Significant beneficial ownership rules revamped

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The Ministry of Corporate Affairs (MCA), on 8 February 2019, notified the Significant Beneficial Ownership (Amendment) Rules, 2019, (amended rules) which overhauled the amended section 90 of the Companies Act, 2013, notified June 2018.

Section 90 requires every individual, acting alone, together with, or through one or more persons or trusts (individual), to make a declaration if the individual holds beneficial interest in 25% of the shares (or such other percentage as may be prescribed in the rules) of a company, or exercises significant influence or control in the company.

The definition of a significant beneficial owner (SBO) of a company has been clarified and detailed under the amended rules and includes every individual, who:

  • indirectly or together with any direct holdings (i) holds at least 10% of the shares, including global depository receipts, compulsorily convertible preference shares and compulsorily convertible debentures, or voting rights in the shares of the company, or (ii) has the right to participate in at least 10% of the total dividend and other distributions in a financial year; or
  • has the right to exercise, or exercises significant influence (the power to participate in, but not control, the financial and operating policy decisions of the relevant company) or control over the company in any manner other than through its direct shareholding alone in the company.

An individual is said to have indirectly a right or entitlement in the shares, voting rights or distributions, as the case may be, of a relevant company where:

  • such individual holds a majority stake in, or majority stake in the ultimate holding company of, an Indian or foreign incorporated or registered corporate body other than a limited liability partnership;
  • such individual is the karta (manager) of a Hindu Undivided Family that is a member of the relevant company;
  • such individual is (i) a partner in, or (ii) holds a majority stake in, or majority stake in the ultimate holding company of, a corporate body that is a partner in a partnership entity that in turn is a member of the relevant company;
  • such individual is a trustee of a discretionary or charitable trust, a beneficiary in a specified trust, or author or settlor in a revocable trust, where such trust, in turn, is a member of the relevant company;
  • such individual is a general partner, individual investment manager, or chief executive officer of a corporate investment manager of a pooled investment vehicle, and such pooled investment vehicle or an entity controlled by such pooled investment vehicle is, in turn, a member of the relevant company. The pooled investment vehicle referred to must be based in a member country of the Financial Action Task Force on Money Laundering and the securities market regulator in such state must be a member of the International Organization of Securities Commissions. If that is not the case, the individual holding interest in the pooled investment vehicle will be treated in accordance with (1) to (4) above to determine if such individuals are SBOs.

The amended rules place the onus on companies to take necessary steps to identify individuals who are SBO and have them complete a form – BEN-1 – in the format prescribed by the MCA. To this end, each company must also notify its non-individual members who hold at least 10% of its shares, voting rights or the right to receive or participate in the dividend and other distributions in a financial year, and request information about its ultimate individual members or right holders who may qualify as SBO of the company. Pursuant to section 90(7) of the act and rule 7 of the amended rules, where the information requested by the relevant company has not been provided by any person, or such information is unsatisfactory, each relevant company must apply to National Company Law Tribunal for passing orders, directing that the shares in question are to be subject to restrictions on all or any rights attached to the shares, including but not limited to restrictions on transferability, right to receive distributions, and voting rights.

The responsibility of an individual qualifying as an SBO to declare its beneficial interest in form BEN-1 to the relevant company continues and all individuals qualifying as SBO on 8 February 2019 must make such a declaration within 90 days therefrom. All individuals who qualify as SBO, or where their significant beneficial ownership undergoes a change within 90 days from 8 February 2019, must make such declarations within 120 days therefrom if an individual becomes an SBO, or if their significant beneficial ownership undergoes a change after 90 days from 8 February 2019, the individual must declare the same within 30 days from such acquisition or change in significant beneficial ownership.

The relevant company must then file returns in this regard. The amended rules provide exceptions from making declarations in respect of shares held by certain categories of persons, including, but not limited to Securities Exchange Board of India registered investment vehicles such as mutual funds, alternative investment funds, real estate investment trusts, or central, state or local government authorities.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.