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Are you a Significant Beneficial Owner of a Company

The law relating to companies provides that a Shareholder or in case there are several shareholders in a company, a majority Shareholder is the owner of a company. In the globalized world, where investment could be made from one corner of the world in a company resident in a foreign jurisdiction, at times it is difficult to ascertain who is a truly beneficial owner of a company. In other words, who is the one who would benefit from the enterprise by reaping dividends? The beneficial owner may have certain tax obligations and in some jurisdiction an additional compliance obligation as well.

The objective of the amendment to the Significant Beneficial Owner rules is to reveal individual shareholders that ultimately derive economic benefits from and/or control a corporate entity in India.

A significant beneficial owner (SBO), in relation to a reporting company is an individual, who:

  • acting alone or together, or
  • through one or more persons or
  • through a trust

possesses one or more of the following rights or entitlements in a reporting company:

  • holds indirectly, or together with any direct holdings, at least 10% of the shares;
  • holds indirectly, or together with any direct holdings, at least 10% of the voting rights in the shares;
  • has the right to receive or participate (by virtue of their indirect and/or direct holdings) at least 10% of the total distributable dividend or any other distribution in a financial year; or
  • has the right to exercise, or actually exercises, significant influence or control (through their indirect holdings and direct holdings) over the reporting company.

In addition, the New Rules also lay down comprehensive criteria for the determination of an individual’s indirect holdings in the reporting company for the purpose of determining whether or not an individual is an SBO.

The following illustration explains who can be regarded as an SBO in case the member is a body corporate:

An illustration for identifying SBO is explained below:

  1. Company A is the Reporting Company, which has 2 members, i.e. Company B and an individual C, who are holding 80% and 20% respectively stake in the Reporting Company A;
  2. Since Individual C is only holding directly in the Reporting Company A and has been identified as a registered owner, the Individual C cannot be regarded as an SBO, even though it holds more than 10% in the Reporting Company A.
  3. We know that if the member of a reporting company is a company, the SBO is the individual who either holds a majority stake in that member or holds a majority stake in the ultimate holding company of that member. For identifying the beneficial owner, we are required to analyze the shareholding pattern of the Company B. Now, Company B has 3 shareholders, a company D holding 60% stake, Individual E and Individual F holding 5% and 35% stake respectively in Company B.
  4. The major shareholder is again a company, i.e. Company D, therefore we have to analyze the shareholders of Company D. Company D has 2 individual as shareholders, i.e. Individual G and Individual H, holding 90% and 10% stake respectively.
  5. Indirectly, Individual G holds 54% in Company B, i.e. the majority stake in the member of the Reporting Company A and will be regarded as an SBO.

In terms of the prescribed law, every reporting company shall take necessary steps to find out if there is any individual who is a significant beneficial owner and make such individuals to file a declaration. The company shall serve notice to all member (other than an individual) of a company which if they are holding at least ten percent of shares or voting rights or right to receive or participate in dividend or any distribution payable in a financial year, and seeking information in the prescribed format.

Compliance requirement

  1. Every significant beneficial owner of a company has to file a declaration to that effect within the prescribed time frame.
  2. Upon receipt of the declaration under rule 3, the reporting company shall file a return in prescribed format with the Registrar of Companies within a period of thirty days from the date of receipt of such declaration.

In case the significant beneficial owner fails to give satisfactory information, the company can apply to the National Company Law Tribunal for directing that the shares in question be subject to restrictions, including –

  • restrictions on the transfer of interest attached to the shares in question;
  • suspension of the right to receive the dividend or any other distribution in relation to the shares in question;
  • suspension of voting rights in relation to the shares in question;
  • any other restriction on all or any of the rights attached with the shares in question.

Who is exempted

The SBO Rules are not applicable, to the extent the shares of a reporting company are held by:

  • IEPF authority;
  • its holding reporting company, the details of such holding reporting company shall be reported in the prescribed format;
  • the Central Government, State Government or any local Authority;
  • a reporting company; or a body corporate; or an entity, controlled by the Central Government or by any State Government or Governments or partially by the Central Government and partly by one or more State Governments;
  • SEBI registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by the Securities and Exchange Board of India;
  • Investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

Penalty

If any person fails to make a declaration, he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees or with both and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.

Contact us to know more.

 

Last Updated: 25th February 2019
This article is contributed by:

Puneet Bhatia
Senior Associate

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