Whole lot about Significant Beneficial Ownership

SHORT SUMMARY:

The Ministry of Corporate Affairs (the 'MCA') vide its circular dated the 13th of June, 2018introduced the Companies (Significant Beneficial Owners) Rules, 2018 (‘Rules').

In this editorial author shall discuss the basics about 'Beneficial Ownership', and Significant Beneficial Ownership legal provisions about beneficial ownership, compliance requirement as per Companies Act, 2013 in this respect.

We have found there is always confusion in relation to the Beneficial Ownership or like: who is beneficial owner, what are the rights or liabilities of beneficial owner, what are the legal compliances for beneficial owner etc. vice versa.

BACKGROUND:

The Provisions of SBO, in a different form, been part of the Companies Act, 1956, under section 180(7)(3). The new avatar comes under Section 90 of the Companies Act, 2013, as amended in 2017.

The issue of the misuse of multi-layered corporate entities has grabbed attention of various policymakers and regulators. Regulatory authorities have adopted a step-by-step approach and tried to address this issue by enacting various legislations, notable among them being:

Basic Terms to understand the Concept:

a. Registered Owner: means 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 beneficial interest in such shares;

In general words, this person are not an actual owner of shares. Only his name is entered into register of members. He is not entitled to dividend, officer for right issue of shares, bonus shares etc. However, this person having voting rights in the Company, Vote on poll, name shall be entered in registered of member, entitle to sign proxy form, shall be count for the quorum etc.

b. Beneficial Owner: Every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, in shares of a company or the right to exercise, or the actual exercising of significant influence or control.

In general words, beneficial owner is actual owner of the shares. Only his name is not entered in register of members. He is entitled to all beneficial interest as mentioned below.

c. Beneficial Interest: Beneficial interest in a share 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;

(i) Exercise or cause to be exercised any or all of the rights attached to such share; or

(ii) Receive or participate in any dividend or other distribution in respect of such share.

In general words, beneficial owner is entitled to exercise all the rights of the shares like: Dividend, right issue, bonus of shares etc.

d. Significant Beneficial Owner: means beneficial owner holding ultimate beneficial interest not less than 10% and whose name not entered in the register of members of a Company.

Note:

I. For the purpose of calculation of 10% of beneficial interest in shares, Shares Includes…Instrument in form of

• Global Depository Receipts,
• Compulsorily Convertible Preference Shares or
• Compulsory convertible debentures.

II. For the purpose of significant beneficial owner, in case of'person other than individuals or natural person', shall be determined as under:

Note:

Where no natural person is identified in point No. 1 and 2, the significant beneficial owner is the relevant natural person who holds the position of Senior Managing official;

FOOD FOR THOUGHT

I. What is meaning of Senior Management as per above mentioned note?

II. How to calculate 10% Share Capital in above mentioned Table Point No. A, in case Where Company A hold 70% share capital of Company B and Mr. X is holding 10% shares of Company A and Mr. Y is holding 20% shares of Company A. “Whether Mr. X and Y shall be fall in the point or have to file BEN-1”.

III. If any person taking benefit from the trust more than 10% whether require to file BEN-1?

Compliance requirement – Beneficial interest

A. Compliance by Registered owner:

A declaration to that effect in Form No.MGT.4within 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) read with Rule 9(1)}

B. Compliance by Beneficial Owner:

A declaration disclosing such interest in Form No.MGT.5within thirty days after acquiring such beneficial interest in the shares of the company.{Section 89(2) read with Rule 9(2)}

C. Compliance by Company:

Where any declaration as mentioned above received by the company, the company shall make a note of such declaration in the register of members and shall file, within a period of thirty days from the date of receipt of declaration by it, a return in Form No.MGT.6with the Registrar in respect of such declaration with fee.{Section 89(6) read with Rule 9(1)}

Food for thought

IV. Whether beneficial owner can claim the rights, where no declaration u/s 89(2) made by the beneficial owner?

Section 89(8)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, shall be enforceable by him or by any person claiming through him.

Compliance requirement –

SIGNIFICANT BENEFICIAL INTEREST

A. Compliance by Significant Beneficial Owner:

First Disclosure: Every significant beneficial owner (SBO) shall file a declaration in Form No.BEN-1 to company in which he holds the significant beneficial ownership on the date of commencement of these rules within 90 days from commencement of these rule i.e. 13th June, 2018.

Disclosure on change basis: Every SBO shall file any change in his significant beneficial ownership within 30 days to the Company. {Section 90(1) read with Rule 3 of SBO Rules}

Become Significant Beneficial Owner: Every individual, who acquires significant beneficial ownership in a Company, shall file a declaration in Form No.BEN-1to the Company within 30 days of acquiring such significant beneficial ownership.

B. Compliance by Company:

Registers: Every company shall maintain a register of the interest declared by individual's u/s 90(1).

Return: Company shall file a return in Form No.BEN-2 with ROC within 30 days from the date of receipt of declaration in BEN-1. {Section 90(4) read with Rule 3 of SBO Rules}

Registers: The Company shall maintain a register of significant beneficial owner in Form No. BEN – 3.

