What Do You Mean By Significant Beneficial Ownership?

What Do You Mean By Significant Beneficial Ownership?

Failure to disclose Beneficial Ownership can result in fines or even imprisonment for the Significant Beneficial Owner (SBO). Moreover, the relevant company must apply for an order restricting the owner's rights to sell the shares or receive dividends, although the SBO has the right to contest the order.

What do you understand by Beneficial Interest?

Section 89(10) of the Companies Amendment Act 2017, beneficial interest in the shares of a company includes, directly or indirectly, through contract or otherwise, the right of a person to exercise rights attached to such shares or receive or participate in any dividends or other distribution in respect of the shares.

Who qualifies as an SBO as per the SBO Rules?

When an individual owns the ultimate beneficial interest under the definition in Section 89 (10) of the Act) of not less than 10% in a company but whose name is not entered in the register of members of a company as the holder of such shares; qualifies as an SBO.

Where the shareholder is a company or a partnership firm, the SBO is the natural person who, whether acting alone or together with others, holds not less than 10% of the share capital of the company or is entitled to 10% of the profits of the partnership firm or who exercises significant influence or control in the company or partnership firm through other means;

In case of a trust, managed by a trustee, the SBO shall include the settlor, trustee or beneficiaries of the trust with not less than 10% interest in the trust and other persons exercising effective control over the trust; and

where no natural person is identifiable in case the member is a partnership firm or a company, the SBO would be the relevant natural person who holds the position of senior managing official.

Why is the disclosure of beneficial ownership necessary?

The Companies Amendment Act, 2017 established a rule to identify a Significant Beneficial Owner (SBO) in a company. This was previously regulated by Sec 90 of the Companies Act 2013, which is to ensure that an artificial legal entity has a natural person who controls its affairs.

The provisions are applicable to all companies– pubic companies, private companies, listed companies, unlisted companies, small companies and large companies.

Moreover, Section 90 of the Act requires every company to do, inter alia, the following:

• To maintain a register of the interest declared by individuals along with the prescribed particulars of such individuals and keep the register open for inspection by shareholders;

• To file a return of SBOs of the company with the Registrar, containing the prescribed particulars;

• To give notice to any person whom the company believes to be an SBO of the company or to have been an SBO of the company during the preceding three years and who is not registered as an SBO; and

If a person fails to provide the information sought by a company, the company is required to apply to the National Company Law Tribunal (NCLT) for an order directing that the shares in question be subject to prescribed restrictions including those with respect to the transfer of shares and suspension of rights attached to the shares, amongst others.

What are the rules in India beneficial for disclosure of SBO rules?

The original form of the rules was issued by the Ministry of Corporate Affairs in June 2018, requiring both resident and foreign SBOs to declare the nature of their interest to that company, where the 'significant' threshold was set at 10 per cent of the ownership. It also included individuals who have the right to exercise significant influence or control over the reporting company. SBOs were required to report themselves by filing a Form BEN-1 to the relevant company by 11 September 2018. However, these rules were regarded as unclear and were therefore amended earlier this year.

From this onwards, every individual who becomes an SBO, or who changes their SBO status, must declare it to the company within 30 days, and the company must report these declarations to the official registrar of companies within 30 days of receiving them.

Failure to disclose can result in fines or even imprisonment for the SBO. Moreover, the relevant company must apply for an order restricting the owner's rights to sell the shares or receive dividends, although the SBO has the right to contest the order.

How does the SBO affect?

The SBO effects in several ways, they are as follows:

• For Companies: The notification of Section 89 (10) and Section 90 of the Act and the SBO Rules significantly increases the onus on companies to identify and maintain adequate records of and update the Registrar with the details of SBOs. In doing so, companies will not only have to identify shareholders who hold, individually or with others, more than 10% shares of a company, but also those who directly or indirectly exercise control or significant influence in a company.

Moreover, each company is required to give notice to any person whom the company knows or has reason to believe is an SBO or to have been an SBO during the preceding three years and who is not registered as such with the company. Where the information provided upon such notice is not satisfactory, the company is required to apply to the National Company Law Tribunal (NCLT) within a period of 15 days from the expiry of the notice for an order with directions to impose the above restrictions on such shares. Failure to comply with this requirement would attract prescribed monetary penalties.

• For Shareholders: The primary obligation of disclosure of significant beneficial interest has been cast on all natural persons who hold such interest directly and indirectly, regardless of their domicile or residency status.

Natural persons who, either directly or along with others (including through intermediate holding companies or trusts), hold 10% or more shareholding of a company, or who exercise 'significant influence' or 'control' in a company, are required to make a declaration of the nature of their interests to the company together with particulars of instruments embodying the transfer or acquisition of the beneficial interest. Failure to comply with this requirement or suppression of any material information would attract both monetary and penal consequences.