DECLARATION OF SIGNIFICANT BENEFICIAL OWNERSHIP IN A COMPANY

1. BACKGROUND

1.1
Section 90 of the Companies Act, 2013 (Act), when enacted from 01.04.2014,
provided for investigation of beneficial ownership of shares in certain cases.
This section corresponded to section 187D of the Companies Act, 1956.This
original section is replaced by a new section by the Companies (Amendment) Act,
2017 effective 13.06.2018. This new section provides that every individual or
trust having significant beneficial ownership of shares in a company (private
or public) has to file a declaration for such holding in the manner prescribed
in the Rules.

1.2
By a Notification dated 13.06.2018, the Companies (Significant Beneficial
Owners) Rules, 2018 were notified. These Rules came into force on 13.06.2018.
There were a lot of ambiguities about some of the provisions in these Rules.
Therefore, they were not made operative and have been amended by a Notification
dated 8.02.2019. Accordingly, the Companies (Significant Beneficial Owners)
Amendment Rules, 2019 have now come into force from 8.02.2019.

1.3
Section 90 has been further amended by the Companies (Amendment) Ordinance,
2018 effective 02.11.2018. Section 90 and the above Rules contain provisions
which require certain individuals having significant beneficial ownership in
shares of a company to make a declaration in the prescribed form. In this
article some of the important provisions relating to declaration of significant
beneficial ownership in a company are discussed.

2. DECLARATION OF BENFICIAL INTEREST IN ANY SHARE

2.1
Section 89 of the Companies Act, 2013 provides for declaration to be filed by a
shareholder in respect of beneficial interest in any shares of a company
(whether public or private). Under this section, if a shareholder of a company
has no beneficial interest in the shares of a company held by him / her, such
shareholder has to file with the company a declaration in Form No. MGT-4 giving
particulars of the beneficial owners of the shares within 30 days of acquiring
these shares. A similar declaration is also required to be filed with the
company within 30 days whenever there is a change in the particulars of the
beneficial owners. Similarly, the person having beneficial ownership in shares
of a company held in the name of any other person is required to file a
declaration in Form No. MGT-5 within 30 days of acquiring such beneficial
interest. On receipt of the above declarations, the company is required to make
a note of such declarations in the Register of Members and file Form No. MGT-6
within 30 days with the Registrar of Companies (ROC) with the prescribed filing
fees.

2.2 If there is default in filing the above
declarations by the shareholder or the beneficial owner of shares within time,
section 89(5) provides for levy of a fine up to Rs. 50,000. For continuing
default further fine up to
Rs. 1,000 for each day can be levied. Similarly, for default in filing Form.
No. MGT-6 in time by the company a fine will be levied on the company and every
officer in default. In this case the minimum fine will be Rs. 500 subject to
maximum of Rs. 1,000. Further, in case of continuing default by the company, a
further fine up to Rs. 1,000 per day will be levied on the company and on the
officers in default.

2.3 Further, if the beneficial owner does not make
the declaration u/s. 89, he / she or any person claiming through him / her
shall not be entitled to claim any right in respect of such shares. Section 89
is amended by the Companies (Amendment) Act, 2017, effective from 13.06.2018.
According to this amendment, it is provided that for the purposes of sections
89 and 90, beneficial interest in a share includes, directly or indirectly,
through any contract, arrangement or otherwise, the right or entitlement of a
person or persons to (a) exercise any or all of the rights attached to such
shares, or (b) receive or participate in any dividend or other distribution in
respect of such shares.

3. SIGNIFICANT BENEFICIAL OWNER

3.1 The
term “Significant Beneficial Owner” is defined in section 90(1) of the Act as
under:

(i)  This
term applies to – every individual, who acting alone or together, or through
one or more persons or trust (including a foreign trust and persons resident
outside India);

(ii)  Such
person holds beneficial interest of not less than 25%, or such other
percentage, as may be prescribed (at present the Rules prescribe 10%), in the
shares of the company;

(iii) Such person may have right to exercise or may be actually
exercising significant influence or control as defined in section 2(27) of the
Act.

