The concept of identifying UBOs/ SBO is not a new one. The requirement has already been prescribed by following: 

·      SEBI under Guidelines on Identification of Beneficial Ownership

·      RBI under Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016

·      Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005

Provisions of Companies Act, 2013:

·      Section 90 of Companies Act, 2013

·      Rule 9

BACKGROUND:

First time Ministry has introduced the provisions of Significant Beneficial Owner in LLP Act, 2013.

The issue of the misuse of multi-layered corporate entities has grabbed attention of various policymakers and regulators. Regulatory authorities have adopted a step-by-step approach and tried to address this issue by enacting various legislations, notable among them being:

OBJECTS

Ø  To Close the loop on Combating Money Laundering

Ø  Transparency

Ø  The mandate of the Rules is to “look through” the entire maze of intermediate entities and identify the ultimate individual owners of a company.

Ø  Identify individual who ultimately holding significant beneficial ownership

Applicability of Section-90

A.  Which companies are required to comply with the provisions of Section 90?

The provisions of SBO applicable to all companies without any exemptions to Small, Private, Public or Listed.

Exemptions under Section - 90

The rules are not applicable to the extent the shares of the reporting company are held by:

§  IEPF authority;

§  Its holding reporting company, however, the details of such holding reporting company shall be reported in Form No. BEN-2;

§  The Central Government, State Government or any local Authority;

§  Reporting company; or a body corporate; or an entity, controlled by the Central  Government or by any Stare Government or Governments or partially by the Central Government and partly by one or more State Governments;

§  SEBI registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by the Securities and Exchange Board of India; 

§  Investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority

A. Basic Terms to understand the Concept:

I.   Registered Owner: means a person whose name is entered in the register of member as the holder of share in that Company but who does not hold beneficial interest in such shares;

In general words,

ü  this person are not an actual owner of shares.

ü  Only his name is entered into register of member.

However, this person having:

ü  voting rights in the Company,

ü  Vote on poll,

ü  name shall be entered in registered of member,

ü  entitle to sign proxy form,

ü  shall be count for the quorum etc.

Short Example:

Mr. A holds shares of XYZ Private Limited. However, Name of Mr. B entered into registered of members as registered member. In this case Mr. B is registered owner of Shares of XYZ Pvt Ltd. But the actual Owner is Mr. A.

II.   Beneficial Owner: Every person who holds or acquires a beneficial interest in contribution of a Limited Liability Partnership, but his name is not registered in the register of partners.

In general words,

ü  Beneficial partner is actual owner of the contribution.

ü  Only his name is not entered in the register of partner.

ü  He is entitled to all beneficial interest on such contribution.

Short Example:

Mr. A holds shares of XYZ Private Limited. However, Name of Mr. B entered into registered of members as registered member. In this case Mr. A is beneficial owner of Shares of XYZ Pvt Ltd. But the Mr. B name mentioned in Registered of Members.

III.   Beneficial Interest: A beneficial interest is the right to receive benefits on contribution held by another party. Beneficial interest is often referred to in matters concerning trusts, whereby one has a vested interest in the trust’s assets. A beneficial interest is “that right which a person has in a contract made with another (third party)”.

Example: Mr. D desires to hold complete ownership of GDA Pvt Ltd, but due to the mandatory minimum number of members, he cannot do so alone. Thus, he may present Mr. P as a representative to fulfill the minimum requirement of at least two member. Mr. P’s name would be listed on the register of member, although he would indirectly serve as the Companies owner (beneficial owner) and controller.

In this scenario, Mr. P serves as the registered owner, while Mr. D serves as the beneficial owner, with GDA Pvt Ltd serving as the Company.

B.  Significant Beneficial Owner:

Every individual,

Ø  who acting alone or together, or

The holdings are in separate names of different natural persons, but they act together for the purpose of controlling the target company.

Ø  through one or more persons or trust,

As mentioned above, the section covers both direct and indirect holdings. Indirect holdings may be coming through any number of layers.

Possesses one or more of the following rights or entitlement in such reporting Company.

