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Analysis and disclosures on holding Beneficial Interest under Companies Act, 2013

BENEFICIAL INTEREST

I.  Background:

The concept of beneficial ownership refers to having a beneficial interest in any property, goods including securities. A beneficial interest is “that right (in the form of profit, benefit or advantage) which a person has in a contract made with another (third 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 different from the rights of someone like a trustee or an official who has the responsibility to perform and/or title to the assets but does not share in the benefits. As per sec 89 of the Companies Act 2013, A beneficial interest is the right to receive benefits on shares held by another party.

II.  Important Terms:

a. Registered Owner – A person whose name is registered in the Register of Members as the as the holder of shares in that company but who does not hold the beneficial interest in such shares is commonly called as the registered owner of the shares.

b. Beneficial/Legal Owner – Whereas a person who actually holds the beneficial interest in the shares but whose name is not registered in the Register of Members is commonly called as the beneficial owner/legal owner.

c. Beneficial Interest - 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.

In general words, the beneficial owner is entitled to exercise all the rights of the shares like: Dividend, right issue, bonus of shares etc.

d. Significant Beneficial Owner – It means beneficial owner holding ultimate beneficial interest not less than 10% and whose name not entered in the register of members of a Company.

Note:
I.  For the purpose of calculation of 10% of beneficial interest in shares, Shares Includes Instrument in form of

  • Global Depository Receipts,
  • Compulsorily Convertible Preference Shares or
  • Compulsory convertible debentures.

II.  For the purpose of significant beneficial owner, in case of ‘person other than individuals or natural person’, shall be determined as under:

S No Where Member is Along with Percentage
1. Company Significant beneficial owner is the natural person, who,

  • Whether acting alone or
  • together with other natural persons, or
  • through one or more other persons or trust
Hold at least 10% of share capital of the Company or Who exercise significant influence or control in the company through other means.
2. Partnership Firm Significant beneficial owner is the natural person, who,

  • Whether acting alone or
  • together with other natural persons, or
  • through one or more other persons or trust
Hold at least 10% of capital or Has entitled  of not less than 10% of profits of the partnership firm.
3 Trust The beneficial owner shall includes

  • Identification of the author of the trust, and
  • The trustee, and
  • The beneficiaries with not less than 10% interest in the trust and
  • Any other natural person exercising ultimate effective control over the trust through a chain of control or ownership

Note:
Where no natural person is identified in point No. 1 and 2, the significant beneficial owner is the relevant natural person who holds the position of senior managing official;

III.  Law(s) governing the regulatory framework

    1. Sec 89 : Deals with disclosure of beneficial interests. (Beneficial Interest). (Applies when there is an acquisition of a beneficial interest in shares).

 

    1. Rule 9 of the Companies (Management and Administration) Rules, 2014 : Declaration in Respect of Beneficial Interest in Any Shares.

 

    1. Sec 90 : Individuals who hold or control significant holding in a company should disclose such fact to the Company.(Significant Beneficial Interest). (Applies in cases when that acquisition of beneficial interest is “significant”.).

 

  1. Companies (Significant Beneficial Owners) Rules, 20l8

IV.  Compliance requirement

Compliance requirement - Beneficial interest:

A.    Compliance by Registered owner:

A declaration to that effect in Form No. MGT. 4 within a period of 30 days from the date on which his name is entered in the register of members of such company. (Section 89(1) read with Rule 9(1) of Companies (Management and Administration) Rules, 2014)

B.    Compliance by Beneficial owner:

A declaration disclosing such interest in Form No. MGT 5 within 30 days after acquiring such beneficial interest in the shares of the company. (Section 89(2) read with Rule 9(2) of Companies (Management and Administration) Rules, 2014)

C.    Compliance by Company:

Where any declaration as mentioned above received by the company, the company shall make a note of such declaration in the register of members and shall file, within a period of 30 days from the date of receipt of declaration by it, a return in Form No. MGT 6 with the Registrar in respect of such declaration with fee.(Section 89(6) read with Rule 9(1) of Companies (Management and Administration) Rules, 2014)

D.     Penalty for Non-Compliance for A and B (As mentioned in the  above):

He shall be punishable with fine which may extend to 50,000/- rupees and where the failure is a continuing one, with a further fine which may extend to 1000/- rupees for every day after the first during which the failure continues.

E.    Penalty for Non-Compliance for C (As mentioned in the above):

The Company and every officer of the company shall be punishable with fine which may extend to 5,000/- rupees and where the failure is a continuing one, with a further fine which may extend to 1000/- rupees for every day after the first during which the failure continues.

F.    Consequences of Non-filing of Declarations:

No right in relation to any share in respect of which a declaration is required to be made under this section but not made by the beneficial owner, shall be enforceable by him or by any person claiming through him.

Compliance requirement – Significant Beneficial Interest:

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 from commencement of these rule i.e. 13th June, 2018.

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 Companies (Significant Beneficial Owners) Rules, 2018)

Become Significant Beneficial Owner: Every individual, who acquires significant beneficial ownership in a Company, shall file a declaration in Form No. BEN-1 to the Company within 30 days of acquiring such significant beneficial ownership.

B.    Compliance by Company:

Registers: Every company shall maintain a register of the interest declared by individual’s u/s 90(1).

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 Companies (Significant Beneficial Owners) Rules, 2018)

Registers: The Company shall maintain a register of significant beneficial owner in Form No. BEN-3.

Note:
Above compliances shall be done by Company after receipt of information from the Significant Beneficial Owner.

