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Amendment Rules for Significant Beneficial Ownership

The Government of India has amended the significant beneficial ownership rules for companies, putting in place a more clear regulatory framework that would also help identify entities that might be controlled from outside the country. The Ministry of Corporate Affairs (MCA) has issued amendments to the Significant Beneficial Ownership rules under the Companies Act, 2013.

Apart from providing more clear definitions for determining whether an individual or an entity has significant beneficial ownership, corporate will be required to provide the details in a more elaborate manner to the ministry. For the first time, the ministry issued the rules pertaining to significant beneficial owners in June 2018.

The amended rules are clear, precise and “all forms of control” that could be exercised in the affairs of a company are being captured.

How the amended rules for Significant Beneficial Ownership came into force?

To facilitate the implementation of the provision and to remove the practical difficulties faced by the stakeholders in complying with the requirements of the provisions:

• The MCA on 8 February 2019 (Effective Date) has notified the Companies (Significant Beneficial Owners) Amendment Rules, 2019 (also known as SBO Amendment Rules).
• The amendments were much-awaited and follow the notification of the principal rules on 14 June 2018, where a shareholding of 10% or more of an Indian company was considered as the threshold for determining ‘significant beneficial ownership’.
• The principal rules caused a fuss because of the low threshold limit of 10% for determination of significant beneficial ownership as compared to the 25% threshold in most of the developed countries.
•  In addition, there were various ambiguities and interpretation issues which were subsequently raised with the MCA by various stakeholders.

The following article explains the revised requirement of the rules and responsibilities of the companies and the immediate actionable to be taken in order to comply with the revised requirements. But before moving ahead, let us try to discuss few of the terms in detail for better understanding.

What is Significant Beneficial Ownership (SBO)?

As per the amended Section 90 of the Companies Act, 2013, SBO can be understood as under:

Accordingly, the revised rules provides the following definition as –

“Significant Beneficial Owner in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who acting alone or, together, or through one or more persons or trust, who possesses one or more of the following rights or entitlements in such company, namely:-

• Holds indirectly, or together with any direct holdings, not less than ten percent of the shares;
• Holds indirectly, or together with any direct holdings, not less than ten percent of the voting rights in the shares;
• Has the right to receive or participate in not less than ten percent of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
• Has the right to exercise or actually exercises, directly or indirectly, significant influence or control, in any manner other than through direct holdings alone.

What is Indirect Holding?

If an individual does not hold any right or entitlement indirectly as per the above-mentioned clauses, then he should not be considered to be a significant beneficial owner. Therefore, in order to be an SBO, a person must have an indirect right or entitlement and where the person has only direct holding, he shall not be termed as the SBO.

How would you determine Direct Holding and Indirect Holding?

You can determine the holdings in the way mentioned below:

Determining Direct Holding

An individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria:

• The shares in the reporting company representing such a right or entitlement are held in the name of the individual – this means that the name of such person should be reflected in the register of members of the company.
• The individual holds or acquires a beneficial interest in the share of the reporting company under sub-section (2) of section 89, and has made a declaration in this regard to the reporting company – this means that the company must be fully informed about the details of such person by furnishing form MGT 4 and MGT 5.

Determining Indirect Holding

An individual is considered to hold a right or entitlement in a direct if he satisfies any of the following criteria’s:

Revised Key Terms

The following key terms are very important to know:

1. Majority Stake: This term has been newly inserted in the amended rules which define:

• Holding of more than 50% of the equity share capital in a body corporate; or
• Holding of more than 50% of the voting rights in a body corporate; or
• Having the right to receive or participate in more than 50% of the distributable dividend or any other distribution by the body corporate.

2. Person Acting Together: If any individual or a group of individuals acting through any person or trust, act with a:

• Common intent; or
• Purpose of exercising any rights or entitlements; or
• Exercising control; or
• Significant influence,

on a reporting company through an agreement which can be formal or informal. Hence, such individuals or a group of individuals shall be deemed to be ‘acting together’.

3. Shares: Shares apart from including equity shares also includes instruments in the form of Global Depository Receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall also be treated as shares.

Declaration of Significant Beneficial Ownership under Section 90

We can divide the declaration into two stages:

• Initial Mandatory Disclosure: On the date of commencement of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, every individual who is a significant beneficial owner in a reporting company, shall file a declaration in Form No. BEN-1 to the reporting company within ninety days from the date of this notification i.e. 8th February, 2019
• Continual Disclosure: Where an individual becomes a significant beneficial owner, or where his significant beneficial ownership undergoes any change shall file a declaration in Form No. BEN-1 to the reporting company, within 30 days of acquiring such significant beneficial ownership or any change therein.

Return of SBO in shares

The reporting company shall file a return 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 such declaration

Non Applicability of the Amendment

These rules would not be applicable to the extent the share of the reporting company is held by:

• The Investor Education and Protection Fund
• Its holding reporting company
• The Central Government, state governments and local authorities.
• Entities administered by the Central Government, by any of the state governments or partly by the Central Government and any of the state governments.
• All investment vehicles registered with the Securities and Exchange Board of India (SEBI).
• Investment vehicles governed by the Reserve Bank of India (RBI)/Insurance Regulatory and Development Authority of India (IRDA)/ Pension Fund Regulatory and Development Authority

Format of Form/ e-Form

The revised format of the Forms BEN-1, BEN2, BEN-3 and BEN -4 has been provided, however, the electronic version of the BEN-2 is still awaited. For more information, you can read the official notification here

Conclusion

While the revised rules and forms seem to simplify and ease the practical implementation of the rules, the real test will be for the companies to ensure compliance of the revised requirements and to implement them. Due to the lowered threshold limit for determining the ownership, the compliance burden of the companies will increase drastically and, hence, it will be interesting to witness how the companies implement the provisions of the revised rules.