Brief Note on Declaration in Respect of Beneficial Interest in any Share

Introduction

Section 89 of the Companies Act, 2013 (the Act) read with Rule 9 of Companies (Management and Administration) Rules, 2014 (the Rules) extensively deals with declaration required when a person holds shares in a Company as a registered or ostensible owner. This registered owner is a nominee nominated by another person or body corporate which is called as Beneficial Owner.

It is frequently observed that during incorporation of wholly owned subsidiary (WOS) company, other Company is acquiring shares in that WOS through persons or persons who act as nominee of that Company to fulfil the requirement of at least 2 members in a private company and 3 members in public company as per Section 3(1) of Companies Act, 2013.

Section 187C of foregoing Companies Act, 1956 dealt with declaration of beneficial interest in shares. Correspondingly, Section 89 is a simple provision as far as compliance is concerned.

Rationale behind incorporating Section 187C and Section 89 in foregoing and present Companies Act was to let Central Government and Company to know as to who are actually holding shares or ownership in Company indirectly to avoid deadlocks, takeovers, illegal transactions etc.

It is pertinent to mention that Section 89 will be triggered irrespective of percentage of holding acquired by a person, whereas Section 90 will be triggered only in the event of the beneficial interest acquired by an individual is 25% or such other percentage as may be prescribed.

In this article, we will discuss statutory provisions involved and things to be taken care of while doing compliance of this Section.

Statutory Provisions Governing Declaration in respect of Beneficial Interest in any share under the Companies Act, 2013

Under the Companies Act, 2013 following section and rule govern declaration in respect of Beneficial Interest in any share:

1. Section 89 of Companies Act, 2013; and
2. Rule 9 of Companies (Management and Administration) Rules, 2013

Definitions

“Beneficial Interest in shares” as per Section 89(10) of Companies Act, 2013 includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

• exercise or cause to be exercised any or all the rights attached to such share; or
• receive or participate in any dividend or other distribution in respect of such share.

It is pertinent to mention that two interest are created:

• First is legal interest vested with person whose name is entered in Register of Members as holder of shares i.e., Registered Owner or Ostensible Owner.
• Second is beneficial interest vested with beneficial owner.

Compliances prescribed under Section 89

1. Declaration by Registered Owner

A person whose name is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares (hereinafter referred to as “the registered owner”), shall file with the company, a declaration to that effect in Form MGT-4, within a period of thirty days from the date on which his name is entered in the register of members of such company. [Section 89(1) of the Act read with Rule 9(1) of the Rules]

Provided that where any change occurs in the beneficial interest in such shares, the registered owner shall, within a period of thirty days from the date of such change, make a declaration of such change to the company in Form MGT-4. [Section 89(3) of the Act read with Rule 9(1) of the Rules]

2. Declaration by Beneficial Owner

Every person holding and exempted from furnishing declaration or acquiring a beneficial interest in shares of a company not registered in his name (hereinafter referred to as “the beneficial owner”) shall file with the company, a declaration disclosing such interest in Form MGT-5, within thirty days after acquiring such beneficial interest in the shares of the company. [Section 89(2) of the Act read with Rule 9(2) of the Rules]

Provided that where any change occurs in the beneficial interest in such shares, the beneficial owner shall, within a period of thirty days from the date of such change, make a declaration of such change to the company in Form MGT-5. [Section 89(3) of the Act read with Rule 9(2) of the Rules]

3. Power of Central Government to make rules

Central Government has power to make rules for the manner of holding and disclosing beneficial interest and beneficial ownership under Section 89 of the Act. [Section 89(4) of the Act]

4. Penalty for not making declarations under Section 89(1), (2) & (3)

If the Beneficial Owner or Registered Owner fails to make declarations as required under sub-section (1), (2) and (3) of Section 89, such persons shall be liable to a penalty of Rs. 50,000/- (Fifty Thousand Rupees) and in case of continuing failure, with a further penalty of Rs. 200/- (Two Hundred Rupees) for each day after the first during which such failure continues, subject to a maximum of Rs. 5,00,000/- (Five Lakh Rupees). [Section 89(5) of the Act]

5. Obligation on part of the Company post receipt of declarations

Where any declaration is received by the company from the Registered Owner and Beneficial Owner under this Section, the company shall make a note of such declaration in the register of members and shall file, within a period of 30 (thirty) days from the date of receipt of declaration by it, a return in Form MGT-6 with the Registrar in respect of such declaration with fee. [Section 89(6) of the Act read with Rule 9(3) of the Rules]

Provided that nothing contained in this rule shall apply in relation to a trust which is created, to set up a Mutual Fund or Venture Capital Fund or such other fund as may be approved by the Securities and Exchange Board of India. [Section 89(11) of the Act read with Rule 9(3) of the Rules]

6. Penalty on Company for not filing Form MGT-6

If a company, required to file a return in Form MGT-6, fails to do so before the expiry of 30 days from the receipt of declaration, the Company and every officer of the Company who is in default shall be liable to a penalty of one thousand rupees for each day during which such failure continues, subject to a maximum of five lakh rupees in the case of a Company and two lakh rupees in case of an officer who is in default. [Section 89(7) of the Act]

7. Right of Beneficial holder is not enforceable when declaration is not made

No right in relation to any share in respect of which a declaration is required to be made under this section but not made by the beneficial owner with the Company, shall be enforceable by him or by any person claiming through him. [Section 89(8) of the Act]

8. Duties on part of the Company not to be discriminatory

Company shall pay dividend to its Registered member under this Act and the said obligation shall stand discharged once the payment is made. [Section 89(9) of the Act]

It is pertinent to note here that by virtue of disclosure so made under this Section, Company is not required to pass on any benefits to the Beneficial owner. The rights shares, bonus shares and dividend etc., should be given to the Registered owner only and on the request/directions of the Registered owner, these benefits will be transferred to Beneficial owner. Further, in this regard, terms of the “Instrument creating the beneficial interest” should be taken into consideration like Nomination Letter, Share Purchase Agreement etc.

Procedure for Compliance of Section 89 and filing of Form MGT-6

1. Registered owner will send Form MGT-4 to the Company after registration of shares in his own name.
2. Beneficial owner will send Form MGT-5 to the Company intimating it of creation of Beneficial interest in shares.
3. After receipt of such declarations in Form MGT-4 and MGT-5, Company shall issue notice of Board Meeting to all the directors of the Company stipulating date, time and venue for passing of board resolution so as to approve such creation of beneficial interest and taking note of MGT-4 and MGT-5.
4. Attach agenda, notes to agenda and draft resolution with the notice of Board Meeting.
5. Hold the meeting of Board of Directors of the Company on the day, date, time & venue stipulated in the notice and pass the necessary Board Resolution to approve the creation of beneficial interest in shares and taking note of MGT-4 and MGT-6 so received.
6. File Form MGT-6 with ROC within 30 (thirty) days of receipt of such declarations by it.
7. Attachments to be given with MGT-6 are:

• Signed MGT-4;
• Signed MGT-5
• Nomination Letter
• Instrument creating beneficial interest

8. Draft minutes of the board meeting shall be circulated to all the directors within 15 days from the date of conclusion of the meeting by hand delivery or by registered post or by speed post or by courier or by email or by any other recognised electronic means. [Section 118(1) of the Companies Act, 2013 read with Clause 7.4 of Secretarial Standard on Board Meeting-1 promulgated by the Institute of Company Secretaries of India].

The author can also be reached at harsh@sarvaankassociates.com