Hold Indirectly OR together with Direct Holding

I.        Not Less than 10% of Shares;

Shares: Shares include Equity Shares, Compulsorily Convertible Preference Shares, and Compulsorily Convertible Debentures. However, optionally convertible shares, warrants shall not be taken as share until they are converted into shares

II.        Not less than 10% of Voting Right in Shares;

III.        Has right to receive or participate in not Less Than 10% of the total distributable dividend, or any other distribution, in a financial year (through indirect holding or together with any direct holding)

IV.        Has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings along.

Irrespective of the holdings, if the natural person is in a position to control the target company, that clearly establishes significant beneficial ownership 

DIRECT HOLDING OF RIGHT AND ENTITLEMENT:

Meaning of Holding ‘Right or Entitlement Directly” an individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely:-

a.   The shares in reporting company representing such right or entitlement are held in the name of Individual;

NOTE:

EXPLANATION-1: If an individual does not hold any right or entitlement indirectly under clause (i), (ii) (iii) and (iv) as mentioned above. He shall not be a significant beneficial owner.

    I.       Shares (like Equity, CCDs, CCPS, GDR, ADR);

   II.        Voting rights;

 III.       Distributable dividends;

 IV.        Indirect control / indirect significant influence 

QUICK BITE:

A.   Does the expression “shares” mean equity as well as preference shares?

As per Explanation VI to Rule 2 (h) of SBO Rules, following shall be treated as shares: 

§  Compulsorily Convertible Preference Shares; 

§  Compulsorily Convertible Debentures;

§  Global Depository Receipts.

B.  In case of non-convertible preference shares, where dividends have consecutively failed for 2 years, will preference shares also be counted along with equity shares?

INDIRECT HOLDING OF RIGHT AND ENTITLEMENT:

Meaning of Hold ‘Right or Entitlement Indirectly” an INDIVIDUAL shall be considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company, namely:

A.  Body Corporate Member:

Where the member of reporting Company is a body corporate.

Note:

·      Whether incorporated or registered in India Or

·      Whether Incorporated or registered in abroad.

·      Other than a Limited Liability Partnership and

The SBO shall be Individual, who-

a.   Hold majority stake in that Member (means such individual hold majority stake in that body corporate member); or

b.   Hold majority stake in the [1]ultimate holding Company of that Member

“Majority Stake” means;-

(i) Holding more than one-half of the equity share capital in the body corporate; or

(ii) Holding more than one-half of the voting rights in the body corporate; or

(iii) Having the right to receive or participate in more than one-half of the distributable dividends or any other distribution by the body corporate.

B.  HUF Member:

Where the member of reporting Company is a HUF and the SBO individual is Karta of the HUF

C.  Partnership Entity Member:

Where the member of reporting Company is a Partnership Entity (through itself or a partners) and 

The SBO shall be Individual, who:

a.   Is a partner; or

b.   Holds majority stake in the body corporate which is a partner of the partnership entity; or

c.   Holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity;

D.  Trust Member:

Where the member of reporting Company is a Trust (through trustee);

The SBO shall be Individual, who

a.   Is a trustee in case of a discretionary trust or a charitable trust;

b.   Is a beneficiary in case of a specific trust;

c.   Is the author or settler in case of a revocable trust.

TEST FOR SBO DISCLOSURES:

i.            To Which Companies these SBO provisions shall apply?

ii.        The word “alone or together” includes interest of Relatives in shares also?

iii.        If an individual holding interest in shares less than 10% whether SBO rules shall apply on such person

Example:

Capital Structure of Company GDA Pvt limited is as following:

·      Equity Share Capital of                             Rs. 1,000

·      CCD’s of                                                    Rs. 1,500

·      CCPS’ of                                                    Rs.   500

TOTAL      Rs. 3,000             

Mr. DG beneficially holds Rs. 260 equity shares in the Company. Whether Mr. DG beneficially required giving disclosure under SBO?

Solution:

In the above mentioned exampl; Mr. DG holding shares as beneficially.