3.2
In order to further understand who is a “Significant Beneficial Owner” we have
to refer to the Companies (Significant Beneficial Owners) Amendment Rules,
2019. This term is defined in Rule 2(h) to mean as under:

An individual referred to in section
90(1), who acting alone or together, or through one or more persons or trust,
possesses one or more of the following rights or entitlements in the company:

(i)  Holds
indirectly or together with any direct holdings not less than 10% of (a)
shares, (b) voting rights in the shares, or (c) right to receive or participate
in the total distributable dividend or any other distribution in a financial
year;

(ii)  Has
right to exercise or actively exercises significant influence or control in any
manner other than through direct holdings alone. For this purpose “Significant
Influence” is defined in Rule 2(i) to mean the power to participate, directly
or indirectly, in the financial and operating policy decisions of the company
but not control or joint control of those policies. The term “Control” includes
the right to appoint majority of the directors or to control the management or
policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of shareholding or
management rights or shareholders agreements or voting agreements or in any
other “manner”;

(iii) If an individual does not hold any right or entitlement as stated in
para 3.2(i), indirectly, he shall not be considered to be a significant
beneficial owner.

3.3
(i) An individual shall be considered to hold a right or entitlement, as stated
in Para 3.2(i), directly, if he / she (a) holds the shares in the company in
his own right, or (b) holds or acquires a beneficial interest in the shares of
the company as provided in section 89(2) and has made the declaration required
to be made u/s. 89;

(ii)  From
the above, it is evident that the provisions of section 90 are applicable to a
person only if he / she holds shares in the company indirectly. If he / she
holds such shares directly only, he / she has to make the declaration u/s. 89
only and not u/s. 90.

3.4
Explanation III to Rule 2(4) states that an individual shall be considered to
be holding a right or entitlement
in the shares of a company indirectly if he / she satisfies any of the following
criteria in respect of the member of the company:

(i)  Where the member of the company is a body
corporate (whether Indian or foreign), other than an LLP, and the individual
(a) holds majority stake in that member, or (b) holds majority state in the
ultimate holding company (whether Indian or foreign) of that member;

(ii)  Where the member of the company is an HUF
(through karta) then the individual who is the karta of the HUF.
This will mean that if the individual is only a member of an HUF (and not its karta),
he / she will not be considered to have indirect interest in the company;

(iii) Where the member of the company is a
partnership entity (including an LLP) and the individual is (a) a partner, (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 above body corporate;

(iv) Where the member of the company is a trust
(through its Trustee) and the individual is (a) a Trustee in the case of a Discretionary
Trust or a Charitable Trust, (b) a beneficiary in the case of a Specific Trust,
or (c) Author or settlor in the case of a Revocable Trust. This will mean that
a settlor of an Irrevocable Trust or a beneficiary of a Discretionary Trust
will not be considered as holding indirect interest in the shares held by a
Trust;

(v) Where the member of the company is (a) A pooled
Investment Vehicle, or (b) An entity controlled by the pooled Investment
Vehicle based in Member State of the Financial Action Task Force on Money
Laundering and the Regulator of the Securities Market in such Member State is a
member of the International Organisation of Securities Commissions, and the
individual in relation to the pooled Investment Vehicle is (A) a general partner,
(B) an Investment Manager, or (C) a Chief Executive  Officer, where the Investment Manager is a
body corporate or a partnership entity. It may be noted that if the pooled
Investment Vehicle is based in a jurisdiction which does not fulfil the above
requirements, the provisions of items (i) to (iv) above will apply.

(vi) Explanation VI clarifies that any financial
instruments in the form of (a) Global Depository Receipts, (b) Compulsorily
Convertible Preference Shares, or (c) Compulsorily Convertible Debentures will
be treated as shares in the company and all the above provisions will apply to
such instruments;

(vii)
It may be noted that for the above purpose the expression “Majority Stake” is
defined in Rule 2(1)(d) to mean (a) holding more than 50% of the equity share
capital in the body corporate, (b) holding more that 50% of the voting rights
in the body corporate, or (c) having the right to receive or participate in
more than 50% of the distributable dividend or any other distribution by the
body corporate;

(viii) It may be noted that the
above provisions do not apply to the shares of the company held by the
following entities:

(a) The
Authority constituted u/s. 125(5), i.e., Investor Education and Protection
Fund;

(b) The
Holding Company, provided that the details of such holding company are reported
in Form No. BEN-2;

(c) The
Central Government, State Government or any Local Authority;

(d) The
Company, Body Corporate or the entity controlled by the Central Government,
State Governments or partly by Central and partly by a State Government or
Governments;

(e) SEBI-registered Investment Vehicles, Mutual
Funds, Alternative Investment Funds, Real Estate Investment Trust,
Infrastructure Investment Trusts, regulated by SEBI;

(f)  Investment
Vehicles regulated by RBI, IRDA or Pension Fund Regulatory and Development
Authority.

