DECLARATION BY BENEFICIAL &
SIGNIFICANT BENEFICIAL OWNERS
SECTION 89 & 90 OF THE COMPANIES ACT 2013
This write up is prepared in regards to the
newly introduced/ substituted provisions under the Companies Act, 2013 (herein
referred thereafter ‘the Act’) i.e. Section-90 (Register of significant
Beneficial Owners in a Company) herein enforced[1]
and the Companies (Beneficial Interest and Significant Beneficial Interest)
Rules, 2018 (‘Final Rules’) issued by MCA in relation to Significant Beneficial
Ownership (‘SBO’) by MCA vide its Notification dated June 13, 2018[2].
Why this concept…?
[3]This measure is implemented for the avoidance
of misuse of “Corporate vehicles” such as —such as companies, trusts,
foundations, partnerships, and other types of legal persons and arrangements,
which plays a vital role in economy round the globe. These corporate vehicles
in some or the other ways are misused for unlawful purposes such as Tax
Evasion, Money Laundering, Corruptions, insider dealing and other illegal/
Benami transactions.
By introduction of this concept in India law,
it attempts to procure and conceal as much information about the legal owners
and beneficial owners (who are actual source of these corporate vehicles) about
their beneficial interest which enhances transparency in corporate world. By
securing the Legal and beneficial ownership information, aid to the concerned
investigation and other competent authorities can be provided which allows them
to identify those natural persons who may be responsible for the underlying fraudulent
or illegal activity of concern, or who may have relevant information to further
an investigation.
Individuals, every so often create,
administer, control, own and operate numerous corporate vehicles financially or
in other specified manner from different countries with ready access to the international
financial system, thereby making difficult for investigation and other
competent authorities for procurement of information from different
jurisdiction which is exposed to investigation under Money Laundering or other
illegal transaction. For Example: Information in regards to “Beneficial Owner”
can remain unnoticed through following ways:
§
Formation of
Shell Companies
§
Complex
ownership: holding of shares through different names
§
[4]Bearer shares and share warrants (Bearer
shares are not permitted under Indian legislation. The Companies Act permits
ownership of public companies through bearer share warrants, but there appear
to be adequate safeguards in place to ensure that beneficial owners of these
instruments are identified)
§
Unrestricted
use of legal persons as directors.
§
formal
nominee shareholders and directors where the
identity of the nominator is undisclosed
§
informal
nominee shareholders and
directors, such as close associates and family,
§
Trusts and
other legal arrangements which
enable a separation of legal ownership and beneficial ownership of assets.
§
use of
intermediaries in forming legal persons,
including professional intermediaries
Therefore, Law in India; herein the companies
act, 2013 has recognized the concept “Declaration in Respect of Beneficial
Interest in any Share under Section 89 of the Act” and Maintenance of Register
of significant beneficial owners in a company under section 90 of the Act”
which will ensure that adequate, accurate and timely information on the
beneficial ownership of corporate vehicles is available (in form
of declaration of beneficial interest in a share to be given by both the legal
owner and the person holding beneficial interest) which
increases transparency and avoidance
of illicit transactions.
Terminologies
Before understanding the provisions of the
sections, let’s discuss with the crux of the sections and important terms used
therein:
1.
Section 89: This section provides that declaration to be
filed by “registered owner” as well as “beneficial owner” holding beneficial
interest in the shares of the Company.
Thereby requiring the Company to record this information in its register
and file requisite return with the Registrar of Companies within a prescribed
time period. However, CA 13 does not define term 'beneficial interest in a share'.
It also specifies fines and penalties for non-compliance of same.
2.
Section 90: Whereby this is new section which has
introduced the concept of “Significant Beneficial owner” and filing of
declarations by such ‘SBO’ of the Company, “Maintenance of Registers of
interest so declared” and also specifies fines and penalties for non-compliance
of same.
3.
