Behind the Corporate Veil: India's Hunt for Significant Beneficial Owners

[Vedansh is a student at Hidayatullah National Law University.]

Do you recall the days when reveals of corporate ownership could be hidden behind layers of holding companies and trusts? These days are quickly fading away in the realms of the regulatory playing field in India.

The author has witnessed the evolution of significant beneficial ownership (SBO) from a footnote of regulatory disclosure to being part of the fabric of corporate governance. The introduction of the Companies Act 2013 certainly turned up the volume, but it was not until the introduction of the Companies (Significant Beneficial Owners) Rules of 2018 that showcased actual requirements for the unveiling of the corporate ownership structure.

So, what and who is an SBO? An SBO is considered to be any person who directly or indirectly:

• Holds at least 10% of shares or voting rights

• Exercises significant influence or control

• Has a right to participate (in excess of 10%) in distributable dividends.

That sounds simple enough, right? Then why does it seem that it is exceedingly difficult to determine SBOs? Perhaps because the world is becoming increasingly interconnected and the corporate structures used are often convoluted.

The Letter and Spirit of the Law

Section 90 of the Companies Act 2013 does not merely contemplate transparency, but requires it. Companies are required to identify their SBOs, maintain a register and make disclosures to the Registrar of Companies. Persons that qualify as SBOs must self-declare their SBO status. 

But the legislation goes further than shareholding percentages to take cognizance of the reality of control. A person may hold less than 10% shares directly, but will still be an SBO through indirect shareholding or by virtue of being able to exercise significant influence. 

This is not simply regulatory red tape. There can be significant penalties, and non-compliance can add up to lakhs of rupees.

Case Studies: When Regulators Come Knocking

Let us look at some real-world examples that illustrate just how seriously Indian regulators are taking SBO compliance.

The Samsung Display puzzle

Samsung Display Noida Private Limited, a subsidiary of the larger South Korean conglomerate Samsung, had a multi-layered ownership structure typical of multinational enterprises. Essentially, they did not have anyone with majority ownership, but still did not name anyone members of the Lee family, who are the ultimate controllers of the Samsung group, as SBOs, apparently due to their complex structure. The Registrar of Companies (RoC) thoroughly investigated Samsung's corporate structure and traced share ownership through several different countries and corporate layers. They ultimately determined that although it did not appear that any member of the Lee family had substantial ownership of the Indian subsidiary, the control by all of the Lee family members of the company that owned the Indian company amounted to control of the Indian company.

The total penalization for Samsung Display and its officers amounted to over INR 8,00,000. More importantly, this case provides certainty that control can be traced through multiple layers of corporate ownership to identify the ultimate beneficial owners. The complex corporate structures that ultimate controllers use will not provide protection from SBO disclosure, and authorities are prepared to pursue control through the corporate layers, no matter how convoluted.

LinkedIn's C-Suite surprise

LinkedIn India Technology Information Private Limited was a subsidiary of the widely popular global professional networking and media company which is owned itself by Microsoft. LinkedIn's structure followed the typical corporate ownership structure of tech multinationals. LinkedIn India did believe that its ownership was purely too diluted for any one person to trigger the SBO criteria. Regulators acted with boldness in early 2024 when they declared both Satya Nadella (the CEO of Microsoft) and Ryan Roslansky (the CEO of LinkedIn) as SBOs of the Indian entity; not for their ownership of shares but for their respective influence over the use of executive roles over the entity. Each CEO was fined personally INR 2,00,000 with penalties totaling INR 27,00,000 once added on to all of the other officers.

The company also lost a reputational aspect because it had to report its non-compliance publicly. LinkedIn went on to appeal the decision and argued that executive duties do not equate to beneficial ownership; however, the authorities said that their level of influence over key strategic decisions amounted to significant control per the SBO criteria. The SBO definition does not mean that beneficial ownership cannot occur without some kind of financial ownership. Any operational control or decision-making authority, which could also mean functioning in a privileged position, could be seen as beneficial ownership even if no one share of the entity was owned directly.

The private equity predicament: Leixir Resources

Leixir Resources Private Limited had a complex structure of private equity investments involving multiple entities and individuals between the operating company and the actual investors. Leixir maintained that it had an ownership structure through investment funds and no one person exceeded 10% ownership for purposes of receiving a SBO classification. The RoC looked beyond the formal shareholding and determined that the CEO of the investment manager Michael Falk was a SBO who rather than managing shares was identifying himself as having decision making control over those shares because of his directing investment decisions.

This case brought substantial significance to the understanding of “significant influence or control” and included those individuals who themselves are key decision makers on investments even if acting in a professionally managed capacity. Leixir had to change not only its applicable penalties, but also reform its compliance and governance processes for identifying and reporting beneficial ownership. These health checks were costly and time consuming. The RoC ruled that investment structure can result in the manager of capital being an SBO even if they their personal economic share is practically meaningless.

The cement case: Shree Digvijay

Shree Digvijay Cement Co Limited was a long-standing player in the marketplace with what seemed to be a simple ownership structure. The company filed SBO disclosures late, and later claimed that it was exempt because its shareholder was a SEBI-registered alternative investment fund. The RoC was unpersuaded by this argument, and imposed penalties of nearly INR 25,00,000 on the company, and some of its officers, for disclosing SBOs late. 

The company appealed the penalties, arguing that they were unclear in the case of an AIF. The regulatory bodies stated that simply because the intermediate entity was exempt from identifying and reporting SBOs, did not eliminate the obligation to identify and report SBOs. In the end, the company paid the penalties and developed stronger processes regarding monitoring and reporting beneficial ownership changes. Regulatory exemptions for certain types of corporate entities do not automatically filter down to release them from the obligation of SBO compliance. Each corporate entity has to independently comply with its own statutory obligations.

The Path Forward

SBO compliance is becoming much more important as 2025 approaches. The era of corporate structures remaining opaque is coming to an end. The search for beneficial owners is on, with many companies beginning to recognize the stakes. For all businesses operating in India, particularly subsidiaries of global companies, this means:

• Implementing comprehensive beneficial ownership identification processes.

• Monitoring control structures on a continual basis to look for changes.

• Keeping a thorough record of all analysis related to ownership.

• Filing SBO forms on a timely basis with the RoC.

The regulatory focus on transparency related to beneficial ownership is not an episodic event but rather a fundamental change to how corporate governance is constructed globally. Enforcement actions in India signal that regulators are serious about this shift and are committed to it going forward.

For corporate executives, the message is clear: know who controls your company, document it clearly, and disclose it accurately – or else take your chances.