From the above discussions it is
evident that each individual will have to study the provisions of section 90
and the Rules carefully to determine whether he / she along with any other person
is holding directly and indirectly 10% or more of the specified rights or
entitlements in the shares or financial instruments such as CCPS or CCDS of the
company. This is an onerous exercise depending on the facts of each case.

4. DECLARATION OF SIGNIFICANT BENEFICIAL OWNERSHIP

4.1
Section 90(1) further provides that the person who has significant ownership in
shares of a company should file with the company the prescribed Form No. BEN-1,
specifying the nature of his / her interest and such other particulars as
provided in the Rules. This Form is to be filed within the prescribed time
limit as under:

(i)  In
respect of significant beneficial ownership existing on 08.02.2019, within 90
days from the commencement of the Rules, i.e., by 07.05.2019;

(ii)  If
the significant beneficial ownership is obtained after 08.02.2019, but before
07.05.2019, the Form should be filed within 30 days after 07.05.2019.

(iii) In all other cases within 30 days of acquiring significant
beneficial ownership or changes therein.

4.2
Every company has to maintain a Register of Significant Beneficial Ownership in
Form No. BEN-3 as prescribed by the Rules. This Register will be open to
inspection by every member on payment of the prescribed fees.

4.3 Upon
receipt of such declaration in Form BEN-1 from the person who has significant
beneficial ownership in shares, the company has to file Form No. BEN-2 with the
ROC with the prescribed fees within 30 days of the receipt of such declaration.

4.4
If such declaration is not received by a company, it has to give a notice in
Form No. BEN-4 to the person (whether a member of the company or not) if the
company has knowledge or has reasonable cause to believe that such person:

(i)  Is
a significant beneficial owner of the company;

(ii)  Is
having knowledge of the identify of a significant beneficial owner or another
person who is likely to have such knowledge; or

(iii) Has 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.

On receipt of this notice from the
company, such person has to give the required information to the company within
30 days of the date of the notice.

4.5 If no information is received by
the company from the above person or the information given by such person is
not satisfactory, the company has to apply to the National Company Law Tribunal
(NCLT) within 15 days. By this application the company can apply for directions
from NCLT that the shares in question shall be subject to restrictions,
including:

(i)  Restrictions
on transfer of interest attached to such shares;

(ii)  Suspension
of the right to receive dividend or any other distribution in relation to such
shares;

(iii) Suspension of voting rights in relation to such shares;

(iv) Any
other restriction on all or any of the rights attached to such shares.

4.6
NCLT has to give notice to all concerned parties and after hearing them pass
appropriate order within 60 days or such extended period as may be prescribed.
On receipt of the order of the NCLT, the company or the aggrieved person may
apply for modification / relaxation of the restrictions within one year from
the date of such order. If no such application is made within one year, the
shares will be transferred to the Authority appointed u/s. 125(5) of the Act
for administration of the Investor Education and Protection Fund.

5. PUNISHMENT FOR CONTRAVENTION OF SECTION 90

Section 90(10) to 90(12) provides
for punishment for contravention of provisions of section 90 as under:

(i)  If
a person required to file declaration u/s. 90(1) does not file the same he
shall be punishable with imprisonment for a term which may extend to one year
or with fine of Rs. 1 lakh which may extend to Rs. 10 lakhs, or with both. For
continuing default, there will be a further fine up to Rs. 1,000 per day till
the default continues;

(ii)  If a company required to maintain the Register
u/s. 90(2) and to file information with the ROC u/s. 90(4) fails to do so in
time or denies inspection of relevant records, the company and every officer
who is in default shall be punishable with fine which shall not be less than
Rs. 10 lakhs and may extend to Rs. 50 lakhs. In case of continuing default a
further fine up to Rs. 1,000- per day will be levied for the period of the
default;

(iii) If any person wilfully furnishes any false or incorrect information
or suppresses any material information of which he / she is aware in the
declaration filed u/s. 90, he / she shall be liable to action u/s.  447 of the Act (i.e., Punishment for Fraud).

