[Ishita Vyas and Akash Srivastava]

 

Ishita & Akash are 5th year students at HNLU, Raipur.

Introduction

The ‘White Paper on Black Money’ prepared by the Ministry of Finance in May 2012 categorically stated that black money has a “debilitating effect on the institutions of governance and conduct of public policy in the country”[1]. The Govt. of India has been persistently fighting against the menace of black money and corruption. In pursuance of that it had demonetized higher value currency in December 2016. The parliament also amended the Benami Transactions (Prohibition) Act, 1988 in November 2016. Moreover the Securities and Exchange Board of India, via its circular no. CIR/IMD/FPIC/CIR/P/2018/64 dated 10th April 2018, came out with new KYC requirements for ‘foreign portfolio investments’ that ultimately seek to reveal the names of the actual beneficiaries behind a particular investment or security. This step has been taken to check prevention of money laundering and round-tripping[2] of unaccounted income.

Misuse of corporate vehicles for the purpose of evading tax or laundering money for corrupt or illegal purposes, including for terrorist activities has been a concern worldwide[3]. Complex structures and chains of corporate vehicles are used to hide the real owner behind the transactions made using these structures.[4]

On the same lines, the Ministry of Corporate Affairs (“MCA”) sought to amend the Companies Act in 2017. The Companies (Amendment) Act, 2017 has brought about some major changes to the law governing companies in India. It has introduced the concept of beneficial ownership along with an exhaustive compliance requirement with respect to reporting of the same. Section 89 and 90 deal with declaration of beneficial ownership and registration of significant beneficial owners in a company. In order to supplement the statutory provisions, the MCA has also notified the Companies (Significant Beneficial Ownership) Rules, 2018 on June 13, 2018.

Important Definitions

Firstly, beneficial interest (“BI”) refers to the right or entitlement of a person alone or together with any person, directly or indirectly, through contract, arrangement or otherwise, to exercise or cause to be exercised any or all of the rights attached to the share; or to receive or participate in any dividend or other distribution in respect of such share[5]. A significant beneficial owner (“SBO”)[6] is an individual who holds not less that 10%[7] of shares in a company or the actual exercising of significant influence or control, over the company, but whose name is not entered into the register of members of the company[8].

It has been further explained that depending on the form of business the method of identification of the Significant Beneficial Owner will vary[9]. In case of a the member being a company, the significant beneficial owner shall be the natural person, who holds not less than ten percent of the share capital of the company or who exercises significant influence or control in the company through other means. In case of the member being a partnership firm, the significant beneficial owner is the natural person who holds not less than ten percent of capital or has entitlement of not less than ten percent of profits of the partnership. Moreover, where there is no natural person identifiable then the person who holds the position of senior managing official will be the SBO.[10] In case of the member being a trust, the SBO would be the author, trustee and the beneficiaries with not less than ten percent interest in the trust and any other natural person exercising ultimate effective control over the trust through a certain chain of control or ownership.

Whereas 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[11].

Compliances

The compliances can be categorized into three divisions on the basis of applicability.

1. For a registered owner: A registered owner is supposed to make a declaration to the Company specifying the name and other particulars of the person who holds the beneficial interest in such shares, as specified[12]. The rules do not specify any particulars or any particular form which needs to be referred to for this declaration.
2. For a person holding beneficial interest: Holder of beneficial interest must submit a declaration to the company specifying the nature of his interest and particulars of the corresponding registered owner in whose name the shares are held. However, a declaration form has been prescribed only for the declaration of significant beneficial ownership. Such a declaration needs to be made within 90 days[13] of the commencement of the SBO Rules and within 30 days[14] in case of any change is Significant Beneficial Ownership. Such declaration must be made in the prescribed format i.e. Form BEN- 1
3. For the Company: Whenever a declaration has been made under Section 89 to a company, the company is supposed to make note of those declarations in a separate register.[15] It is also supposed to file a return to the Registrar of Companies (“ROC”) regarding such declarations within 30 days of receiving these declarations. The return needs to be filed the format of Form BEN-2. The register of declarations needs to be prepared in the prescribed format i.e. Form BEN- 3. This register shall be open for inspection during business on every working day as decided by the Board of Directors of the Company. The inspection can only be open for members and for not less than two hours each day. The company can charge fees subject to a maximum of Rs 50.[16]

