Significant Beneficial Owner – A move to pierce Corporate Veil
In order to prioritize transparency and combat illicit financial practices, regulators worldwide introduced this concept which requires the identification and disclosure of individuals with significant ownership in reporting companies. India and other countries have implemented regulations to enforce the concept of Significant Beneficial Owner (SBO) with an aim to reveal beneficial individuals who hold indirect rights or shareholdings in companies through different investment models. The intention is to uncover the undisclosed identities of real owners who use complex corporate structures for anonymity.
Introduction & Background for the Provision
The Company Law Committee in its 2016 Report proposed the need for the introduction of beneficial ownership provisions in the Companies Act to address concerns related to tax evasion, money laundering, and illicit activities facilitated by complex corporate structures. In line with recommendations from the Financial Action Task Force (FATF), India strengthened the concepts of beneficial interest and beneficial ownership in its Prevention of Money Laundering Act and introduced a comprehensive definition through SEBI guidelines.
The SEBI guidelines, issued in 2010, aim to identify beneficial owners of security accounts held by intermediaries. However, other jurisdictions have made significant advancements in promoting transparency in company ownership and control. For instance, the UK amended the English Companies Act in 2015, requiring certain companies and LLPs to maintain a publicly accessible register known as the ‘Persons with Significant Control’ Register, which also needs to be filed with the UK Companies House. Additionally, the UK has established a central registry for UK company beneficial ownership information. These developments in other countries have raised regulatory concerns in India, prompting the Ministry of Finance to propose the introduction of a Register of Beneficial Owners through mandatory provisions in the Companies Act.
The report recommended amending the Act to define beneficial interest and ownership, obligating companies and individuals to obtain information on beneficial ownership, mandating the maintenance of registers of beneficial owners, and ensuring periodic updates. Non-compliance with these requirements results in fines and criminal prosecution.
Who is a ‘Significant Beneficial Owner’ (SBO)?
The term ‘Significant Beneficial Owner’ refers to an individual who, either independently or in concert with others, possesses one or more rights or entitlements in a reporting company. These rights and entitlements include indirect or direct holdings of at least 10% of the shares, voting rights, participation in distributable dividends, or the ability to exercise significant influence or control over the financial and operational policies of the reporting company.
Indirect Holding Through Body Corporate, HUF, Partnership, or Trust
Indirect holdings are also taken into account when identifying SBOs. If the member of a reporting company is a body corporate, such as a company, and an individual holds a majority stake in that body corporate or its ultimate holding company (UHC), they will be deemed to have indirect holdings in the reporting company. Similarly, in the case of Hindu Undivided Families (HUFs), the Karta (head) of the HUF is considered to hold indirect holdings. Partnerships, Limited Liability Partnerships (LLPs), and trusts also play a role in determining indirect holdings, based on the involvement of individuals as partners, trustees, beneficiaries, authors, or settlers.
Summary of the Statutory Provision (Section 90)
Section 90 of the Companies Act, 2013 deals with Significant Beneficial Ownership. The summary of the provision is as follows:
- Any individual or group of individuals, including trusts and persons resident outside India, holding beneficial interests of at least twenty-five percent (or any other prescribed percentage, presently 10% under Rules) in shares of a company or exercising significant influence or control over the company must make a declaration to the company. The declaration should specify the nature of their interest and other relevant details within a prescribed timeframe.
- Every company must maintain a register of the interests declared by individuals. The register should include details such as the individual’s name, date of birth, address, ownership details in the company, and other prescribed particulars.
- The register maintained by the company is open for inspection by any member of the company upon payment of the prescribed fees.
- The company is required to file a return of significant beneficial owners and any changes therein with the Registrar of Companies. The return should contain the names, addresses, and other prescribed details within the specified time, form, and manner. The company is responsible for taking necessary steps to identify individuals who qualify as significant beneficial owners and ensure their compliance.
- If the company knows or has reasonable cause to believe that a person is a significant beneficial owner, knows such owner’s identity or has been a significant beneficial owner in the past three years, the company must give notice to that person in the prescribed manner.