6. IMPACT OF THE ABOVE PROVISIONS

Some practical issues arise from the
above provisions relating to declaration of Significant Beneficial Ownership of
shares in a company. As stated earlier, the above declaration is to be made by
the individual who has indirect beneficial interest in the shares of a company
held by any other person. Further, section 90 and the applicable Rules provide
that the company has to maintain certain records and file the declaration with
the ROC. Non-compliance with the provisions of the section and the Rules invite
stringent penalties. In view of the above, some of the practical issues are
discussed below:

(i)  If
Mr. X holds 5% of equity shares in XYZ Pvt. Ltd., but he has no beneficial
interest in such shares. Mr. M is the beneficial owner of these shares. In this
case, section 89 is applicable. Mr. X will have to file declaration in Form No.
MGT-4 within a period of 30 days from the date on which his / her name is
entered in the Register of Members of such company and Mr. M will have to file
declaration in Form No. MGT-5 with the company within 30 days after acquiring
such beneficial interest in the shares of the company. The company will have to
file the declaration with the ROC in Form No. MGT-6 within 30 days of receipt
of the Forms MGT-4 and MGT-5;           

(ii)  PB
Pvt. Ltd. is holding 8% of the equity shares of XYZ Ltd. and Mr. P is holding
4% of the equity shares in XYZ Ltd. Mr. P is also holding 51% of equity shares
of PB Pvt. Ltd. In this case, Mr. P will be deemed to be holding significant
beneficial ownership in shares of XYZ Ltd., as he is indirectly holding
interest in 8% equity shares (through PB Pvt. Ltd) and directly holding 4% of
equity shares. In this case, Mr. P will have to file declaration in Form No.
BEN-1 with XYZ Ltd.;

(iii) AB Pvt. Ltd. is holding 15% of equity shares of XYZ Ltd. Mr. A is
holding 55% of equity shares in AB Pvt. Ltd. In this case, Mr. A will be
considered as holding Significant Beneficial Ownership of more than 10% of
equity shares of XYZ Ltd. This is because Mr. A will be considered to have 15%
indirect ownership of shares of XYZ Ltd. through AB Pvt. Ltd. Therefore, Mr. A
will have to file declaration in Form No. BEN-1;

(iv) ABC
(HUF), through its karta Mr. B, is the owner of 12% equity shares of XYZ
Ltd. In this case, Mr. B will be considered as indirect owner of these shares
and he will have to file declaration in Form No. BEN-1. No other member of the
HUF has to file this declaration;

(v) Mrs.
N is a Trustee of NPS Trust. There are two beneficiaries of the trust who have
equal share. Mrs. N in her capacity of Trustee is holding 20% equity shares in
ABC Ltd. In this case, each beneficiary will be deemed to have significant
beneficial ownership in shares of ABC Ltd. Therefore, each beneficiary will
have to file declaration in Form No. BEN-1. If the trust is a discretionary
Trust, the above declaration is to be filed by the Trustee only. If the trust
is a revocable Trust, such declaration is to be filed only by the Settlor of
the Trust.

(vi) JDS
LLP is holding 25% equity shares of ABC Ltd. Mr. J, Mr. D, Mr. S and JDS Pvt.
Ltd are partners of JDS LLP. In this case Mr. J, Mr. D and Mr. S will be deemed
to be significant beneficial owners of the shares and each of them will have to
file a declaration in Form No.BEN-1. There is one Mr. R who holds 60% of equity
shares of JDS Pvt. Ltd. (one of the partners of JDS LLP).Therefore, Mr. R will
also be considered as a Significant Beneficial Owner of shares of ABC Ltd. and
he will also be required to file declaration in Form No. BEN-1.

(vii) There are the following
members in PR Ltd.:

Mr. A holds 55% equity shares in CD
Pvt. Ltd. He is the karta of ABC (HUF). He is also a partner of PDS LLP.
and XYZ Co. and a Trustee of DC Trust. All these entities together own 22% of
equity shares in PR Ltd. Therefore, Mr. A will be treated as having Significant
Beneficial Ownership of more than 10% of equity shares of PR Ltd. and he will
have to file declaration in Form No. BEN-1.

7. TO SUM UP