Beneficial
Interest: A beneficial interest is "that
right which a person has in a contract made with another" (third) person.
The typical example is "if A makes a contract with B that A will pay C a
certain sum of money, B has the legal interest in the contract, and C the
beneficial interest. In our case; it is right to receive benefits on shares
held by another.
Erstwhile, the expression “beneficial
interest” was not defined, and in absence of specific provisions, the term has
been defined by amending the section 89 of the Act, in form of insertion of sub
section (10)[5];
It provides
the following- “beneficial interest in a share includes, directly or
indirectly, through any contract, arrangement or otherwise, the right or
entitlement of a person alone or together with any other person to—
(i)
exercise or
cause to be exercised any or all of the rights attached to such share; or
(ii)
Receive or
participate in any dividend or other distribution in respect of such
share."
Please Note: “beneficial Interest” Cannot be created for Debentures
4.
Registered
Owner: It is
standing defined in the Companies (Beneficial Interest and Significant
Beneficial Interest) Rules, 2018 (‘Final Rules’):
It 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 beneficial interest in such
shares.
5.
[6]Beneficial owner: In layman language “beneficial owner are the
one who hold shares indirectly either through bank or sub broker” however they
are the actual owners of the shares and has to right to enjoy the benefits
attached with such shares.
Beneficial
owner definition includes it
includes natural persons on whose behalf a transaction is being conducted, even
where that person does not have actual or legal ownership or control over equity.
It’s like person enjoy ownership of the shares irrespective of the title.
In other words: on the natural (not legal) persons who
actually own and take advantage of capital or assets of the legal person; and
have control over it rather, than just the
persons who are legally (on paper) entitled to do so.
For example: if a company
is legally owned by a second company (according to its corporate registration
information), the beneficial owners are actually the natural persons who are
behind that second company or ultimate holding company in the chain of
ownership and who are controlling it.
6.
Significant
Beneficial Owners: As per the Section 90 and the Companies (Beneficial Interest and
Significant Beneficial Interest) Rules, 2018 (‘Final Rules’):
“SBO” means
|
Individual Referred in sub section (1) of section 90
§ Means Every Individual (natural person)
§ Acting alone or together (directly)
§ Or through one or more persons (indirectly)
§ Including trust or person resident outside
India (NRI/ Foreign Nationals)
|
Holding beneficial Interest
|
Holding beneficial Interest:
§ More than 10% (minimum): in shares[7]
of a company or the right to exercise,
§ or the actual exercising of significant
influence[8]
or control[9];
Where
significant influence or control is defined in clause (27) of section 2 of
the Act: (i.e., control of at least twenty per cent of total voting power,
or of business decisions under an agreement)
Threshold limit has been decreased to 10%
§ Refer Sub Section (10) of section 89:It
defines “Beneficial Interest” in shares”
|
Securities Covered[10]
|
Equity shares, Global Depository Receipts,
Convertible Preference Shares, Compulsory Convertible Debentures; (For the
purpose of “SBO”)[11]
|
Register
|
And whose name is not entered in Register of Members
It means shareholders whose name is entered
in “Register” are not required to file.
|
Difference between Beneficial owner and
Significant Beneficial Owner
|
BO: They are required to make disclosures
as per section 89 of the Act, even when their holdings are less than 10%.
SBO: They are required to make disclosure’s
as per section 90 of the Act if interest is or more than 10%
|
7.
