Significant Beneficial Owner

July 2019

The Significant Beneficial Ownership Rules, 2019 (“the Rules”) issued by Ministry of Corporate Affairs’ (“MCA”) through its notification dated February 8, 2019. The Rules mandate Indian companies (“Reporting Companies”) to furnish a declaration with the Registrar of Companies (“ROC”) notifying their Significant Beneficial Owner (“SBO”), if any.

Who is a SBO

As per rule 2(h) of the Rules, SBO is an individual who, acting alone or through one or more persons, holds directly and indirectly, at least 10% of the shares or voting rights in the Reporting Company. Merely having direct shareholding in the Reporting Company shall not make any individual an SBO.

Direct and Indirect shareholding

Under direct shareholding, an individual either holds shares in its own name or acquires a beneficial interest. On the other hand, indirect shareholding is, when a shareholder is a (a) Body corporate: Individual majority shareholder of such shareholder or majority individual shareholder of ultimate holding company; (b) Hindu Undivided Family: Karta (c) Partnership: its partner, or an individual who holds majority stake in the holding company or ultimate holding company which is a partner; (d) Trust: trustee in case of discretionary or charitable trust, beneficiary in case of specific trust and author or settlor in case of revocable trust (e) Pooled investment vehicle: an individual who is general partner, investment manager or CEO if the investment manager is a body corporate or partnership entity. All the aforementioned individuals shall deem to be indirect shareholders in the Reporting Company.

Even though multiple permutations and combinations of shareholdings are possible, let us look at two illustrations below to understand how to identify an SBO:

(a) Mr. A holds majority stake in X Ltd., and X Ltd. holds more than 10% stake in Y Ltd. which is the Reporting Company. Here, Mr. A would be the SBO of Y Ltd.

(b) A Ltd., the Reporting Company has 4 shareholders i.e. Mr. B, an individual (holds 11% stake); C Ltd. (holds 9% stake); D Ltd. (holds 14% stake); and E Ltd. (holds 66% stake). D Ltd. has further 4 individual shareholders who hold 25% stake each and E Ltd. has 2 individual shareholders, Mr. X and Mr. Y, who hold 49% and 51% respectively. Here, Mr. B would not be considered SBO of A Ltd. since his shareholding, though above 10%, is held directly. With respect to C Ltd., since it holds less than 10% in A Ltd. we do not have to identify its SBO. D Ltd., on the other hand, owns more than 10%. However, since none of D Ltd.’s shareholders (i.e. 4 individuals) individually own more than 50% in D Ltd., there would be no SBO of A Ltd. Finally, E Ltd. also owns more than 10% in A Ltd. and one of its individual shareholders Mr. Y owns 51% stake in it. Accordingly, Mr. Y shall be deemed as the only SBO of A Ltd. as per the Rules.

Reporting requirement and contravention

SBO shall file a declaration with the Reporting Company in form BEN-1, failing which there is an imprisonment up to 1 year or a fine up to INR 10 lakhs (US$ 14,500) or both, and if the default continues, a further fine up to INR 1,000 (US$ 15) per day.

Once form BEN-1 is received, the Reporting Company shall file a return in e-form BEN-2 with the ROC and maintain a register of SBO(s) in form BEN-3, format of which is prescribed under the Rules. The due date is July 31, 2019 for filing BEN-2. If the Reporting Company does not file BEN-2 or fails to maintain BEN-3, there is a fine up to INR 50 lakhs (US$ 72,500). Further, if the default continues, there will be an additional fine up to INR 1,000 per day on the Reporting Company and every defaulting officer.

PSA view This is a significant development by the MCA to identify the actual owners of a corporate entity. This move is expected to aid the Government authorities in curbing illicit flow of money and curtailing illegal activities such as tax evasion, money laundering, benami transactions etc. The extent to which these Rules shall be enforced, is something we have to wait and watch.

By:

Jaya Moorjani