BACKGROUND
Section 90
was enacted by the Companies Act, 2013. It was recast totally by the
Companies (Amendment) Act, 2017. The amended section was made effective from 13th
June 2018. MCA has further notified Companies (Significant Beneficial Owners)
Rules, 20l8 on 13th June 2018. These rules (herein after referred as
SBO) cast various responsibilities on the Companies, Shareholders (for that
matter members too) and beneficial owners in shares.
PROBLEM
Section
90(1) of the Companies Act, 2013 (as amended), provides that declaration is to
be filed by every Individual, who acting alone or together, or through
one or more persons or trust, including a trust and persons resident outside
India, holds beneficial interests, of not less than twenty-five per cent or
such other percentage as may be prescribed, in shares of a company or the
right to exercise, or the actual exercising of significant influence or control
as defined in clause (27) of section 2, over the company shall make a
declaration to the company. The Central Government may however, prescribe
class/es of persons who shall not be required to make declaration. (delegated
legislation).
However,
explanation appended below the applicable rules (The Companies (Significant
Beneficial Owners) Rules, 2018) clearly exceeds an authority granted to the
rule makers because through an explanation what is sought to be done is expansion
of the scope of Significant Beneficial Owner so as to bring even persons other
than individuals within the scope.
UNFAIRNESS
1. The Companies (Amendment) Bill, 2016 contained
provisions which proposed to delegate the Central Government the power to
prescribe, by way of rules, the details with regard to – certain time-limits,
contents and manner of issuing/filing of certain forms including abridged
forms, amount of fees to be paid and other similar items of subordinated
legislation. A Memorandum Regarding Delegated Legislation (MRDL) explaining
such delegation is attached to the Companies (Amendment) Bill, 2016.
The
relevant extract of the Memorandum (so far as it relates to SBO is reproduced hereunder):
Clause 22,
inter alia, empowered Central Government to prescribe u/s. 90 of the
Act—
……
(c) class
or classes of persons which shall not be required to make declaration
under proviso to s/s.(1)
(d) Other
details which may be included in the register of interest declared by
individual in s/s. (2),
…………
2. Thus above delegation presupposes that rules
framed will include
- class or classes of
persons which shall not be required to make a declaration
Present
rules do not contain any such provision as to which persons shall not make the
declaration.
3. Besides next requirement w.r.t., to rules also
presupposes that declaration is to be given by an individual where as
present rules have cast a responsibility on various entities including
Company, Firm and Trust.
4. Rule 2(1) (e) of The Companies (Significant
Beneficial Owners) Rules, 2018 reads as under:
(e)
“significant beneficial owner” means an individual referred to in
sub-section (1) of section 90 (holding ultimate beneficial interest of not less
than ten per cent) read with sub-section (10) of section 89, but whose name is
not entered in the register of members of a company as the holder of such
shares, and the term ‘significant beneficial ownership’ shall be construed
accordingly
5. However, explanation appended below above
mentioned rule clearly exceeds an authority granted to the rule makers because
through this explanation what is sought to be done is expansion of the scope of
Significant Beneficial Owner so as to bring even persons other than
individuals within the scope. The said explanation reads as under:
Explanation
l. – For the purpose of this clause, the significant beneficial ownership, in
case of persons other than individuals or natural persons, shall be determined
as under:
The explanation thereafter covers Company, Firm and Trust.
This
clearly exceeds the rule making powers of the subordinate legislation.
6. Let us now see briefly what subordinate
legislation is and what principles are required to be observed by subordinate/
delegated legislation:
The need
and importance of subordinate legislation has been underlined by the Supreme
Court in the Gwalior Rayon Mills Mfg. (Wing.) Co. Ltd. vs. Asstt.
Commissioner of Sales Tax and Others** thus:
……….
Nature of subordinate legislation
‘Subordinateness’,
in subordinate legislation is not merely suggestive of the level of the
authority making it but also of the nature of the legislation itself. Delegated
legislation under such delegated powers is ancillary and cannot, by its very
nature, replace or modify the parent law nor can it lay down details akin to
substantive law. There are instances where pieces of subordinate legislation
which tended to replace or modify the provisions of the basic law or attempted
to lay down new law by themselves had been struck down as ultra vires.
7. It is a well settled principle
that a rule, regulation or bylaw must not be ultra vires, that is to
say, if a power exists by statute to make rules, regulations, bylaws, forms,
etc., that power must be exercised strictly in accordance with the provisions
of the statute which confers the power, for a rule, etc., if ultra vires,
will be held incapable of being enforced.
CONCLUSION FROM THE ABOVE
Let us now
revert to the provision of section 90(1) which clearly provided that
declaration is to be filed by an Individual.
The word
‘individual’ makes it clear that the section cannot apply unless the holder of
shares or significant influence/control is a natural person (human being) and
not an artificial person such as a company or firm or trust as is envisaged in
the explanation to Rule 2(e) of SBO.
The term
individual is not defined in Companies Act, 2013 but the term is defined in
various dictionaries and definition of Individual by Merriam- Webster defines Individual as “a
particular being or thing as distinguished from a class, species, or
collection”
Even
definition of Person u/s. 2(31) of Income Tax Act, 1961 reads as under:
“person”
includes- (i) an individual, ………..
Thus,
individual is a subset of a person and has narrow meaning as compared to Person
which includes other incorporated and non incorporated entities.
SOLUTION
The
explanation in Rule 2(e) , which is contradictory to the provisions of the
section 90(1) of the Companies Act, 2013 has cast an onerous responsibility on
entities such as Companies, Firms and Trusts to make a declaration under SBO
even though the parent section did not put such responsibility and as such is prima
facie ultra vires.
It is therefore essential that
either parent section is amended or Rule is in synchronisation to the section.
