On 13 June 2018, the Ministry of Corporate Affairs (MCA), released the Companies (Significant Beneficial Ownership) Rules, 2018. The rules, along with amendments to sections 89 and 90 of the Companies Act, 2013, marks an effort to make Indian laws consistent with global anti-money laundering standards. While 11 September 2018 was indicated as the last date for compliance with reporting requirements under the rules, the MCA issued a circular on 10 September 2018 clarifying that Form BEN-1 under the rules was being revised and advised stakeholders to wait for the revision.
A significant beneficial owner (SBO) under the rules is an individual holding ultimate beneficial interest of not less than 10% share capital in a company or who has the right to exercise, or actually exercises, significant influence or control over the company, but whose name is not in the register of members. The rules explain that for a member who is a company, the SBO is the natural person holding 10% or more share capital or exercising significant influence or control over the member, and for a partnership firm, the SBO is the natural person holding 10% capital in the partnership, or who has entitlement of not less than 10% of profits of the partnership. If no person is identified as above, then the SBO of the legal entity will be the senior managing official.
An SBO is required to give a declaration to the company (in Form BEN-1). The company is then required to file the form with the Registrar of Companies (in Form BEN-2) and also maintain a register of beneficial ownership (in Form BEN-4). The rules empower a company to seek information about SBOs from persons that it has reasonable cause to believe are SBOs, have been SBOs of the company in the preceding three years or may have knowledge on the identity of SBOs. Any person who receives such a request from the company is required to respond to the company within 30 days, failing which the company may apply to the National Company Law Tribunal for an order restricting transfer of the shares in question or suspending the rights with respect to such shares.
The rules are not made applicable to the holding of shares in pooled investment vehicles and investment funds regulated under Securities and Exchange Board of India Act. This is because the Securities and Exchange Board of India has its own framework on identification of beneficial ownership.
While the rules are a welcome effort by the legislature, there are some clarifications needed. For instance, there is an inconsistency between the definitions of SBO in section 90(1) of the Companies Act and the rules. The rules appear to suggest that an SBO must be an individual who holds beneficial interest “but whose name is not included in the register of members”, while this last phrase does not find a mention in the definition under section 90(1). The reason for this difference is unclear, but a literal interpretation of the SBO definition under the rules would suggest that a natural person whose name is included in the register of members would not need to file a declaration in Form BEN-1. On the other hand, if the shareholder named in the register is a legal entity rather than a natural person, it would appear that a natural person would have to be identified, as the definition of SBO states that it must be an individual.
Further, the rules state that if an SBO is not identified in the first step, i.e., if no natural person is identified who holds ultimate beneficial interest or who exercises significant influence or control, then the senior managing official should be disclosed as the SBO. In situations where the shareholder is another legal entity, the rules do not explain how far up the chain one needs to go in order to identify a natural person, or whether the senior managing official of the legal entity can be disclosed.
The rules also provide no guidance on how a senior managing official should be identified. The Financial Action Task Force Guidelines provide a framework in this regard. While the rules state that a senior managing official should be disclosed as the SBO when no individual SBO can be identified, the corresponding declaration for an SBO in Form BEN-1 had no provision for disclosure of a senior managing official.
The rules have introduced a new set of BEN forms while the existing beneficial ownership forms continue to remain. It is not yet clear whether the BEN forms will be consolidated with these existing forms.
A number of stakeholders have raised concerns on the ambiguous language in the rules. It is hoped that the MCA will publish clarifications on these issues as well a revised Form BEN-1.
Aparna Ravi is a partner and Surabhi Rao is an associate at the Bengaluru office of Samvad Partners.
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