By Jayant M. Thakur
Chartered Accountant
Background
Section 90 and related provisions of the
Companies Act, 2013, have finally been brought into force on 13th June
2018 along with related Rules. They apply to all companies, with a small set of
specified exceptions. “Significant beneficial owners” of such companies are
required to make certain declarations. The intention appears to be that those
natural persons (i.e. individuals) who have significant ownership of or
influence in or control of a company need to come forward and disclose their
names. From the point of view of transparency, it would be known who really
controls/owns the company, even if the ownership/control is through holding
entities such as companies, LLPs, Trusts, etc. or through contracts,
arrangements etc. The other major intention and consequence may be that
benami holdings could be identified, or at least required to be.
However, as we will see, the wording not
just of the provisions in the Act but also of the Rules has ambiguities and
uncertainties. This is owing to poor drafting, undefined important terms, etc.
which could lead to problems in implementation. Indeed, it is even difficult to
be clear what is the real intention. For example, is the intention to target
only those cases where the real owners are behind the scenes through certain
structures? Or is the intention to require that all persons with significant
ownership/control be brought on record? If the latter is the intention, there
will be a one-time massive exercise since lakhs of companies will have to make
such disclosures.
This column had discussed earlier some
issues on section 90, at a time when the new provisions were made part of the
Act through the Companies Amendment Act 2017 but were not brought in force. Now
that they have been duly notified and brought into force and require action,
and that the detailed Rules/Forms too are also released, the provisions and
their implications deserve a fresh and closer study.
It may be added that several other
provisions of law such as those relating to money laundering, certain
securities laws, etc. already have provisions requiring disclosures
under certain circumstances. The Benami Transactions (Prohibition) Act, 1988,
too deals with comparable provisions.
Relevant provisions
The relevant provisions are section 90 of
the Companies Act, 2013, with a definition of a term in section 89(10), and the
Companies (Significant Beneficial Owners) Rules, 2018. While the sections give
the primary requirements, the Rules provide for further definitions, the
benchmark at which a shareholder would be treated as a significant beneficial
owner, the process to be followed when shareholders are companies, LLPs, etc.
and the forms, records, etc.
Definition of a “Beneficial Interest”
Section 89 deals with disclosures by persons
with beneficial interests in shares. A person whose name is entered in the
register of members as the holder of shares but who does not hold the
beneficial interest is required to make disclosures. The term “beneficial
interest” has been defined quite broadly in section 89(10) and reads as
follows:
“(10) For the purposes of this
section and section 90, beneficial interest in a share includes, directly or
indirectly, through any contract, arrangement or otherwise, the right or
entitlement of a person alone or together with any other person to—
(i) exercise or cause to be exercised any
or all of the rights attached to such share; or
(ii) receive or participate in any
dividend or other distribution in respect of such share.”
However, while Section 89 requires
disclosure for all cases of shareholding without beneficial interest, section
90 (read with Rules) requires disclosure where there is at least 10% beneficial
shareholding (which would make it a ‘significant beneficial holding’). Section
90 of course applies also to cases where a person has or exercises significant
influence or control.
Terms such as “through contract, arrangement
or otherwise” and “alone or together with any other person” are used but not
defined.
Requirements relating to disclosure
Section 90 (read with relevant Rules)
requires, to simplify a little, a “significant beneficial owner” to make
disclosure. This includes persons having at least 10% beneficial shareholding
or having the right to exercise or who actually exercises “significant
influence” or “control”.
The term “control” has been defined in
section 2(27). The term “significant influence” has not been defined in the Act
or Rules and hence there can be uncertainty. Interestingly, the definition of
the term “associate company” in section 2(6) does define this term, though for
purpose of that clause. It means having “control of at least twenty per cent of
total share capital, or of business decisions under an agreement”.
Holding in shares or other securities
While sections 89/90 refer to the beneficial
interest in shares, the Rules extend it also to global depository
receipts, compulsorily convertible preference shares and compulsorily
convertible debentures. However, no further details are given as to how these
will be applied.
Holding through companies, LLPs, etc.
The intention appears to be to ascertain
those natural persons (i.e., individuals) who are the real owners of a company
and who control it. If the shareholders are persons other than individuals, it
would be necessary to go behind these entities and find who are the significant
owners behind them. Hence, for this purpose, the Rules essentially require the
natural persons who have at least 10% interest in such entity. However, while
one can gauge the intention here, in practice, the wording does not seem to be
sufficient to unravel complex structure of holdings/control.