As per Explanation I:- Individual should hold atleast any no. shares Indirectly.

Explanation II:- A individual shall cosider holding of shares indirectly if, the individual holds or acquires shares through Body Corporate, Trust, HUF ect in the share of the reporting company.

Conclusion: Therefore, in above mentioned Example Mr. DG shall not be considered a Significant Beneficial Owner and no need to file any disclosure of SBO.

iv.        Meaning of Shares under Section 90 read with relevant rules.

As per Explanation VI of Rule 2 (h) of SBO Rules, For the purpose of calculation of 10% of beneficial interest in shares, Shares Include Instruments in form of

·      Global Depository Receipts,

·      Compulsorily Convertible Preference Shares or

v.        Whether SBO rules applicable on person resident outside INDIA (Non-Resident).

 Compliance requirement –

A.  Compliance by Significant Beneficial Owner:

First Disclosure: Every significant beneficial owner (SBO) shall file a declaration in Form No.BEN-1 to company in which he holds the significant beneficial ownership on the date of commencement of these rules within 90 days (i.e. 09^th May, 2019) from commencement of these rule i.e. 8^th February 2019.

Disclosure on change basis: Every SBO shall file any change in his significant beneficial ownership within 30 days to the Company. {Section 90(1) read with Rule 3 of SBO Rules}

B.  Compliance by Company:

Return: Company shall file a return in Form No.BEN-2 with ROC within 30 days from the date of receipt of declaration in BEN-1. {Section 90(4) read with Rule 3 of SBO Rules}

Note:

Food for thought………..

I.        If Company has not received any such BEN-1 from significant beneficial Owner, then whether company have to take any actions to obtain such information?

As per provisions of Section 90(5) read with rule 6, 7 of (SBO Rules, 2019),

Section 90(5) A company shall give notice, in the prescribed manner, to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe—

a.   To be a significant beneficial owner of the company;

b.   To be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or

c.   To have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued,

d.   and who is not registered as a significant beneficial owner with the company as required under this section.

Rule 6: Company shall give notice seeking information in Form No.BEN-4.

PROCESS:

STEP: 1 - Reply by Concerned Person:

The person to whom notice has been issue shall revert to the Company within 30 days of Notice.

STEP: 2- Action by Company

 The company shall, apply to Tribunal within 15 days of the expiry of the period specified in Notice,—

(a) Where that person fails to give the company the information required by the notice within the time specified therein; or

(b) Where the information given is not satisfactory, {Section 90(7) read with Rule 7 of SBO Rules}

for an order directing that the shares in question be subject to

·      restrictions with regard to transfer of interest,

·      suspension of the right to receive dividend;

·      suspension of voting rights;

·      any other restriction on all or any of the rights attached with the  shares in question.

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Order of Tribunal

·      The Tribunal may after giving an opportunity of being heard to the parties concerned, make such order restricting the rights attached with the shares

·      within a period of sixty days 60 days of receipt of application or such other period as may be prescribed [section 90(7)]

The company or the person aggrieved by the order of the Tribunal may make an application to the Tribunal for relaxation or lifting of the restrictions placed by the Tribunal.

COMPLIANCE FOR PROFESSIONAL

I.        Auditor/ Person who is signing MGT-7 of Company ‘S’

·  Auditors’ while audit the Company have to check whether there is any body corporate is shareholder of Company ‘S’.

·  If Yes, whether BEN-1 is received by the Company.

·  If BEN-1 not received, whether Company sent notice to such persons.

II.        Directors/ Officer in Default of Company ‘S’:

It is responsibility of the directors as officer in default to do followings:

·      They shall check whether there is any beneficial owner of shares of Company.

·      Whether there is any Holding Company

·      Whether there is any Subsidiary, WOS, associate Company

If Company having any Holding Company has to follow process as mentioned in Section 90(5) discussed above.

If Company having Subsidiary, Associate Company they have to check whether their shareholders required to file BEN-1, If yes they will follow with them to file BEN-1 to subsidiary/ associate Company.

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com). 

Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information. 

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