- If a person fails to provide the required information within the specified time or if the information provided is unsatisfactory, the company can apply to the Tribunal for an order which will impose restrictions on the shares in question, such as transfer restrictions or suspension of rights.
- The Tribunal has the authority to make orders restricting rights attached to shares after considering the application made by the company. This order should be issued within sixty days of receiving the application or within the prescribed timeframe. The company or any person aggrieved by the Tribunal’s order can apply for the relaxation or lifting of the imposed restrictions within one year from the date of the order.
- Failure to make the required declaration as a significant beneficial owner may result in a penalty of fifty thousand rupees, with an additional penalty for each day of continuing failure. Companies failing to maintain the register or provide the required information may face penalties, and officers of the company in default may also be penalized.
- Wilfully providing false or incorrect information or suppressing material information in the declaration under this section can lead to legal action under Section 447.
How to Determine SBO: 12 Practical Illustrations
I. Indirect Holdings & Control
Example 1: Indirect Rights and Policy Control
In a reporting company, ABC Private Limited, Mr. A and Mr. B each hold a 50% stake. However, Mr. B has the right to appoint a majority of the directors through an agreement, and Mr. C has the power to participate in the financial and operating policy.
Determination: In this case, the SBOs of the reporting company would be Mr. B and Mr. C. Mr. A, despite having a direct holding, does not possess any indirect holdings.
Example 2: Purely Direct Holdings
In another scenario, ABC Private Limited has three shareholders: Mr. A with a 60% stake, Mr. B with a 30% stake, and Mr. C with a 10% stake.
Determination: None of them would be considered an SBO in this case since there are no indirect holdings.
II. Requirement of Majority Stake in Corporate Shareholder
Example 3: Majority Stake in Intermediary Holding Company
In ABC Private Limited, Mr. A holds 50.10% of PQR Private Limited, which in turn holds 10% of ABC Private Limited.
Determination: Mr. A is deemed the SBO for ABC Private Limited due to his majority stake in PQR Private Limited.
Example 4: Aggregation of Direct and Indirect Holdings
In ABC Private Limited, Mr. A holds 55% in PQR Private Limited and holds 1% in ABC Private Limited through PQR Private Limited. Additionally, he directly holds 9% of ABC Private Limited.
Determination: Mr. A is considered the SBO for ABC Private Limited as he holds a majority stake in PQR Private Limited and has direct (9%) and indirect (1%) holdings totaling 10% in ABC Private Limited.
Example 5: Absence of Majority Stake in Intermediate Body
In ABC Private Limited, Mr. A holds 49% in PQR Private Limited and holds 1% in ABC Private Limited through PQR Private Limited. He also directly holds 10% of ABC Private Limited.
Determination: In this case, Mr. A is not considered the SBO for ABC Private Limited as he does not hold a majority stake (>50%) in PQR Private Limited.
Example 6: Total Aggregate Holdings Below Threshold
In ABC Private Limited, Mr. A holds 55% in PQR Private Limited and holds 1% in ABC Private Limited through PQR Private Limited. He also directly holds 7% of ABC Private Limited.
Determination: Mr. A is not considered the SBO for ABC Private Limited as his total holdings (Direct 7% + Indirect 1%) in ABC Private Limited is 8% (i.e. less than 10%).
Example 7: Multi-Tier Holding Company Structure
In ABC Private Limited, Mr. X holds 51% of XYZ Private Limited, which in turn holds 51% of PQR Private Limited. Mr. X also holds 10% in ABC Private Limited through PQR Private Limited.
Determination: Since XYZ Private Limited is the ultimate holding company of ABC Private Limited and Mr. X holds a majority stake in XYZ Private Limited, he is considered the SBO for ABC Private Limited.
III. Individuals Acting Together
Example 8: Collective Action / Concert by Family Members
In ABC Private Limited, Mr. X, Mr. Y, and Mr. Z are brothers who collectively hold 33% each of XYZ Private Limited, which in turn holds 51% of PQR Private Limited. They also hold 10% in ABC Private Limited through PQR Private Limited.
Determination: As they are acting together, Mr. X, Mr. Y, and Mr. Z are considered the SBO for ABC Private Limited.