Significant
Beneficial to be determined (Other than
individuals/natural Person):
MEMBER WILL BE:
|
SIGNIFICANT BENEFICIAL OWNER
|
HOLDING
|
Company
|
Natural Person
§ who, whether acting alone or together
§ with other natural persons, or
§ through one or more other persons or trusts
|
§
Whose name
is not entered in register of members
§
Holds at
least 10 % in shares of a company or the right to exercise
§
or the
actual exercising of significant influence or control
|
Partnership
firm[12]
|
Natural Person
§ who, whether acting alone or together
§ with other natural persons, or
through
one or more other persons or trusts
|
|
![]()
In aforesaid Situation will be
beneficial owner
|
||
Trust
through trustee
|
“SBO” will
be:
-author of
the trust,
-the
trustee
-the
beneficiaries- Holds at least 10 % of interest in trust
-any other
natural persons- exercising of significant influence or control
|
QUICK REFERNENCER FOR DECLARATION: IN
SECTION 89 OF THE ACT:
As per
Section 89 and the Companies (Management and Administration) Rules, 2014;
Declaration in Respect of “Beneficial Interest” in any Shares by Registered
owner and beneficial Owner is to be made in following Manner:
Registered owner
(Section 89 (1))
|
§
Declaration
by person who does not hold BENEFICIAL INTEREST but his name is entered in
Register:
§
Form MGT-4 within 30 days from date of entry
in Register of Members
§
To be file
with Company
|
|
|
Beneficial owner
(Section 89 (2))
|
§
Declaration
by person who holds BENEFICIAL INTEREST but his name is not entered in
Register:
§
Form MGT-5 within 30 days from acquisition of such
beneficial interest
§
To be file
with Company
|
|
|
In case of Change of Beneficial Interest
(Section 89 (3))
|
§
Form MGT-4
within 30 days from date of Change by “RO”
§
Form MGT-5
within 30 days from date of Change by “BO”
§
To be file
with Company
|
|
|
Declaration by Company[13]
(Section 89 (6))
|
§
On receipt
of such declaration either in Form MGT-4 or Form MGT-5
§
Within 30
days from such receipt of declaration
§
Form MGT-6
to be filed by Company
§
To be file
with Registrar
|
|
|
Penal Provision for RO or BO
|
§
If
declaration as required under section 89 (1), (2) or (3) is not made
§
Fine up to
INR 50000/- and on Continuation for 1 year extension with INR 1000 per day
§ Further rights of BO is not enforceable if
he fails to make declaration
|
|
|
Penal Provision for Company
|
§
If
declaration as required under section 89 (6) is not made
§
Fine up to
INR 500/- to INR 1000/- for defaulting officer and on Continuation for 1 year
extension with INR 1000 per day
|
QUICK REFERNENCER FOR DECLARATION: IN
SECTION 90 OF THE ACT:
As per
Section 90 and the Companies (Significant Beneficial Owners) Rules, 2018;
Declaration in Respect of “Significant Beneficial Ownership” in any Company by
Significant Beneficial owner is to be made in following Manner:
Ownership
(As on commencement date: 13.09.2018)
|
§
Every ‘SBO’
to make disclosures
§
In Form
BEN-1
§ Within 90 days from such commencement
§
Within 30
days; if any changes in such ownership
|
|
|
Ownership
(Acquisition after commencement date:
13.09.2018)
|
§
Every ‘Individual’
to make disclosures
§
In Form
BEN-1
§
If they
acquire Significant Beneficial Ownership
§
i.e. whose
ultimate beneficial holding is at least 10%
§
Within 30
days; if any changes in such ownership
|
|
|
Declaration by Company
|
§
On receipt
of such declaration
§
Within 30
days
§
Form BEN-2
to be filed by Company
§
To be file
with Registrar
|
|
|
Maintenance of registers
|
§
Company to
maintain Register of SBO in Form BEN-3
§
Same to be
open for inspection,
§
On payment
of fees not exceeding INR 50/- for each inspection
|
|
|
Powers of Company
(Section 90(5) & (6))
|
§
A company
has power to give notice to “Any person”
§
In Form
BEN-4
§
If Company
has reasonable cause to believe that:
i.
To be SBO
ii.
Having
knowledge of the identity of SBO or another person likely to have such
knowledge
iii.
