When Samara Capital (51%) and Amazon (49%) acquired 100% of Aditya Birla Retail Limited (ABRL), which operates the supermarket chain ‘More’, the world’s richest man, Jeff Bezos, who currently owns around 17% of Amazon, indirectly became a significant beneficial owner of ABRL.

At some point in the near future, Bezos may have to file a declaration (Form BEN-1) with ABRL, providing personal details (including his residential address and email, wife’s name and passport number) and declaring his significant beneficial interest acquired through Amazon in ABRL.

ABRL, in turn, will have to file a return (Form BEN-2) with the Registrar of Companies in respect of the declaration received from Bezos and also maintain a Register of Significant Beneficial Owners (SBO), which would include the personal details of all significant beneficial owners. Samara, as a member of ABRL, would be entitled to inspect this register on payment of a nominal fee. Any member of the public would also be able to access Bezos’ personal details filed by ABRL with the Registrar of Companies on payment of a nominal fee for inspecting the company’s records.

Wow! Is India powerful enough to make the world’s richest man submit to its laws? More importantly, what would happen if Bezos refused to comply? The reader may appreciate the answers to these questions with a better understanding of the background and the objectives underlying the SBO Rules.

The Financial Action Task Force (FATF) is an inter-governmental body, which sets standards to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction, and other related threats to the integrity of the international financial system. FATF has made recommendations on transparency and beneficial ownership of legal persons and legal arrangements.

India, as a member of FATF, has recently amended section 90 of the Indian Companies Act, 2013, and introduced the Companies (Significant Beneficial Owners) Rules, 2018 (collectively, the SBO Rules) to give effect to the FATF recommendations.

Pursuant to the SBO Rules, every individual (whether Indian or foreign) who ultimately and indirectly, through a minimum 10% holding or interest in companies, partnership firms, trusts or otherwise (in India or abroad), either holds beneficial interest of at least 25% in the shares of an Indian company or has the right to exercise significant influence or control over such Indian company, must file Form BEN-1 with the Indian company.

Failure to do so, could have significant implications for the immediate and direct holder of the shares in the Indian company, such as restrictions on voting and transfer rights and receipt of economic benefits, which may be imposed by the competent judicial authority (National Company Law Tribunal) on the application of the Indian company and after hearing all parties concerned.

Where shares of an Indian company are held by another company or a partnership firm and no natural person is identified as the significant beneficial owner, the senior managing official of the company or partnership firm (as applicable) would be treated as the significant beneficial owner.

The SBO Rules are not applicable to the holding of shares of companies or body corporates, in the case of pooled investment vehicles or investment funds, such as mutual funds, alternative investment funds, real estate investment trusts, and infrastructure investment trusts regulated by SEBI.

The Government of India has presently deferred the operation of the SBO Rules with respect to the filing of Form BEN-1 and Form BEN-2 respectively, until further notice.

The enactment of the SBO Rules raises several critical issues for consideration. This article endeavours to shed light on some of them.

Can Indian law apply beyond its territorial boundaries?

Yes, it can but only in certain circumstances. Article 245 (2) of the Constitution states that no law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

The Supreme Court has held that Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes that have a real connection to India. Where Parliament itself posits a degree of relationship beyond the constitutional requirement, which should be real and not fanciful, then the courts would have to enforce such a requirement in the operation of the law as a matter of that law itself, and not of the Indian Constitution.

The SBO Rules have been enacted to give effect to the FATF recommendations on combating of money laundering, terrorist financing, etc., and expressly cover non-residents (i.e. individuals and corporate vehicles). So, they prima facie appear to pass the constitutionality test.

Is Bezos not entitled to privacy?

Absolutely, but his right is not absolute. While he may be at the top of the list of billionaires, his personal data is certainly not open to public scrutiny. Article 21 of the Constitution states that no person (i.e. Indian or foreign) shall be deprived of his life or personal liberty except according to procedure established by law.

The Supreme Court has held that while the right to privacy is protected under Article 21 of the Constitution, it is subject to reasonable regulations to protect legitimate state interests or public interest. The objective of enactment of the SBO Rules (i.e. combating money laundering, terrorist financing, etc. in India) would squarely fall within the domains of state interests and public interest.

Who is going to protect Bezos’ personal data?

While the SBO Rules permit members of ABRL and the public respectively to access the personal data of Bezos (if he does make the requisite filing) through inspection of the relevant records of ABRL, they are silent on the consequences for misuse of such personal data.

Until a data protection law is enacted in India, significant beneficial owners like Bezos remain exposed to the potential risk of misuse of their personal data, without having any efficacious remedy for redressal or compensation.

Who is a senior managing official?

The Companies Act in general and the SBO Rules in particular, are silent on the meaning of the term “senior managing official”.

FATF provides an illustrative list of natural persons (i.e. managing or executive director, chief executive officer, chief financial officer or president) who may be construed as “senior managing officials” in respect of a company, since they have significant authority over the company’s financial relationships (including with financial institutions that hold accounts on behalf of the company) and the ongoing financial affairs of the company. In the case of a partnership firm, the “senior managing official” may be the managing partner or designated partner responsible for and in charge of the management and day to day operations of the partnership firm, in terms of the partnership deed.

However, where the individuals holding controlling positions within a company are acting on behalf of someone else, FATF also states that they cannot be considered as beneficial owners because they are ultimately being used by someone else to exercise effective control over the company.

Who would want to continue investing in India?

Monetary investment (domestic and foreign) contributes significant capital towards India’s economic growth and development. The enforcement of the significant deterrent measures specified in the SBO Rules for failure to declare one’s significant beneficial interest in a company, is likely to prejudice investment sentiments (domestic and foreign) in India.

In the absence of a robust data protection regime in India governing access, storage and use of personal data, high net worth individuals (Indian or foreign) and senior managing officials of Indian and multinational corporations, which invest through corporate vehicles for tax, intellectual property and various other commercial reasons, may understandably be reluctant (and rightly so) to provide the specified personal data, as required by the SBO Rules.

There can be no dispute over the intent of the SBO Rules. However, their objectives and purpose may perhaps be better served if the issues are evaluated in a holistic and balanced manner and effectively addressed through a consultative process with all the stakeholders. The deferment of the filing of forms BEN-1 and BEN-2 by the Government of India, would appear to suggest that the above issues and other concerns raised by the relevant stakeholders may be under review.

Register of Significant Beneficial Owners

Lifting the purdah: Hey, its Jeff Bezos!