Based on recommendations of the Financial Action Task Force, the Ministry of Corporate Affairs (MCA), in order to identify the ultimate beneficial owner of shares in investments made through multi-layered structures, notified the Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules), on 13 June 2018, under the section 90 of the Companies Act, 2013 (act), as substituted by the Companies (Amendment) Act, 2017.
Section 89 of the act requires a person registered as the holder of shares in the registers of a company, but who does not hold beneficial interest in such shares, to make a declaration to the company furnishing particulars of the person who holds such beneficial interest. In turn, the company would be required to file such declaration with the jurisdictional registrar of companies.
Section 90 of the act appears to operate independently of section 89, and provides (when read in conjunction with the SBO Rules) that every individual who holds a beneficial interest of 10% or more of a company’s shares, or the right to exercise, or actually exercises “significant influence” or “control” over the company (SBO), must declare to the company the nature of the interest. This would apply whether or not the SBO is acting alone or together with, or through, one or more persons or trust or persons resident outside India. Companies are required to maintain registers in respect of SBOs, including the name, date of birth, address, details of ownership in the company and other prescribed details. The SBO Rules do not apply to the holding of shares by pooled investment vehicles and investment funds that are regulated by the Securities and Exchange Board of India (SEBI). Foreign venture capital funds registered under the SEBI (Foreign Venture Capital Investors) Regulations, 2000, while investing under the FVCI route may be eligible for this exemption.
The triggers for disclosure and compliance are difficult to ascertain as “significant influence” is not defined in the act, and there are many situations where investments are held through pooled investment vehicles, in which there may be multiple persons exercising varying degrees of control or influence.
The extent of disclosures required to be made by venture capital funds is especially unclear, given the broad strokes that have been applied to determine the SBO overlying company and trust structures. For example, where a shareholder is a trust, the SBO identification includes the author, the trustee, the beneficiaries with an interest of 10% in the trust, and any other natural person “exercising ultimate effective control over the trust through a chain of control or ownership”.
It is also unclear whether details of administrators of vehicles constituted offshore, or directors of entities holding units of such investment vehicles, or directors of entities exercising managerial control over such investment vehicles would also be required to be disclosed. The phrase “who exercises significant influence or control in the company through other means” may also be construed to mean and include advisory entities based in India, and disclosure of the details of the relationship between such advisory entities and the investment vehicles may lead to undesirable or unintended consequences.
Most problematic may be the fact that companies are empowered to apply to the National Company Law Tribunal, where any investor fails to furnish the required information, thereby seeking to curb investor rights, such as voting rights attached to the shares of such investors, which may further put the investment at risk.
While the substituted section 90 of the act and the SBO Rules seek to ensure transparency in ownership structures, the ambiguous nature of the terminology, the broad scope of the deeming fictions and mandatory inclusions, and the onerous nature of the penalties, may deter bona fide investors from making meaningful investments in India. Further, the scheme of penalties prescribed in section 90 for incorrect disclosures versus not making the required disclosures at all, perhaps creates inapposite incentives for non-compliance.
Perhaps in response to the representations made before it by the relevant stakeholders, the disclosure requirements have been kept in abeyance by the MCA pending the notification of a revised disclosure form. It is expected that the central government will address the practical difficulties faced by investors when the new disclosure form is prescribed, and that it will also effect changes to the SBO Rules as well.
Siddharth Nair is a partner at Shardul Amarchand & Co and Ritwik Mukherjee is an associate.
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