IV. Hindu Undivided Family (HUF)
Example 9: Karta as SBO
In ABC Private Limited, Mr. X, as the Karta of a Hindu Undivided Family (HUF), holds 10% of the company.
Determination: Mr. X is deemed the SBO in this case.
Example 10: HUF Combined with Direct Holding
In ABC Private Limited, Mr. X, as the Karta of an HUF, holds 7% in the company. He also holds 8% directly in ABC Private Limited.
Determination: Mr. X is considered the SBO as he holds a total of 15% (directly and indirectly) in the reporting company.
V. Partnerships & LLPs
Example 11: Individual Partners in Firm
In ABC Private Limited, Mr. A and Mr. B are partners in PQR & Company, through which they hold 10% in ABC Private Limited.
Determination: Both Mr. A and Mr. B are deemed the SBOs for ABC Private Limited as partners of PQR & Company.
Example 12: Partnership with Corporate Partner
In ABC Private Limited, Mr. A is a partner in PQR & Company and holds 10% of ABC Private Limited through it. Mr. P holds 51% of PQR Limited and is also a partner in PQR & Company.
Determination: Both Mr. A and Mr. P will be considered the SBOs for ABC Private Limited. Mr. A is an individual partner in PQR & Company, and Mr. P holds a majority stake in PQR Limited, which is a partner in PQR & Company. Therefore, both individuals meet the criteria for being significant beneficial owners of ABC Private Limited.
Procedure for Identifying and Disclosing SBOs
| Step | Prescribed Form | Responsible Party & Statutory Timelines |
|---|---|---|
| 1. Company Inquiry Notice | Form BEN-4 | The reporting company has the responsibility to send a notice in Form BEN-4 to any member (other than an individual) holding 10% or more shares, voting rights, or dividend entitlements, seeking information about SBOs. |
| 2. SBO Declaration | Form BEN-1 | Individuals identified as SBOs must file a declaration in Form BEN-1 to the reporting company within 30 days of acquiring such status or any subsequent changes. |
| 3. ROC Return Filing | Form BEN-2 | Upon receiving the declaration, the reporting company must file a return in Form BEN-2 with the Registrar of Companies (ROC) within 30 days, disclosing the SBO details. |
| 4. Register Maintenance | Form BEN-3 | The reporting company must maintain a register of SBOs in Form BEN-3, accessible for member inspection during specified business hours upon payment of a nominal fee. |
Exempted Entities
Certain entities are specifically exempted from the applicability of these rules:
- The Investor Education and Protection Fund (IEPF) Authority;
- Holding reporting companies (where details are disclosed by the holding company);
- Central Government, State Governments, and local authorities;
- Entities owned or controlled by government authorities;
- SEBI-registered investment vehicles (such as Mutual Funds, Alternative Investment Funds (AIFs), REITs, and InvITs);
- Investment vehicles regulated by the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDAI), or Pension Fund Regulatory and Development Authority (PFRDA).
Conclusion
- By identifying and disclosing SBOs, these regulations provide greater transparency in corporate structures. It becomes harder for individuals to hide behind complex ownership arrangements or nominee shareholders, as the focus shifts to unveiling the ultimate beneficiaries.
- It contributes to strengthening corporate governance practices. Shareholders and stakeholders gain a clearer understanding of who wields power within an organization, ensuring accountability and responsible decision-making.
- The existence of SBO regulations acts as a deterrent for individuals involved in fraudulent activities.
- SBO regulations align with global initiatives to combat money laundering and promote transparency, such as the Financial Action Task Force (FATF) recommendations. These regulations facilitate harmonization with international standards, making it easier to track and prevent cross-border illicit transactions.
The concept of a Significant Beneficial Owner and the associated regulations represent a crucial step in enhancing corporate transparency, deterring illicit activities, and promoting responsible business practices. By piercing the corporate veil, these regulations shed light on the individuals who exercise significant control or influence over reporting companies. Ultimately, this promotes a more accountable and transparent corporate ecosystem, safeguarding the interests of investors, stakeholders, and the economy as a whole.
References
- The Company Law Committee, ‘Report of The Companies Law Committee’ (February 2016), dated 1st February, 2016.
- Section 90 of the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018.