The method to determine significant
beneficial owners (SBO) in such cases has been specified as follows.
Where the member is itself a company, SBOs
would be the natural persons who directly or indirectly or alongwith other
natural persons or through other persons/trusts hold at least 10% of the share
capital or who exercise significant influence or control through other means.
Where the member is a partnership firm, the principle is the same except that
the holding may be in terms of capital or entitlement to the profits. In any of
these two cases, if the SBOs can still not be ascertained, then the natural
person who is the senior managing official would be deemed to be the SBO. If
the shareholder is a Trust, the persons to be disclosed are the Trustees, the
beneficiaries who have at least 10% interest in the Trust, and any other
natural person “exercising ultimate effective control over the trust through a
chain of control or ownership”.
Residence of significant beneficial owner
The significant beneficial owner or
intermediary entities may be in India or abroad.
When are disclosures to be made?
The required disclosures have to be made to
the Company within 90 days of the new law coming into force. The Company would
then have to make disclosures to the Registrar within 30 days of receipt of
such disclosures.
There is a one time requirement of making
disclosures and thereafter, disclosures have to be made for changes as well as
for acquisition by new acquirers.
Applicable to which companies?
The new provisions are applicable to all
types of companies, small or big, public or private. The Rules make exceptions
for shareholdings of certain SEBI regulated entities. Clearly, then, lakhs of
companies will have to examine whether these new requirements apply to them.
Do only significant beneficial owners who
are not legal owners have to make disclosures?
Section 89 requires disclosure by a person
who holds shares in his name, but does not have the beneficial holding in them.
Section 90 contains no such limitation. The question then is whether a person
who holds 10% or shares legally and beneficially, would also be required to
disclose? If yes, then practically each and every company will see such
disclosures. The Rules define the term “significant beneficial owner” as a
person specified in section 90(1) who holds at least 10% beneficial holding in
shares, but “whose name is not entered in the register of members of a company
as the holder of such shares”. However, section 90 has much wider scope and,
for example, includes persons having significant influence or control. Hence,
while the Rules may have intended to specify disclosure where there are
beneficial holders who are not legal holders, the wording does not seem to be
clear enough.
Disclosure by institutional shareholders
Though the language is not wholly clear, it
appears that shareholders who are pooled investments funds (regulated under the
SEBI Act), such as the following, do not have to make disclosures under these
provisions:
1. Mutual Funds
2. Alternative Investment Funds
3. Real Estate Investment Trusts
4. Infrastructure Investment Trust
Obligation on company to inquire
into/report
Obligation has also been placed on the
Company to require persons to make disclosures if it has reason to believe that
such persons are covered by these provisions. If such persons still do not make
a disclosure, the Company has to refer the matter to the National Company Law
Tribunal for directions that may include restrictions over such shares.
Implications for non-disclosures/false
disclosures
If the persons who are obligated to make
disclosures – i.e., the significant beneficial owner and the company – do not
make the prescribed disclosures, they will be subject to fines. False
disclosures may result in prosecution that can be stringent.
Benami transactions
The provisions will surely apply to
legitimate significant beneficial owners. There may be persons who have reason
to hold shares through companies, trusts, etc. or through other complex
structures. However, they could also apply even to persons holding shares
benami as specified in the Benami Transactions Prohibition Act, if the
requirements of that Act are attracted. Disclosure by such persons may result
in very stringent consequences under that Act.
Conclusion
There are several other laws that already
require disclosure of those persons who are the ‘real’ owners/controllers of a
company. The object of each of these laws may be different ranging from
prevention of money laundering, to protection of shareholders, to preventing
tax evasion/corruption, etc. Some such as the Takeover Regulations are
fairly elaborate and while they are complex, the specific nature of provisions
leaves lesser aspects to uncertainty. In other cases, the requirements broadly
describe what is to be ascertained in general terms and then give detailed
clarifications which generally help cover a large variety of situations. The
newly introduced provisions in the Act/Rules make certain well meaning and
significant requirements. However, there are ambiguities in several places that
raise concerns whether the objective would be achieved at all. In many cases,
the provisions may be simple to apply and persons may even err on the side of
caution (even though the disclosures carry the risk of inviting inquiries).
There will however be several situations
where the provisions may be difficult to apply on the facts. One hopes that
clarifications/FAQs with examples of several alternative situations are given
so that there is clarity for at least the vast majority of companies.