C.    Power of companies to approach the Tribunal in case of non-receipt  or inadequate response from the members and non-members:

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

  • Section 90(5)
  • Rule 6 of (Companies (Significant Beneficial Owners) Rules, 2018)

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, 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, —

(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 6 of Companies (Significant Beneficial Owners) Rules, 2018}

The Company shall apply to Tribunal within 15 days of the expiry of  the period specified in Notice.

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.

Illustrations:

(1)   Computation of ultimate beneficial holding of the natural person:

Case 1:

(a) Is Mr. M an SBO for Company X?

  • Holding through Company A = 30% * 10% = 3%
  • Holding through Company B = 15% *5% = 0.75%
  • Total holding in Company X = 3 + 0.75 = 3.75%
  • This is not resulting in holding ultimate beneficial interest of not less than ten per cent. Therefore, Mr. M is not the SBO.
  • Also note that the holding of Company B may actually not be relevant at all, as Company B is not a significant shareholder itself. Hence, there is no reason to trace the holding of natural persons in an insignificant Investing Structure.

Case 2:

(b) Is Mr. M an SBO for Company X?

  • Holding through Company A = 30% * 10% = 3%
  • Holding through Company B = 15% *5% = 0.75%
  • Direct holding in Company X = 7%
  • Total holding in Company X = 3 + 0.75 + 7 = 10.75%
  • This is resulting in holding ultimate beneficial interest of not less than ten per cent. In this case, though a part of the ultimate holding of M is direct, and therefore, his name is borne on the register of members, yet, he is not a significant beneficial owner going by the register of members. Therefore, M will have to declare himself as an SBO.

(2)   What will be the case if the beneficial interest holder’s name is borne on the register of members?

In such a case, given the definition of SBO in Final Rules, there is no need for the person holding significant shareholding in his own name to make a declaration. However, the following examples illustrate this:

As per the definition of SBO, name of Mr. A and Mr. B reflects in the register of members. Therefore, they need not give any declaration as the names of the SBO are reflecting in the register of members.

However, if there is a natural person holding significant interest in Company C, such that the ultimate holding of such natural person is 10% or more, the natural person will have to make a declaration.

(3)   What will be the case if the natural person holds directly as well as indirectly?

However, as per Para (i) of Explanation I of Rule 2 (e) of SBO Rules, Mr. A is the natural person who holds 10% or more in Y Ltd as well as in X Ltd through Y Ltd.

In approach to applying section 90, SBOs and companies may be guided by the general principle that the intent of the section is to bring on record such individuals, who are not directly visible as SBOs on the register of members of the company, but who do hold significant beneficial interest through some entity.

In this case, the Mr. A is not a significant holder as per register of members. However, he is significant, once we aggregate the indirect holding through Company Y. Hence, Mr. A will be required to make a declaration of significant beneficial interest.

(4)   In case the register of members comprises of majority of individual members, will there be a natural person identifying oneself as an SBO?

Example: Shareholding pattern of X Ltd comprises of following:

Mr. A: 10%
Mr. B: 15%
Mr. C: 20%
Mr. D: 5%
Mr. E: 3%
Mr. F: 2%
Mr. G: 30%
H Pvt Ltd: 5%
J Ltd: 5%
K Ltd: 5%

In the above case, the names of the SBO i.e. natural persons holding more than 10% are already reflecting in the register of members. Therefore, there is no need for such persons to identify themselves as SBO.

The Company is required to maintain a register of SBO under Section 90 (2) based on the declaration received from the SBOs. Where the no declaration is required to be given, the Company does not need to maintain the register of SBO.

(5)   In what situation, the senior managing official is required to declare?

As per clause (iii) of Explanation I to Rule 2 (e) of SBO rules:

“(iii) where no natural person is identified under (i) or (ii), the significant beneficial owner is the relevant natural person who holds the position of senior managing official;”

The word used is ‘or’. Accordingly, where a natural person is identified, either because of direct holding, or under (i) or (ii) or (iv), the senior managing official need not be regarded as SBO. This is going by the rule that primary indicator of beneficial interest is shareholder. It is only where shareholder cannot be detected, or where shareholding is dispersed, that the question of identification of the SMO comes.

Example 1:

In this case, Mr. M will be regarded as SBO for Company X

Example 2:

(with no natural person identified as SBO)

In this case, the SMO of Company X will be regarded as SBO.

(6) Whether the Companies should first write to all its shareholders, other than natural persons holding beneficial interest and whose names reflect in register of members, holding more than 10% of shares or exercising significant influence or control over it?

It is a logical way to ensure compliance under this Section. It is a collaborative exercise which the Company and the SBO has to ensure.

One option is that the Company waits for its shareholders holding beyond the threshold, to submit declaration in Form BEN 1.

Alternatively, the Company may identify the shareholders, other than natural persons, holding more than 10% of shares (equity + CCPS+CCDs+ GDRs) or exercising significant influence or control as on June 13, 2018 and seek information from them in Form No. BEN - 4.

This will mandate the shareholders to identify the natural person and obtain declaration from the said natural person in Form No. BEN-1 and submit to the Company within 30 days of receipt of the letter seeking information.

While the MCA has introduced the SBO Rules, stakeholders have raised various concerns on the details of information required. The MCA, taking cognizance of these concerns has issued a Circular 08/2018 dated 10 September 2018 informing that revisions will be brought into the declaration forms. Notifications from MCA are awaited.

In the interim, it is prudent for stakeholders to plan and organize the information required as per Section 90 of the Act and the SBO Rules to enable completing these filings within the timelines that would be prescribed and avoid last minute rush.

Disclaimer: The entire contents of this document have been developed on the basis of relevant information and the views of the authors. It may be pertinent to state that MCA, the regulator is in the process of re-engineering this concept considering the interest of various stakeholders and therefore this concept may be subject to changes. The authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

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