual is an author or settlor in case of revocable trust

   It is important note that in case of specific trust, the shares are held in the name of the Trustee. Further the Trustee is duty bound under Section 89 to file a declaration of beneficial ownership in the name of the beneficiaries. So, in case such declaration has been filed, then the beneficiaries will be deemed to be holding rights or entitlements directly and not indirectly. 

   Pooled Investment Vehicle

   1. Where the member of the Reporting Company is a pooled investment vehicle or entity controlled by pooled investment vehicle, based in a member state of FATF on Money Laundering and the regulator of securities market in such member state is a member of the International Organization of Securities Commissions and individual in relation to pooled investment vehicle is
   1. General partner
   2. Investment manager
   3. Chief executive officer where the investment manager of such pooled vehicle is a body corporate or partnership entity
   2. Where the member of the Reporting Company is a pooled investment vehicle or entity controlled by pooled investment vehicle but doesn’t fulfill the eligibility criteria as prescribed in(a),  thenSBO shall be determined in accordance with the SBO Rules
4. Individuals acting together as SBO

   In case, where more than one individual in aggregate are holding rights or entitlements in the Reporting Company, they all shall be treated as SBO, if they acting together with a common interest or purpose.

   As per the SBO Rules, if an individual is acting through

   1. Any person or
   2. Trust

   And act with common interest or purpose of

   1. exercising any rights or entitlements or
   2. 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 shall be deemed to be acting together.

   So, for example, rights or entitlements held by individuals, who are relatives or acting with common intent under an understanding shall be aggregated for the purpose of determining an SBO. 

5. Identification of SBO

In case you are an Individual and holding shares in a company, then following process shall be undertaken to identify whether you are an SBO or not:

Step 1: Identify the Reporting Company for which SBO needs to be ascertained

Step 2: Ascertain you direct holding (if any) in the Reporting Company

Step 3: Ascertain your indirect holding (through body corporate, LLP, Partnership, Trust, HUF, PIV)

Step 4: If there is any indirect holding under step 3, apply the rules provided for identification of indirect holding, where member is body corporate, LLP, Partnership, Trust, HUF, PIV.

Step 5:  Aggregate direct holding ascertained in Step 2 and indirect holding as per Step 4.

Step 6: Check whether any relative/any other person with common understanding is also holding shares in the Reporting Company. If yes, ascertain its holding as per Step 2 and Step 4.

Step 7: If any holding is ascertained under Step 6, then aggregate with holding as per Step 5

Step 8: You are an SBO, if individual holding as per Step 5 is 10% or more of Reporting Company. If your holding is less than 10% but when aggregated with holding of other individuals under step 6 is 10% or more, then you along with other individual are SBO of the Reporting Company.

Note:  In case of Ultimate Holding Company or any other Body Corporate, which doesn’t have any Ultimate Holding Company, the majority shareholders, shall be either individually or in aggregate of all the individuals, who are acting together. The said shareholding can be held directly or indirectly

6. Responsibilities of SBO
1. SBO as on Feb 08, 2019: Every individual of the Reporting Company who is a SBO shall on or before May 09, 2019 make declaration in Form BEN-1 to the Reporting Company;
2. SBO on or after May 09, 2019: Every Individual who acquires significant ownership in a company on and after May 09, 2019 shall make a declaration within 30 days from the date of acquisition in Form BEN-1.
3. If an Individual(s) become SBO between Feb 09 2019 to May 09, 2019: Where an individual(s) becomes a SBO during Feb 09, 2019 to May 09, 2019, then reporting in respect of becoming a SBO shall be made within 90 days of May 09, 2019 i.e. on or before June 08, 2019
4. If there is change in position of SBO between Feb 09 2019 to May 09, 2019: Where there is change in significant beneficial ownership of SBO existing as on Feb 08, 2019, during Feb 09, 2019 to May 09, 2019, then reporting in respect of such change, shall be made within 90 days of May 09, 2019 i.e. on or before June 08, 2019
5. If there is change in position of SBO after May 09, 2019: Where there is change in significant beneficial ownership of SBO after May 09, 2019, details of such change shall be informed to the Reporting Company within such change.

   Note: As per the current SBO Rules, where the significant beneficial ownership undergoes any change, reporting is required to be made to the Reporting Company. While here change means any change in the rights or entitlement held directly and indirectly in the Reporting Company but it is not clear whether the intimation is required, where an Individual(s) ceases to be an SBO. Legally, if there is a declaration on becoming an SBO and then a corresponding declaration should be required in case of cessation.

