The Companies (Significant Beneficial Owner) Amendment Rules, 2019 was introduced by the Ministry of Corporate Affairs in order to make certain amendments to the 2018 Rules to remove the ambiguities that existed earlier.

The Financial Action Task Force suggestion record characterizes Beneficial Owner as the natural person(s) who eventually possesses or controls a client or potentially the common individual for whose benefit exchange is being directed. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. It is imperative to note here that helpful proprietors are not the named proprietors of the offers or other property.

For instance, Mr. A. holds shares of XYZ Pvt. Ltd but the name of Mr. B is registered in the Register of Members. In this case, Mr. A is the beneficial owner of the shares of XYZ Pvt. Ltd even though Mr. B’s name is mentioned in the Register.

Background:
The concept of Significant Beneficial Owner (hereinafter referred to as an SBO) finds its roots in Section 90 of Companies Act 2013 which empowers Central Government to appoint a competent person (s) to investigate and report about beneficial ownership with regard to shares. A similar provision is also contained in Section 187 C of Companies Act 1956. However, an amendment was introduced to the Act of 2013 through the Companies (Amendment) Act 2017.

Through this amendment following provisions were inserted to identify an SBO-

90. (1) Every individual, who acting alone or together, or through one or more persons or trust, including a trust and person resident outside India, holds beneficial interests, of not less than twenty-five percent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of section 2, over the company (herein referred to as significant beneficial owner), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed:
Provided that the Central Government may prescribe a class or classes of persons who shall not be required to make a declaration under this sub-section.’[1]

The Companies (Significant Beneficial Owner) Amendment Rules, 2018 described SBO as an individual who holds 10% or more than 10% of beneficial interest but whose name is not registered in the Register of Members.[2]

Who Is A Significant Beneficial Owner?

A SBO is an individual who holds the shares in a reporting company either directly or indirectly through a body corporate, Hindu Undivided Family, Trust, Partnership Entity or a Pooled Investment Vehicle.

As per Rule 2(1)(h) of the Companies (Significant Beneficial Owner) Amendment Rules, 2019 an SBO is-
‘an individual who acting alone or together or through one or more persons or trust, possess one or more of the following rights and entitlements in such reporting company:

• holds indirectly, or together with any direct holdings, not less than 10% of the shares
• holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;
• has the right to receive or participate (by virtue of their indirect and/or direct holdings) in not less than 10% of the total distributable dividend or any other distribution; or
• has the right to exercise, or actually exercises, significant influence or control (through their indirect holdings only) over the reporting company’[3]

In case of Body Corporate

An individual shall be an SBO if the body corporate is a member of a reporting company and that individual-

• holds majority stake in that member; or
• holds majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of that member[4]

In case of Hindu Undivided Family (HUF)

An individual shall be an SBO if the HUF is a member of a reporting company and the individual is the Karta of the HUF.[5]/

In case of Partnership Entity-

An individual shall be an SBO if the partnership entity is a member of a reporting company and that individual-

• is a partner; or
• holds majority stake in the body corporate which is a partner of the partnership entity; or
• holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity[6]

In case of Trust:

An individual shall be an SBO if the trust is a member of a reporting company and that individual:

• is a trustee in case of a discretionary trust or a charitable trust;
• is a beneficiary in case of a specific trust;
• is the author or settlor in case of a revocable trust[7]

In case of Pooled Investment Vehicle:

An individual shall be an SBO if the pooled investment vehicle is a member of a reporting company and that individual:

• is a general partner; or
• is an investment manager; or
• is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.[8]
  

Furthermore, the New SBO Rules likewise set down extensive criteria for the assurance of a person's indirect holding in the reporting company to decide if an individual is an SBO. For example, if the member of the reporting company is a company, the SBO is the individual who holds majority stake in that member or holds majority stake in the ultimate holding company of that member.

The Amendment Rules also provide clarity on the exclusion for direct holding by stating that any individual who holds any right or entitlement directly shall not be considered as SBO. However, any individual who fulfills any of the following criteria can be considered as an SBO-

• the shares in the reporting company representing such right or entitlement are held in the name of the individual;
• the individual holds or acquires a beneficial interest in the share of the reporting company under subsection (2) of section 89, and has made a declaration in this regard to the reporting company.

Rule 2A- Duty of A Reporting Company

It is the duty of the reporting company to take ‘necessary steps’ to find out if there is any SBO of the reporting company, and to cause such SBO to make a declaration in Form BEN-1. What would be treated as ‘necessary steps’ has not been clarified, thereby putting a greater degree of onus on reporting companies.

Additionally, every reporting company is required to give notice in Form BEN-4 to such members (other than an individual), who hold not less than 10% of its shares, voting rights, or distribution rights, to seek information relating to the SBO. Whilst the amended SBO Rules provide for filing of BEN-1 by the SBOs within 90 days from the date of commencement of the Amendment Rules, in the event the reporting company sends a notice under Form BEN-4, as per Section 90 of the Companies Act, the SBO is required to provide the details within 90 days from the date of the receipt of the Form BEN-4 from the reporting company.

