The concept of disclosing the details of the ultimate beneficial owner of an entity is not new in the Indian context. However, the recently notified provisions under Indian law are interesting and can be challenging to comply with.

The provisions relating to significant beneficial ownership contained in Section 90 of the Companies Act, 2013, (read with Section 89 (10) of the Act) and the corresponding rules, the Companies (Beneficial Interest and Significant Beneficial Interest) Rules, 2018, were notified by the Ministry of Corporate Affairs on June 13, 2018. The Rules were published in the official gazette on June 14, 2018. These Rules are applicable to all companies (private, public (listed and unlisted) and government companies). The Rules are, however, not applicable to the holding of shares of companies/body corporates, in case of pooled investment vehicles/investment funds regulated by the Securities and Exchange Board of India (SEBI).

A similar requirement finds mention in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules), which requires banks and financial institutions to identify the beneficial owners of the client (at the time of opening an account). Unlike the Rules, the PMLA Rules exempt identification and verification of the identity of a shareholder or beneficial owner of a client, where the client or the owner of the controlling interest of the client is a company listed on a stock exchange, or is a subsidiary of such a company. The SEBI has also stipulated a similar requirement for foreign portfolio investors. Where entities, including foreign entities, propose to open a demat account, similar disclosures are required with exceptions being provided in reasonable circumstances.

However, the Rules as presently applicable, seek to go through several layers of shareholding and can pose practical difficulties.

Pursuant to Section 90 (1) of the Act, every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than 25% or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in Section 2 (27) of the Act shall make a declaration with the company specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed.

The Rules define a “significant beneficial owner” as meaning an individual referred to in Sub-section (1) of Section 90 (1) (holding ultimate beneficial interest of not less than 10% read with Sub-section (10) of Section 89, but whose name is not entered in the register of members of a company as the holder of such shares, and the term ‘significant beneficial ownership’ shall be construed accordingly.The first explanation appended to the Rules inter-alia states that where the member is a company, the significant beneficial owner is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trusts, holds not less than 10% share capital of the company or who exercises significant influence or control in the company through other means. It goes to say that where no natural person is identified (where the member is a company or a partnership firm), the significant beneficial owner is the relevant natural person who holds the position of senior managing official.

The second explanation to the Rules clarifies that instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as “shares” for the purpose of the clause. This is wider than what is presently contemplated under Section 89 of the Act, which requires the beneficial owners and registered owners (whose names are entered in the register of members as the holders of shares) to make certain declarations with the company (which pertain to equity and preference shares), albeit not the details of the significant beneficial owner. While at present, the provisions of the Act and Rules require the concerned persons to make declarations and the company is required to make the filings with the registrar of companies under both Section 89 (form MGT 4, form MGT 5 and form MGT 6) and Section 90 (form BEN 1 and form BEN 2), it could perhaps be considered if these declarations can be consolidated and rolled into the new forms itself (given that non-filing entails penalties under both sections).

While the Rules are a welcome change as it traces the ultimate owner of a company (especially to uncover any benami transactions and to prevent money laundering), they would still need to be fine-tuned to address some issues.

Firstly, while the Act requires every individual who directly or indirectly holds beneficial interest of not less than 25% or such other percentage as prescribed to make filings, it does not clarify that such individual would be a person whose name is not entered in the register of members (which is only clarified in the Rules and the forms prescribed). While this is more a drafting point, it may create confusion and make the scope unnecessarily broad.

Secondly, unlike the reference to control being control under Section 2 (27) of the Act, there is no clarification on what constitutes significant influence in the context of identifying a significant beneficial owner, unlike the other similar provisions prescribed under the PMLA Rules and by the SEBI. The Act only clarifies what constitutes significant influence in the context of determining when a company would be considered as an associate company.

Lastly, while the Rules clarify that where a natural person (where the member is a company or a partnership firm) cannot be identified, then the significant beneficial owner would be a person who holds the position of senior managing official, some issues still need to be ironed out. For instance, where the holding company has a board size of eight or 10 directors, who would be the significant beneficial owner? The directors of the shareholding entity may be made vulnerable due to this provision, and some exceptions should be considered and provided.

One can only wait and see how some of these issues are addressed and tackled pursuant to clarifications or subsequent amendments to the Rules.

( Views expressed are personal. )

Image : Archana Tewary
Image : Pooranimaa Hariharan

Archana Tewary ( L) is a partner, and Pooranimaa Hariharan ( R) is a senior associate at law firm J. Sagar Associates

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