Attraction of section 187C of Companies act

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Kunal

Kunal (Querist)
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07 December 2007 I would like to know when does the section 187 C gets attracted in detail if possible

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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07 December 2007 14.7-2 Benami holding of shares by members and guardians for minors

14.7-2a Attempt to bring out beneficial owners - Meanwhile, a new section 187C was inserted in the Act, by the 1974 Amending Act, with a non obstante clause, mandating that the benami-holders whose names were borne on the registers of members to be the beneficial owners if they failed to declare to the company giving the name and other particulars of the person beneficially interested in the shares as well as the encumbrances created on the shares and the nature of the beneficial interest accompanied by a similar declaration by the beneficial owners, in accordance with the Companies (Declaration of Beneficial Interest in Shares) Rules, 1975. All subsequent changes too were required to be so declared to the company.

14.7-2b Beneficial ownership declared was to be recorded in the register by companies - The company had to record such declarations received from the ostensible and the beneficial owners of the shares in its register of members and file a return within 30 days of receipt of such declarations with the Registrar. This one obligation cast on the companies additionally was quite loaded and unwarranted and unconnected to its business and was seen as totally uncalled for. However, these declarations were not to alter the payment of dividend declared by the company to the registered member in terms of section 206 nor did they alter the title to ownership of the shares. Further, section 187D inserted simultaneously with section 187C empowered the Central Government to have such beneficial ownership of shares in any company to be investigated by Inspectors, for good reasons, and when it is ordered the provisions of section 247 shall apply to such investigation. The term “beneficial interest” used in section 187C referred to the real entitlement arising out of the shares as against the name-sake holder whose name is borne on the register of members. The object of this statute change made in 1974 (with effect from 1-2-1975) was to bring out the benami holdings of shares in existence, for, in the absence of such declarations made to the company all the collateral agreements entered into, or instruments executed in connection with such benami holdings were declared to be unenforceable by the beneficial owner or any person claiming through him in sub-section (6) of section 187C.

14.7-2c Banks were exempted - Banks were exempted from this obligation to declare in respect of deposit of shares as security given to the Stock Exchange by its members in accordance with the Notification issued by the Government under the Securities Contracts (Regulation) Act.

14.7-2d The list of holdings included guardians for minors’ holdings - A host of all benami, trustee (private or public), and in representative capacity for a body corporate or a Hindu Idol or a partnership or a HUF or blank transfers or guardians for minors etc. holding of shares in companies were covered by the obligation to declare the beneficial ownership interest under section 187C, excepting the Stock Exchange trades of shares without the transfer deeds as no legal title to the shares traded passes until the relative transfer of shares is completed. Failure to declare was punishable, apart from the benamidar losing the shares in favour of the ostensible owner whose name is borne on the register of members. Any way, all this has been ended with effect from 13-12-2000 by the Amending Act, 2000, with the declaration of sections 153A, 153B, 187B and 187C as non est from 13-12-2000.

14.7-2-1 Benami Transactions (Prohibition) Act and Benami holding - Next in line, the Benami Transactions (Prohibition) Act, 1988 came up prohibiting benami transactions in property except those excluded, viz., the wife and unmarried daughters holding benami property in section 3(2) of the said Act, defeating the locus standi of the beneficial owner to claim any property and rendering both the ostensible owner and the benamidar punishable with imprisonment and fine, section 4. It is difficult to see the logic of the co-existence of benami shareholding recognized under section 187C of the Act side by side with the Benami Prohibition Act.

14.7-2-2 Beneficial ownership in case of demat shares - In the wake of economic reforms, it became necessary to bring in transparency compatible to screen-based trading on the Stock Exchanges, first by NSE in November, 1994 and next by BSE in October 1995, for which dematerialisation of shares of listed companies was prescribed for operations through the Depositories formed under the Depositories Act, 1996, and hence sub-section (3) was inserted in section 41 by that Act to say that the entry of a person’s name as the beneficial owner in the records of the depository shall be deemed to be a member of the concerned company. By May, 2001, BSE made dematerialisation of shares compulsory for all B2 listed companies, thus metamorphosing the register of members into the computer memory of the Depositories as beneficial owners and as index of members, section 152A, regularizing the concept of beneficial ownership in regard to company shares.

14.7-2-3 Minor as shareholder and Benami shareholding - The DCA had clarified in its Circular No. 8-18-75-CL-V, dated 31-3-1975, that a guardian who holds the shares in his own name was to make the declaration under section 187C, unless the name of the minor or ward also appears on the register of members. Is it in the company’s discretion to enter the minors’ names also in addition to the guardians’ names in the register of members and whether DCA Circulars of equivocation have the force of law and reliable are the questions that arise here. Clarity to answer about the validity of minor’s shares in law remains clouded.