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February 2018

New Section 90 In Companies Amendment Act 2017 – Aims At Benami Shareholders, Shoots Everyone Else But Them

By Jayant M. Thakur
Chartered Accountant
Reading Time 10 mins

Background

‘Shell companies’ have been in the news recently. On how money is laundered, laws are avoided/evaded, benami properties are held, etc. through such companies. This is more so post-demonetisation when it has been alleged that a large sum of money has been laundered through such companies. A series of actions have been taken. Several listed companies have got their trading on stock exchanges restricted. Though many got relief thereafter, it is also seen that investigations have been initiated into activities of many such companies. Directors of such companies have also been debarred.

 

It has been perceived that shares of such companies may be held benami, thus making it difficult to catch the real culprits. There are of course laws to deal with benami holdings including the most prominent Prohibition of Benami Property Transactions Act, 1988, which too was substantially amended in 2016.

 

A further step has now been taken to, inter alia, tackle such benami holdings through an amendment to section 89 and through introduction of a new section 90 by the Companies Amendment Act 2017, which has received the assent of the President on 3rd January 2018. However, the provisions, as this article is being written, await notification.

 

Essentially, the said section 90, in very wide terms, requires disclosure by individuals who, singly or jointly with others, hold/control substantial interests in companies. This supplements and indeed widely extends section 89 which requires disclosure of beneficial interests in shares. This effectively appears to be intended to require disclosure not just of benami holdings but also holding by eventual individual owners.

 

However, the provisions are very widely and even loosely/ambiguously worded. They will apply not just to listed companies but also to unlisted/private companies. Further, disclosure, at least one time, will be required by almost all companies, who then will have to make onward disclosures to the Registrar.

 

Existing Section 89

Section 89 of the Companies Act 2013 deals with disclosure of beneficial interests. A person who holds shares in his name but who does not hold the beneficial interest therein is required to make a declaration in the prescribed manner. This section corresponds to section 187-C of the Companies Act, 1956. Now it has been amended by introduction of the following definition which will be relevant also for section 90 discussed below:

 

“(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.”.

 

As can be seen, the scope of section 89 is thus widened.

 

New Section 90

Section 90 goes much further beyond the provisions of section 89. It requires that individuals who hold or control significant holding in a company should disclose such fact to the Company. The Company will record this declaration in a specified register and also make disclosures to the Registrar. Some relevant extracts from the said section are given below (emphasis supplied):-

 

90. (1) 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 (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed:

 

Provided that the Central Government may prescribe a class or classes of persons who shall not be required to make declaration under this sub-section.

 

(4) Every company shall file a return of significant beneficial owners of the company and changes therein with the Registrar containing names, addresses and other details as may be prescribed within such time, in such form and manner as may be prescribed.

 

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

…..

 

(7) The company shall,—?(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, apply to the Tribunal within a period of fifteen days of the expiry of the period specified in the notice, for an order directing that the shares in question be subject to restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other matters as may be prescribed.

 

(8) On any application made under sub-section (7), 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 of receipt of application or such other period as may be prescribed.

 

(9) 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 under sub-section (8).

 

(10) If any person fails to make a declaration as required under sub-section (1),?he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.

 

(11) If a company, required to maintain register under sub-section (2) and file the information under sub-section (4), fails to do so or denies inspection as provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than ten lakh rupees but which may extend to fifty lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.

 

(12) If any person wilfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under this section, he shall be liable to action under section 447.

 

To which categories of companies does this section apply?

Section 90 applies to all types of companies, whether public or private, whether listed or unlisted. All persons who hold such significant beneficial ownership are required to make such declaration, except where the Central Government has exempted them.

What type of holdings are required to be disclosed?

The following types of holdings/control are required to be disclosed:

 

1.  Beneficial interest of at least 25% (or such other prescribed percentage) in shares of a company

2.  Right to exercise significant influence or control.

3.  Actual exercising of significant influence or control.

 

Such holding, etc. would be by an individual either by himself or together or through other persons including even persons outside India. The holding/control may be in a private, public or even a listed company.

 

Implications

The implications of the new provisions are wide. Almost every company will see such disclosures, unless the holding is so widely held that no individual or group hold a significant holding/control. It applies to all companies – private, public or listed. These disclosures will then have to be recorded and then filed to Registrar. There will be massive paperwork, even if one-time. A husband-wife company where each holds such 50% will require disclosure by both persons. Private equity firms will have to make such disclosures if they hold such significant holdings. Listed companies will also see such disclosures. Even if none of these are benami holdings. Even foreign shareholders are covered.

 

The wording is wide and, at some places, ambiguous. Certain definitions are not given and hence may result in further ambiguity. Take some examples.

 

If an individual holds/controls ‘together’ with another person, disclosure is required. However, it is not clear what ‘together’ means. Does it have a meaning similar to ‘persons acting in concert’ as defined in detail under the SEBI SAST Regulations?

 

Often directors, trustees, etc. may exercise voting rights for companies, trusts, etc. Will they too have to make disclosures? The Central Government may notify persons who are exempted from making disclosures.

 

Shareholding particularly in groups and listed companies may be held in complex structures. Is the law sufficient to unravel such structures to find out who, if any, are ultimate persons who hold shares or have or exercise control? SEBI and RBI have given guidance under certain circumstances how to find who are real ultimate owners. But the Act does not give any guidance.

 

Apparently, the provision will apply to existing holdings as well as fresh acquisitions. Hence, a one-time declaration would have to be made.

 

In any case, will the objective of detecting benami holdings be achieved? The Prohibition of Benami Property Transactions Act provides for confiscation of the properties and prosecution of persons involved. Thus, making such a disclosure could be invitation for such serious actions. The penalties for not making such disclosures, though significant in amount, are not very large and does not result in any prosecution under the Act.

 

The Company has an obligation to notify persons who hold shares or control to such extent if it has reason to believe. If they do not take action, they too may face action.

 

Action by Company which believes a person who is a significant beneficial owner

 

If the Company has reason to believe that there is a person who has such holding/control, it needs to notify such person to make a disclosure. If such person does not make a disclosure, the Company has to approach the Tribunal to investigate. If it is found by the Tribunal that there exists such holding, etc., then it may direct that the transfer of such shares shall be restricted and all rights relating to such shares shall be suspended.

 

Penalties

There are penalties if such individuals do not make such disclosure. A penalty of Rs. 1 to 10 lakh plus upto Rs. 1000 for every day of delay can be levied. False disclosures can result in prosecution. The Company too faces penalties.

 

Conclusion

Clearly, these provisions need reconsideration. It is submitted that it should not be notified and brought into effect. Ideally, a revised and well drafted provision should be introduced or, second best, through circulars and rules, the implications need to be diluted and restricted. _

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