REPORTING COMPANY AND REPORTED OWNERS


On public demand, I am summarizing provisions relating to reporting company and the reported significant beneficial owners.[1]

Reporting Company under Rule 2(f) of SBO Rules, 2018 may be any company as defined under Section 2(20). According to Section 90(4), every company under shall report and file the return. For the practical purpose the return to the Registrar in respect of declaration under section 90Form BEN – 2 does not allow to fill the form if the company has no Significant Beneficial Owner.

Take Away 1: No return if no SBO. Read further to identify SBO.

The reporting company shall in all cases where its member (other than an individual), holds not less than ten per cent of its (a) shares, or (b) voting rights, or (c) right to receive or participate in the dividend or any other distribution payable in a financial year, give notice to such member, seeking information in accordance with subsection (5) of section 90, in Form BEN – 4. [Rule 2A]

Take Away 2: Identify Share not held by an individual (human) as a registered member or owner of beneficial interest. [Do not forget humans though, keep record]

Take Away 3: Send notice to every registered member or owner of beneficial Interest identified in Taka Away 2 having 10% of (a) shares, or (b) voting rights, or (c) right to receive or participate in the dividend or any other distribution payable.

Shares and share capital respectively includes Equity share with or without differential voting and/or other rights and Preference shares.

Voting right means the right of a member of a company to vote in any meeting of the company or by means of postal ballot. Generally, Preference share carries voting power in certain resolutions but where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.

Right to receive dividend may be held by someone who is not a registered member.

Take Away 4: check your dividend distribution in the last two years to preference shareholders.

Take Away 5: calculated beneficial owners and the right to receive dividend or profit participation carefully.

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. [Section 89(10)]

Take Away 6: Beneficial Interest is a wider term than a day to day understanding.

Every individual, who acting alone or together, or through one or more persons or trust, holds beneficial interests of not less than percentage as prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control 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. [Section 90(1)]

Take Away 7: Stay focused on Section 90(1)

If an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner. [Explanation I to Rule 2(h)]

An individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely:

(i) the shares in the reporting company representing such right or entitlement are held in the name of the individual;

(ii) the individual holds or acquires a beneficial interest in the share of the reporting company under sub-section (2) of section 89, and has made a declaration in this regard to the reporting company.

Take Away 8: individual members and other Individuals with ANY indirect holding or interests need to be identified.

The reporting company may have partial relief form reporting in respect of certain shares held by –

  1. Investor Education and Protection Fund;
  2. A reporting holding company reporting its own SBOs in Form BEN – 2;
  3. Central, State and Local Government (NOTE: Under Indian Constitution of India);
  4. A government company, government body corporate or government entity controlled by Central, State or Local government;
  5. SEBI Registered investment vehicles like MFs, AIFs, REITs, InVITs, (See footnote)[2]; and
  6. RBI, IRDA, PFRDA Registered investment vehicles. [Rule 8]

Take Away 9: Ignore Shares mentioned in Rule 8. Please seek information or send a notice in case of doubt.

To identify an SBO behind a Body Corporate Member; whether company, other bodies corporate, whether Indian or foreign, the reporting company shall identify the individual who

 (a) holds the majority stake in that body corporate member; or

(b) holds the majority stake in the ultimate holding body corporate  (whether incorporated or registered in India or abroad) of that member.

Take Away 10A: Go up to the steps of holdings body corporate till you find individual members. However, just for the purpose of reporting, identify the holder of a majority stake.

To identify an SBO behind a Hindu Undivided Family (HUF) identify the karta. Sometime the registered member may have shares in his name but the Hindu Undivided Family (HUF) is actual beneficial owner (through karta). The Karta shall be SBO.

Take Away 10C: Identify Karta in HUF.

To identify an SBO behind partnership entity – Limited Liability Partnership or Partnership Firm whether registered or not, the member of the reporting company is a partnership entity (through itself or a partner), and the SBO individual,-

(a) is a partner; or

(b) holds the majority stake in the body corporate which is a partner of the partnership entity; or

(c) holds the majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.

Take Away 10C: In LLP and Partnership, identify the individual partners or SBO as per Take Away 10A where a partner is a body corporate.

To identify an SBO behind the trust, where the member of the reporting company is a trust (through the trustee), and the SBO individual –

(a) is a trustee in case of a discretionary trust or a charitable trust;

(b) is a beneficiary in case of a specific trust;

(c) is the author or settlor in case of a revocable trust.

Take Away 10D: In a trust, SBO individual may differ on a case to case basis.

To identify an SBO behind (a) Pooled Investment Vehicle; or (b) an entity controlled by the pooled investment vehicle, the SBO individual in relation to the pooled investment vehicle,-

(A) is a general partner; or

(B) is an investment manager; or

(C) is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.

Take Away 10E: In pooled investment Vehicle, identify the decision-maker.

If any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be ‘acting together’

Take Away 11: Identity individuals acting together.

Significant Influence means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies.

Take Away 12: Significant Influence may be taken care of.

“significant beneficial owner” in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:-

(i) holds indirectly, or together with any direct holdings, not less than ten per cent. of the shares;

(ii) holds indirectly, or together with any direct holdings, not less than ten per cent. of the voting rights in the shares;

(iii) has right to receive or participate in not less than ten per cent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;

(iv) has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone:

Take Away 13: After identifying all individual beneficial owners on all routes, you may find one individual in more than one place or a few individuals acting together.

If an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner.

Take Away 14: ignore all individuals holding rights or entitlements in the reporting company directly.  

Take Away 15: List out individuals with indirect holdings or individuals having both direct and indirect holdings.

Now, compile the data in the required format. While compiling data, we may face many practical realities.

Special Take Away 1: One individual may have less beneficial ownership from in a single non-individual member but the combined effect of his all beneficial ownership may make him a significant owner.

Special Take Away 2: It is a reporting company which is in a better position to identify SBO then SBO himself, particularly where SBO using multiple member entities in the reporting companies.

Special Learning Point: Beneficial Interests and Beneficial ownership are two different ownership or interest aspect. Do not mingle them.

CS Aishwarya Mohan Gahrana

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[1] Please refer all of these posts for details:

[2] Mutual Funds (MFs), Alternative Investment Funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) and such other SEBI registered investment vehicles

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Politics is claimed to be a dirty game of propaganda in India and the public already accepted it as a reality of life. Unfortunately, Indian professionals start using similar tools against compliance regime and compliance professionals. Role of the media is also come to under strong protest recently. This is evident that Indian media do no research and do not cross verify the facts. Recently published propaganda titled “FM Nirmala Sitharaman urged to waive e-form 22A for firms” published by Deccan Chronicle on 12th June 2019 and copied by few others seems to be published without cross-checking on law and facts.

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PERIOD FOR REGISTRATION OF CHARGES


The Registration of Charges is always one of the most used but controversial and practically ignored chapters of the Indian company law. I personally never understood the utility of such registration except for a limited public notice in an era of Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Recent amendment in the law governing the registration of charge makes it more complicated and less user-friendly. Let us try to understand the amended law.

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Further Discussion on Manufacturing Activities in LLP


I recently published here a post analysing the law relating to manufacturing activities in a limited liability partnership. I, presently, have a strong view that manufacturing is not permitted under the present framework of the law. The parliament in its wisdom included trading as a permitted business for LLPs but not manufacturing under Section 2(e). According to my views, the Parliament may bring an amendment to include manufacturing as a permitted business for LLP. Any Office Memorandum issued by the Ministry or its withdrawal may not give LLPs permission to do the business of manufacturing without an amendment to the Act.

This blog post generated a debate. In this post, I reproduced a consolidation of all these discussions I was part:

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