Rule 3- Declaration Of Significant Beneficial Ownership Under Section 90 Of Companies Act 2013

Rule 3 lays down that a person or an individual, who is already an SBO at the time of commencement of the Rules, is required to file a declaration regarding his ownership in Form No. BEN- 1 within 90 days from the date of commencement of these rules. However, if a person or an individual subsequently becomes an SBO i.e., after the commencement of these Rules then he is required to file a declaration in Form No. BEN-1 or notify changes in the ownership within 30 days of acquiring such ownership or any change.

Rule 4-Return Of Significant Beneficial Owners In Shares

Rule 4 of the Amendment Rules 2019 says that the declaration of beneficial interest received by the company is required to be filed in Form No. BEN-2, with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of declaration by it.

Rule 5-Register Of Significant Beneficial Owners

Rule 5 of Amendment Rules 2019 requires every company to maintain a register of SBOs in Form No. BEN-3. Also, this register shall be open to for inspection during business hours, at such reasonable time of not less than two hours, on every working day as the board may decide, by any member of the company on payment of such fee as may be specified by the company but not exceeding fifty rupees for each inspection.

Rule 6-Notice Seeking Information About Significant Beneficial Owners

In addition to this, Rule 6 requires every reporting company to give notice in Form No. BEN-4 to all its members (who are not individuals) who hold more than 10% of the shares asking the members to, inter alia, disclose information of the SBO of the member.

Rule 7- Application To Tribunal

Rule 7 of the Amendment Rules 2019 says that the reporting company may apply to the Tribunal for relief under certain circumstances. The reporting company may apply to the Tribunal:

• When a person is required to provide information under Rule 2A or Rule 6 by notice in the prescribed form within specified time and such person fails to give information, or
• Where the information provided is not satisfactory.
  The reporting company may also request Tribunal to pass an order directing that shares in question be subject to restrictions. The restrictions in this regard can be imposed on-
• Transfer of interest attached to the shares
• Suspension of the right to receive dividend in relation to the shares
• suspension of voting rights in relation to the shares
• any other restriction

Rule 8- Non- Applicability

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

• An authority constituted by the Central Government for the administration of the Investor Education and Protection Fund
• Holding reporting company where the details of such company are provided in the prescribed Form.
• Central Government, State Government or any local authority.
• A reporting company, body corporate or an entity controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments.
• Securities and Exchange Board of India registered investment vehicles such as mutual funds, alternative investment funds, real estate investment trusts, and infrastructure investment trust.
• Investment vehicles regulated by the Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

Conclusion
On a perusal of the SBO definition and BEN-1 form as specified in the Amendment, it appears that, in the process of identifying SBO for a reporting company where the member of the reporting company is a body corporate or a company, the first step should be to identify all the individuals holding a majority stake in the member which, in most situations, would be only one person as the threshold for majority stake is 51% and above or majority stake in the reporting company itself. If the individual satisfies the 51% criterion, then further enquiry has to be undertaken to determine whether she also holds more than 10% of the shares in the reporting company.

Even though this literal interpretation of the Rules is a bit narrow in its scope, nevertheless, such an interpretation is within the bounds of section 90 of the Companies Act, 2013, which prescribes the materiality threshold to determine SBO as not less than 25% or such other percentage as may be prescribed, in the shares of the company. Another possible and wider interpretation could be that the situations mentioned in Explanation III are not exhaustive and it covers even those cases where the member of the reporting company is a body corporate and an individual who, even though does not have majority stake in the member company or reporting company, still satisfies the criteria of 10% materiality threshold with respect to the ultimate reporting company is an SBO.[9]

However, it is a policy choice undertaken by the Ministry of Corporate Affairs, to incorporate the additional criteria of majority stake in identifying SBO where a member of a reporting company is a body corporate, thereby increasing the materiality threshold for qualifying as SBO above 10% (which extends to 50% or more). From the compliance perspective, indeed there has been more clarity with respect to identifying the SBO and the Amendment has surely brought some relief to the companies by relaxing otherwise onerous reporting requirements.

End-Notes:

1. Section 90 of Companies (Amendment) Act, 2017
2. Rule 2(1)(e) of Companies (Significant Beneficial Owners) Rules, 2018.
3. Rule 2(1)(h) of Companies (Significant Beneficial Owners) Amendment Rules, 2019.
4. Explanation III to Rule 2 of Companies (Significant Beneficial Owner) Amendment Rules, 2019
5. Ibid
6. Ibid
7. Ibid
8. Ibid
9. Aditi Tomar, Do the Companies (Significant Beneficial Owners) Amendment Rules, 2019 Narrow the Scope of these Rules, India Corp Law, https://indiacorplaw.in/2019/03/companies-significant-beneficial-owners-amendment-rules-2019-narrow-scope-rules.html (accessed on 28th June 2019)