[Saumya Raizada and Shreetama Ghosh are Editors at the Indian Review of Corporate and Commercial Laws.]
The Companies (Significant Beneficial Owners) Rules (SBO Rules) were introduced in 2018 to ensure transparency and unmask the “real beneficial owners” of investments made in companies and thus curb money laundering, since it is not uncommon that a person or entity investing in a company is not the real beneficiary thereof. However, the original SBO Rules did not address all the concerns, and they needed to be amended to fill certain gaps. Therefore, in exercise of the powers conferred by section 469 read with section 90 of the Companies Act, 2013, the Central Government, on February 8, 2019, brought in a number of amendments to the SBO Rules.
While certain new terms have been included in the freshly amended SBO Rules, some terms have been laid out in detail, and certain procedures have been updated as per the needs of the time.
Significant beneficial owner
The most extensive amendment made is in the definition of a "significant beneficial owner" (SBO). The said definition has been widened and specifically pointed towards finding the ultimate indirect beneficiaries related to a reporting company, i.e. recommending piercing the organisational veil in every structure to find the person in charge. This has been done to improve transparency and, in the process, the direct owners of the threshold limit of rights and entitlements have been spared.
An SBO has been defined as an individual who, acting alone, or together, or representatively through one or more persons:
holds indirectly, or together with any direct holdings, not less than 10% of the shares or voting rights in the shares; or
has right to receive or participate in not less than 10% of the total dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings; or
has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone.
For this purpose, “significant influence” has been defined as power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not in control or joint control of those policies.
Thereafter, the conditions for determining direct and indirect rights and entitlements of a person have been laid out in detail.
Direct Rights and Entitlements
Direct holding of a right or entitlement by an individual in the reporting company shall include:
the shares in the reporting company representing the rights are in the name of the individual; or
the individual holds or acquires a beneficial interest in the share of the reporting company under section 89(2) of the 2013 Act and has made a declaration in this regard to the reporting company.
Indirect Rights and Entitlements
Before discussing the indirect rights and entitlements, it is important to examine the newly inserted definition of “majority stake”, which refers to holding more than 50% of the equity shares or voting rights in, or having the right to receive or participate in more than 50% of the distributable dividend or any other distribution by the body corporate.
The amendment has laid down the conditions for the identification of the SBO for a member of any structure, that is -
for a body corporate, the individual who holds a majority stake in the entity or its holding entity;
for an HUF, the Karta;
for a partnership entity, a partner or a majority stakeholder in the company which is a partner, or its holding company;
for a trust, the trustee, the author and the beneficiary in different types of trusts; and
for a pooled investment vehicle or an entity controlled thereby, the general manager, the investment manager or the Chief Executive Officer.
Duty imposed on the reporting company
While the original SBO Rules imposed a duty on SBOs to make declarations, the amendment extends the duty of disclosure to the reporting company by requiring it to take steps such as providing notice to its members holding more than 10% of shares or voting rights or share in dividends, finding out who are the SBOs in relation to the company, and making them file their declarations.
Application to the tribunal
Although the company could have filed an application with the National Company Law Tribunal (NCLT) under the original SBO Rules as well, the conditions wherein a company may approach a tribunal have been crystallized by this amendment as follows:
when any person fails to give the information required by the notice in Form No. BEN-4, within the time specified therein; or
when the information given is not satisfactory.
In a move to bring more clarity in the compliance system, the amendment has also widened the non-applicability of the SBO Rules. Accordingly, the following entities are excluded:
an authority constituted under section 125(5) of the Companies Act, 2013;
its holding reporting company, provided that the details of such holding reporting company shall be reported in Form No. BEN-2.
the Central Government, State Government or any local authority;
a reporting company, a body corporate or an entity controlled by the Central Government or any State Government or Governments, or partly by the Central Government and partly by one or more State Governments.
SBO Framework: An International Perspective
In 2015, the UK introduced amendments to the UK Companies Act, 2006, requiring every UK private company to maintain a register of “people with significant control” (PSC) and make the same available to the public. The conditions for a person holding the PSC status have been laid down in the legislation –
the person holds, directly or indirectly, more than 25% of the shares or voting rights in a UK company;
the person holds the right, directly or indirectly, to appoint or remove majority of the board of directors of a UK company;
the person has the right to exercise, or actually exercises, significant influence or control over a UK company; or
(a) the trustees of a trust or the members of a firm not being a legal person, who meet any of the specified conditions in relation to a UK company and (b) the person has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm.
The enactment of this legislation was the result of the EU Fourth Anti-Money Laundering Directive, 2015 (Directive), which introduced the requirement for each member state to set up a central register holding information on the beneficial owners of corporate entities within their territory by June 26, 2017. Article 3(6) of the Directive defines a “beneficial owner” as "a natural person who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means." The exact threshold mentioned in the Directive for determining a beneficial owner is 25%, without prejudice to the right of any member state to set a lower percentage as a threshold. Moreover, companies listed on a regular market and subject to disclosure requirements consistent with law of the land are exempted from these registration requirements.
In the USA, the Financial Crimes Enforcement Network (FinCEN) adopted the rules in 2018 under the Bank Secrecy Act that require "covered financial institutions" (i.e. federal regulated banks, federal insured credit unions, mutual funds, broker dealers, etc.) to identify and verify the identity of the beneficial owners of “legal entity customers” (i.e. a corporation, LLC, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a partnership, and any similar entity formed under the laws of a foreign jurisdiction) when any new account is opened. Under the rules, a “beneficial owner” can be determined through two aspects:
an individual with significant responsibility to control, manage, or direct a legal entity customer, including a senior employee; or
an individual who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer.
It is clear that the regulation of beneficial owners in countries worldwide are related to the money laundering legislations, and while the conditions for being a beneficial owner are similar to that in India after the amendment, which has brought the SBO Rules close to the common international standards, the threshold for determining the beneficial ownership has been made significantly lower (previously, it was 25%) than in the developed countries.
The SBO Rules have been amended to ensure greater compliance by narrowing the categories of companies who need to comply with it and simplifying the forms to be submitted by SBOs and, at the same time, imposing disclosure obligations on the reporting companies. This will go a long way in overhauling the SBO disclosure regime.
SBO Rules, explanation I to rule 2(h).
Ibid, rule 2(h).
Ibid, rule 2(i).
Ibid, explanation II to rule 2(h), Companies (Significant Beneficial Owners).
Ibid, rule 2(d).
Ibid, rule 7.
Ibid, rule 8.
UK Small Business, Enterprise and Employment Act, 2015, which amends the UK Companies Act, 2006, schedule 3.
Beneficial Ownership Requirements for Legal Entity Customers (31 CFR 1010.230).
Companies Act, 2013, section 90.