The Companies (Significant Beneficial Owners) Rules, 2018 – Ambiguities and the Way Forward
[Manjari Rammohan is a fifth-year B.A.LL.B.(Hons.) student at School of Law, Christ University, Bangalore.]
This post seeks to dissect the essential provisions of the Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules) and delve into one of the main ambiguities surrounding it, that being registration of beneficial ownership by foreign companies in an Indian company. Since the rules have come into force in June 2018, law firms across the country have been facing dilemma and indecision regarding the issue of registering foreign companies. This post brings to the fore the possible interpretations which might have been missed out by the Ministry of Corporate Affairs (MCA). It seeks to provide some clarity to propel the way forward in achieving the full objectives of the SBO Rules.
Registered Member v/s Beneficial Member
The concept of ownership of shares is typically divided into two categories – registered ownership and beneficial ownership. The former includes all those shareholders whose names are registered in the register of members of the company but who do not hold the beneficial interest in such shares, and the latter includes those who own a beneficial interest in the shares but whose names do not appear in the register. Identifying beneficial ownership is of profound value as it effectively helps fight money laundering, corruption and tax evasion. This is why a plethora of jurisdictions across the world – such as Hong Kong and Macau – have made a provision for mandatory registration of beneficial ownership of shares, with India following suit on June 13, 2018 by introducing the SBO Rules.
Key Highlights of the Rules
The SBO Rules predominantly stem from sections 89 and 90 of the Companies Act, 2013 (Act), and specify that a significant beneficial shareholder is one holding ultimate beneficial interest of not less than ten per cent of the paid up share capital (either equity or preference or both) of the company. Some of the important provisions under the SBO Rules include rule 3, which provides for declaration of significant beneficial ownership in shares under section 90 of Act (holding ultimate beneficial interest of not less than ten per cent), and filing of Form No. BEN-I by any significant beneficial owner with the company within ninety days of the commencement of the SBO Rules and within thirty days of change in significant beneficial ownership and Form No. BEN-I by any individual to the company within thirty days of acquiring such significant beneficial ownership or change in such ownership. Further, when a company receives a declaration under Form No. BEN-I, it is required to file a return under Form No. BEN-2 with the Registrar within a period of thirty days from the receipt of declaration by it along with the fees as prescribed in the Companies (Registration, Offices and Fees) Rules, 2014. It is also mandated to maintain a register of significant beneficial owners in Form No. BEN-3.
Companies are empowered to seek information, by way of a notice, from a person who, in their opinion, is a beneficial owner or may have knowledge of the identity of a significant beneficial owner or if such a person has been a significant benefit owner during the three years immediately preceding the date of the notice and is not registered as a beneficial owner.
The Clarifications Still Needed
Although the SBO Rules are a positive step forward towards more accountability, there remain a few more areas of ambiguity which need clarification. This post will focus on a two-pronged interpretation regarding registration of beneficial ownership held by a foreign company. Explanation I to the definition of "significant beneficial owner" (regulation 2(e) of the SBO Rules) states where a member is a company, the significant beneficial owner is a 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 ten per cent of the share capital of the company or who exercises significant influence or control therein. This does not clarify whether/how a foreign company is to be registered as a beneficial owner. The author thus highlights two possible analyses of the same:
Analysis 1: The SBO Rules include a foreign company’s significant beneficial shareholding.
Rule 8 of the Draft Companies (Beneficial Interest and Significant Beneficial Interest) Rules, 2018 (Draft Rules) explicitly specified that an exemption should be made in case of foreign listed entities from rules 5, 6 and 7 of the Draft Rules, which deal with filings to be made by both the registered owner and the beneficial owner. However, these rules were not incorporated in the SBO Rules, which could signify that the intention of the legislature was not to exempt foreign entities from declaring registered/beneficial ownership. Moreover, the SBO Rules stem from section 90 of the Act, which includes declaration of registered ownership by trusts and persons resident outside India. As a principle of interpretation, in the event of contradiction/ambiguity between the rules and the parent Act, the latter would prevail. This would mean that the SBO Rules apply to foreign companies as well. Additionally, rule 8 of the SBO Rules specifically mentions that the rules do not apply to mutual funds, alternative investment funds, real estate investment trusts and infrastructure investment trusts, and does not include foreign companies within its ambit. Thus, the SBO Rules read as a whole could indicate that they apply to a foreign company holding beneficial interest.
Analysis 2: The SBO Rules do not include foreign company’s significant beneficial shareholding.
The word "company" as defined in section 2(20) of the Act means a company incorporated under the Act or under any previous company law. A separate definition of "foreign company" has been provided for in section 2(42), which explains a foreign company to be one having a place of business in India whether by itself or through an agent, physically or through electronic mode, and conducting any business activity in India in any other manner. Thus, in the absence of an explicit mention of a foreign company, one could infer that the SBO Rules refer to "company" as only Indian companies. Moreover, Form BEN-1 makes a specific mention of CIN/UIN/PAN in case the beneficial owner is a "company" which, again, is inapplicable to a foreign company as such documents could be available only with an Indian Company. Thus, the intentional lack of option for foreign entity to declare beneficial interest in the Form may imply that the SBO Rules were not meant to cover it within their ambit.
Although it is a welcome move by the MCA to introduce the SBO Rules to track down specific beneficial ownership, a few clarifications – one among them being ownership by foreign entities – should be dealt with by way of a clarification in this behalf by the MCA to help resolve the ambiguity with regard to the multiple plausible interpretations of the same.
 P.P. Craig, Administrative Law, (London: Sweet and Maxwell Limited), 2003, p 5.