A company shall also have to give notice to any person whom the company knows or has reason to believe to be a significant beneficial owner of the company, or to be having the knowledge of the identity of an SBO or another person likely to have such knowledge or to have been an SBO of the company at any time during the preceding three years from the date of issue of notice and who is not registered as required by the provisions of the Act.[17] Such information is supposed to be given to the Company within 30 days of receipt of the notice.

Consequences of Non-Compliance

In case a company which is supposed to file a return within 30 days of receipt of declaration, does not do so within the time limit, the company along with the officer(s) in default shall have to pay a minimum fine of Rs. 500 and a maximum of Rs. 1000. In case of a continuing failure, the fine may extend to Rs. 1000 per day.[18]

All rights attached to the shares in respect of which the required declarations have not been made, shall become unenforceable.[19] However, there is no provision which tells us whether these rights get rescinded or temporarily revoked.

The company has been given authority to apply to the NCLT for an order directing that the shares in question be subject to restrictions including the following:-

1. Restrictions on the transfer of interest attached to the shares in question
2. Suspension of the right to receive dividends in respect of the shares
3. Suspension of voting rights in relation to shares in question
4. Any other restriction on all or any of the rights attached with the shares in question.[20]

Conclusion

The MCA vide its new rules, has placed the burden of disclosure compliance on the all the three parties- the company, the beneficial owner and the registered owner. Consequences of non-compliance are slightly confusing as they seem temporary in nature, and clarifications from the MCA are welcome in this regard. More importantly, these rules are directly in consonance with the policy stance taken by the Govt of India on issues like money laundering, black money, corruption and tax evasion. Higher transparency in the corporate sector with respect to beneficial ownership of shares of the company can be expected in near future.

 

 

[1]Mukherjee Pranab, Foreword to White Paper on Black Money, May 2012, Ministry of Finance. Avaiable on http://www.prsindia.org/uploads/media/White%20Paper%20Black%20Money/WhitePaper_BackMoney2012.pdf

[2]Round tripping has been identified to be a mechanism of bringing back illicit income to the domestic economy through investments in FPIs.

[3]The Report of the Companies Law Commitee, Ministry of Corporate Affairs, Govt of India, Februray 2016, Pg 32 available on http://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf

[4]Ibid.

[5]Section 89(10) of the Companies Act, 2013

[6]Rule 2(e) of the Companies (SBO) Rules, 2018 available on http://www.mca.gov.in/Ministry/pdf/CompaniesSignificantBeneficial1306_14062018.pdf

[7]Rule 2(e)(i) of the Companies (SBO) Rules, 2018

[8]Rule 2(1)(e) of the Companies (SBO) Rules, 2018

[9]Explanation I to Rule 2(1)(e) of the Companies (SBO) Rules, 2018

[10]Explanation III to Rule 2(e) of the Companies (SBO) Rules, 2018

[11]Rule 2(c) of the Companies (SBO) Rules, 2018

[12]Section 89(1) of Companies Act, 2013

[13]Rule 3(1) of the Companies (SBO) Rules, 2018

[14]Rule 3(1) and Rule 3(2) of the Companies (SBO) Rules, 2018

[15]Section 89(6) of the Companies Act 2013

[16]Rule 5(2) of the Companies (SBO) Rules, 2018

[17]Section 90(5) of the Companies Act 2013

[18]Section 89(7) of the Companies Act 2013

[19]Section 89(8) of the Companies Act 2013

[20]Rule 7 of the Companies (SBO) Rules, 2018