7. Responsibility of the Reporting Company

   First Step:

   On receiving the aforesaid declaration in form BEN-1, Reporting Company shall undertake the following:

• file a return in Form BEN 2 with the ROC within 30 days from the date of receipt of such declaration in Form BEN-1.
• In case, Reporting Company is a subsidiary company, then details of Holding Company shall also be filed in Form BEN-1.
• Enter details of BEN-1 in register of SBO to be maintained in Form BEN-3

Second Step:

Reporting Company shall give notice in Form BEN-4 to the following

1. Suspected SBO

   As per sub-section (5) of the Section 90 a Reporting Company shall give notice, in Form BEN-4 to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe—

   1. to be a significant beneficial owner of the company;
   2. to be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or
   3. to have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued,

   and who is not registered as a significant beneficial owner with the company as required under this section but in accordance with SBO Rule

2. Non-individual member holding 10% or more

   As per Rule 2A of SBO Rules, the Reporting Company shall give notice in BEN-4 to

   1. every non-individual member, who holds 10% or more of its shares, voting rights or right to receive or participate in dividend or any other distribution payable in a year as on February 08, 2019 and who doesn’t file BEN-1 on or before May 09, 2019, immediately on expiry of the said period
   2. every non-individual member, who becomes the holder of 10% or more of its shares, voting rights or right to receive or participate in dividend or any other distribution payable in a year after February 08, 2019 but before May 09, 2018 but doesn’t discloses SBO within 30 days of May 09, 2019, immediately on expiry of the said period.
   3. every non-individual member, who becomes the holder of 10% or more of its shares, voting rights or right to receive or participate in dividend or any other distribution payable in a year after May 09, 2018 but doesn’t discloses SBO within 30 days , immediately on expiry of the said period.

   Where no BEN-1 is received as received aforesaid or the Reporting Company is not satisfied with the reasons for non-submission of BEN-1 or where the Reporting Company any believes that an Individual is an SBO, then an application should be filed with the Tribunal within a period of 15 days from the expiry of time given for seeking information in Form BEN-4, for seeking necessary orders in connection with the following:

   1. restrictions on the transfer of interest attached to the shares in question;
   2. suspension of the right to receive dividend or any other distribution in relation to the shares in question;
   3. suspension of voting rights in relation to the shares in question;
   4. any other restriction on all or any of the rights attached with the shares in question.
8. How to determine whether SBO exist?

   A Reporting Company can follow the below mention steps in order to ascertain, whether any SBO exist or not:

   1. Check whether you have shareholders in form of Body Corporate/HUF/Partnership/LLP/Trust/PIV (“Indirect Entities”)?
   2. If answer is no, then no reporting required.
   3. If answer to (1) is Yes, check whether they hold 10% or more?
   4. If yes, you need SBO reporting.
   5. If answer to (3) is No, then no SBO reporting required unless:
   1. an individualis holding shares directly, also holds indirectly through various entities mentioned in (1), aggregating to 10% or more
   2. an individualis holding shares indirectly through various entities mentioned in (1), aggregating to 10% or more

   Note: Identification of SBO based out of step-5 is difficult for a company, therefore

   6. Also check whether you are subsidiary company in chain of subsidiary company? If Yes, no reporting required for shares held by Holding Company.
   7. Check whether an individual exercise significant influence or control? If yes, SBO reporting required
9. Contravention

By SBO:

Where any SBO fails to give required disclosure under the SBO Rules then such individual(s) shall be liable for the following

1. Imprisonment for a term which may extend to one year or
2. With fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees or
3. With both
4. Where the failure is continuous, with a further fine which may extend to one thousand rupees for every day after the first day during which the failure continues.

Contravention by SBO of provisions of Section 90 and SBO Rules is compoundable.

By Reporting Company

Where the Reporting Company fails to maintain register of SBO or file return of SBO with ROC or denies inspection, then

1. Company shall be liable for a fine which shall not be less than INR 10,00,000 but which may extend to INR 50,00,000
2. Every officer in default shall be liable for a fine which shall not be less than INR 10,00,000 but which may extend to INR 50,00,000
3. Where the failure is continuous, with a further fine which may extend to one thousand rupees for every day after the first day during which the failure continues

Contravention by Company and Officer in Default of provisions of Section 90 and SBO Rules is compoundable.

Note: Where the SBO or the Officer in Default intentionally furnishes any false or incorrect information or suppresses any material information, then they will be liable for fraud under section 447.

10. Exempted Entities

    The SBO Rules will not be applicable to the holding of shares of the Reporting Company by the following

    1. IEPF
    2. Central Government or State Government
    3. *Holding Reporting Company (Details of such Holding Reporting Company shall be reported by the Reporting Company in Form BEN-2)
    4. Reporting company or body corporate or any other entity , owned or controlled by Central Government or State Government(s) or partly by Central Government and partly by State Government(s)
    5. SEBI registered vehicles such as mutual funds, Real Estate Investment Trusts (REI’rs), Infrastructure Investment Trusts (lnVITs) and alternate investment funds
    6. Investment vehicles regulated by Reserve Bank of India like NBFC, CIC etc.
    7. Investment vehicles regulated by Insurance Regulatory and Development Authority of India
    8. Investment vehicles regulated by Pension Fund Development and Regulatory Authority.

    So, in case the aforesaid person(s) or entity(ies) holds shares in the Reporting Company, then the Reporting Company is not required to obtain SBO declaration with respect to the shares held by them.

    Further exemption to Holding Reporting Company signifies that intermediate subsidiary companies are not require to identify SBO to the extent of shares held by immediate holding company.

Illustrations