Have been
SBO of the Company at any time during the 3 years immediately preceding the
date on which notice is issued & who is not registered with company
§
Reply to
given by “Concerned Person” with 30
days of such notice.
|
|
|
Power to Apply to Tribunal
|
§
If
“Concerned person” fails to give information to company within
stipulated time
§
Company
will apply to tribunal with 15 days from end of ‘stipulated time’
§ For order direction restriction in regards
to shares in question such as:
i.
Restriction
on transfer of shares
ii.
Suspension
on receiving of dividend
iii.
Suspension
on voting rights etc.
§ Person so aggrieved may also make
application to tribunal for relaxation in regards to order passed
|
Penal Provisions for SBO
(Section 90 (10))
|
§
If
declaration as required under section 90 (1) is not made
§
Fine up to
INR 100000/- and on Continuation for 1 year extension with INR 1000 per day
§
If it is
wilful act than will be liable under section 447 of the Act
|
Penal Provisions for Company
(Section 90 (11))
|
§
If
declaration as required under section 90 (2) or (4) is not made
§
Fine up to
INR 10,00,000/- to INR 50,00,000/- for defaulting officer and on Continuation
for 1 year extension with INR 1000 per day
|
EXEMPTIONS FROM DECLARATIONS:
Section 89
and 90 of the Act, will not apply to a “Government Companies”, vide
Notification dated 05.06.2015.
Further rule
8 of the Companies (Significant Beneficial Owners) Rules, 2018 identifies that
compliance of declaration is not required: for holding shares of following
Companies / body corporate regulated under SEBI Act:
§ Mutual Funds,
§ Alterative Investment Funds (AIFs),
§ Real Estate Investment Trusts(REITs) and
Infrastructure Investment Trusts (lnvlTs)
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[3] Note: Recommendations and
guidelines on beneficial ownership were initially introduced by The Financial
Action Task Force (FATF) which is an independent inter-governmental body that
develops and promotes policies to protect the global financial system against
money laundering, terrorist financing and the financing of proliferation of
weapons of mass destruction. The FATF Recommendations are recognised as the
global anti-money laundering (AML) and counter-terrorist financing (CFT)
standard.
[4] A bearer share is an equity security
wholly owned by whoever holds the physical stock certificate,
thus the name "bearer" share. The issuing firm neither
registers the owner of the stock nor tracks transfers of ownership; the company
disperses dividends to bearer shares when a physical coupon is presented to
the firm.
[5] Inserted by the Companies (Amendment) Act, 2017, however; the enforcement
of the amended Section 89 (10) shall be awaited.
[6]Definition of ‘beneficial owner’ from
the Glossary to the FATF Recommendation: Beneficial owner refers to the natural person(s) who
ultimately owns or controls a customer and/or the natural person on whose
behalf a transaction is being conducted. It also includes those persons who
exercise ultimate effective control over a legal person or arrangement.
[7] Whether the limit stated above shall apply to a particular class of
shares or to all shares together held by a significant beneficial owner is not
clear. (Salient Issue remained unanswered)
[8] Significant influence" in relation to an associate company means
control of at least 20 percent of total voting power, or control of or
participation in business decisions under an agreement.
[9] "Control" shall include the right to appoint a majority of the
directors or to control the management or policy decisions exercisable by a
person or persons acting individually or in concert, directly or indirectly,
including by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner
[10] For Beneficial Owner: Only “equity and preference Shares (weather
convertible or not) are included
[11] How would Company determine Significant Beneficial Owner where
shares/interest is held Instruments in form of global depository receipts,
compulsory convertible debentures or preference shares, Salient Issue remained
unanswered)
[12] Since rules are silent as regards LLP being a member, how would such
membership be treated, (Salient Issue remained unanswered)
[13] No declaration by Company is to be filed: in respect of
beneficial interest in trust which is created for the purpose of Mutual Fund or
Venture Capital Fund or other purposes as approved by SEBI. It implies that
these entities are not required to make declaration as required under section
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