Note:

Above compliances shall be done by Company after receipt of information from the Significant Beneficial Owner. There is a question:

Food for thought

V. If Company has not received any such BEN-1 from significant beneficial Owner, then whether company have to take any actions to obtain such information?

As per provisions of Section 90(5) read with rule 6 of (SBN Rules, 2018),

Section 90(5) A company shall give notice, in the prescribed manner, to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe—

(a) To be a significant beneficial owner of the company;

(b) To be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or

(c) To have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued,

and who is not registered as a significant beneficial owner with the company as required under this section.

Rule 6: Company shall give notice seeking information in Form No.BEN-4.

PROCESS:

STEP: 1 - Reply by Concerned Person:

The person to whom notice has been issue shall revert to the Company within 30 days of Notice.

STEP: 2- Action by Company

The company shall,

(a) Where that person fails to give the company the information required by the notice within the time specified therein; or

(b) Where the information given is not satisfactory, {Section 90(7) read with Rule 6 of SBO Rules}

The Company shall apply to Tribunal within 15 days of the expiry of the period specified in Notice.

Notice for an order directing that the shares in question be subject to restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other matters as may be prescribed.

FAQ'S

A. What is difference between Beneficial Owner and Significant Beneficial Owner?

Beneficial Owner: Every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, in shares of a company or the right to exercise, or the actual exercising of significant influence or control.

Significant Beneficial Owner: means beneficial owner holding ultimate beneficial interest not less than 10% and whose name not entered in the register of members of a Company.

Conclusion: To check relation of BO and SBO, percentage of interest shall require checking. Beneficial owner required to make disclosures as per Section 89 even if interest is more then or less than 10%. However, disclosures requirement of SBO shall occur only if interest is at least 10%.

B. What are the specific rights of Beneficial Owner?

• To exercise any or all the rights attached to the shares.
• Receive and participation in the dividends
• Receive and participation in other distribution in the shares (like: Right offer, bonus Shares)

C. What are the specific rights of Register Owner?

• Right to get notice of General Meetings
• Right to attend General Meeting
• Right to appoint Proxy
• Right to vote in the Meeting
• Right to demand poll

D. Whether Calculating 10% interest in the shares, whether Debentures or preference shares shall be include or exclude?

As per explanation to the SBO Rules, following shall be including in shares while calculating 10% interest in shares:

• Global Depository Receipts,
• Compulsorily Convertible Preference Shares or
• Compulsory convertible debentures.

Some Important Question - SBO

E. COMPANY:

Holding Company (H) Subsidiary Company (S)

Shareholder of H: Mr. A Mr. B Mr. C

Situation I:

Company 'H' holding 50% shareholding of Company 'S'. Mr. A, B and C hold 10%, 20% and 30% shares of Company 'H'. Whether A, B, C have to file BEN-1 to Company‘s'?

Solution: Interest of A, B, C in'S' shall be as follow:

Situation II:

Company 'H' holding 30% shareholding of Company 'S'. Mr. A, B and C hold 50%, 30% and 5% shares of Company 'H'. Whether A, B, C have to file BEN-1 to Company‘s'?

Solution: Interest of A, B, C in 'S' shall be as follow:

Situation III:

Company 'H' holding 10% shareholding of Company 'S'. Mr. A and B hold 99%, and 1% shares of Company 'H'. Whether A and B have to file BEN-1 to Companys'?

Solution: Interest of A, B, C in 'S' shall be as follow:

NOTE:

As we discussed about the Company as Beneficial Interest same is situation with Partnership firms or Trust.

F. On the basis of above mentioned situation, what should be course of action on the part of Company H, Company S, Auditors / Directors of Company 'S'

There are following course of actions for above mentioned parties:

I. Company S: As per section 90(5), A company shall give notice, in the prescribed manner, to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe

(a) To be a significant beneficial owner of the company;

(b) To be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or

(c) To have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued,

Rule 6: Company shall give notice seeking information in Form No.BEN-4.

STEP: 2- Action by Company

The company shall,

(a) Where that person fails to give the company the information required by the notice within the time specified therein; or

(b) Where the information given is not satisfactory, {Section 90(7) read with Rule 6 of SBO Rules}

The Company shall apply to Tribunal within 15 days of the expiry of the period specified in Notice.

Notice for an order directing that the shares in question be subject to restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other matters as may be prescribed.

II. Auditor/ Person who is signing MGT-7 of Company 'S':

• Auditors' while audit the Company have to check whether there is any body corporate is shareholder of Company 'S'.
• If Yes, whether BEN-1 is received by the Company.
• If BEN-1 not received, whether Company sent notice to such persons.
• If Notice Sent, reply not received whether Company has taken action in Tribunal.

In case of non-compliance by the Company, auditor has to report the same in his Report.

III. Directors/ Officer in Default of Company 'S':

It is responsibility of the directors as officer in default to do followings:

• They shall check whether there is any beneficial owner of shares of Company.
• Whether there is any Holding Company
• Whether there is any Subsidiary, WOS, associate Company

If Company having any Holding Company has to follow process as mentioned in Section 90(5) discussed above.

If Company having Subsidiary, Associate Company they have to check whether their shareholders required to file BEN-1, If yes they will follow with them to file BEN-1 to subsidiary/ associate Company.