SIGNIFICANT BENEFICIAL OWNER

The law stated in this post is valid from 8^th February 2019. The earlier post on the subject here was valid from 14^th June 2018 till 7^th February 2019.

Note: Earlier Section 90 {Invesigation of Beneficial Ownership} as applicable form 1st April 2014 to 13 June 2018 was discussed here.

Section 90 of the Companies Act 2013 substituted by a new set of law. It is a drastic change to understand and need urgent attention for all companies. Amended Section 90 and rules made thereunder has been notified with effect from 13th June 2018 and 14th June 2018. However, the Companies Amendment Ordinance, 2018 as well as The Companies Amendment Act, 2019 amended Section 90 with effect from 2nd November 2018.  Thereafter, the Companies (Significant Beneficial Owners) Amendment Rules, 2019 amended the Companies (Significant Beneficial Owners) Rules, 2018 with effect from 8th February 2019.

In this post, we will discuss what constitutes Significant Beneficial Ownership under the amended law.

BENEFICIAL INTEREST

Beneficial Interest under the company law commonly used to mean as holding share as a nominee (read trustee) of another person usually a body corporate, mostly to satisfy the requirement of minimum shareholders.

Newly, inserted subsection (10) of section 89 define beneficial interests for the purposed of Sections 89 and 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.”.

The first clause of the definition gives it a wider meaning. Such right may be any right which may be attached with such shares – security interest, dividend, bonus, trust, bailment, pledge, right related to sale or purchase, pre-emption, succession, actionable claim and so on.

SIGNIFICANT BENEFICIAL OWNER

Subsection (1) of section 90 define a significant beneficial owner. Every individual who holds beneficial interests, of not less than twenty-five per cent or such other percentage as may be prescribed (reduced to ten percent by the rules), 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 is Significant Beneficial Owner.

Such significant beneficial ownership of an individual may be by acting alone or together or through one or more persons or trust, including trust and persons resident outside India.

With effect from 8th February 2019, Rule 2(1)(h) of the Companies (Significant Beneficial Owners) Rules 2018 further explain that “significant beneficial owner” in relation to a reporting company means an individual referred to in subsection (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; or

(iv) has the right to exercise, or actually exercises, significant influence or control, in any manner

other than through direct holdings alone.

Significant Beneficial Owner – pointed definition

An Individual;

• Holding “ultimate” beneficial interest as defined in Section 89(10), or
• the actual exercising of significant influence or control as defined in Section 2(27)
• Not less than 10% shareholding or voting power or distributable dividend, or
• Exercise significant influence or control other than direct holdings alone
• Name not entered in the register of members as a holder of such shares.

Indirect Holding is a key

According to Explanation I of Rule 2(1)(h), for the purpose of definition of Significant Beneficial Owner, 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.

In simple terms, where an individual holds all his rights or entitlement, he shall not be considered as significant beneficial owner. For my understanding, I can call them Significant Owner but not significant beneficial owner.

Determining holding of right or entitlement directly

According to Explanation II of Rule 2(1)(h), an individual shall be considered to hold a right or entitlement directly in the reporting company, if –

(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 subsection (2) of section 89, and has made a declaration in this regard to the reporting company.

Here, significant beneficial interest comes to sharp contrast to beneficial interest, where declared, and become mutually exclusive.

Determining holding of right or entitlement indirectly

Explanation III of Rule 2(1)(h) list out the criteria for determining holding of right or entitlement indirectly.

Through Body Corporate

According to clause (i) of Explanation III of Rule 2(1)(h), where the member of the reporting company is a body corporate (whether incorporated or registered in India or abroad) and the individual,––

(a) holds a majority stake in that member; or

(b) holds a majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of that member;

Such individual shall individual shall be considered to hold a right or entitlement indirectly in the reporting company.

This rule is not for indirect holding through limited liability partnership firms.

Through Hindu Undivided Family

According to clause (ii) of Explanation III of Rule 2(1)(h), where the member of the reporting company is a Hindu Undivided Family (HUF) and the individual is a Karta of that HUF, such individual shall individual shall be considered to hold a right or entitlement indirectly in the reporting company.

This is a very interesting provision and may reduce the significance of HUFs significantly as an investment vehicle.

Through Partnership entity

According to clause (iii) of Explanation III of Rule 2(1)(h), where the member of the reporting company is a partnership entity (through itself or a partner), and the individual,-

(a) is a partner; or

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

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

Such individual shall individual shall be considered to hold a right or entitlement indirectly in the reporting company.

This rule shall be applicable to partnership firms and limited liability partnership firms.

Through Trust

According to clause (iv) of Explanation III of Rule 2(1)(h), where the member of the reporting company is a trust (through trustee), and the 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.

Such individual shall be considered to hold a right or entitlement indirectly in the reporting company.

Through a pooled investment vehicle

According to clause (v) of Explanation III of Rule 2(1)(h), where the member of the reporting company is,-

(a) a pooled investment vehicle; or

(b) an entity controlled by the pooled investment vehicle,

based in member State of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member State is a member of the International Organization of Securities Commissions, and the 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.

Such individual shall be considered to hold a right or entitlement indirectly in the reporting company.

According to Explanation IV of Rule 2(1)(h), where the member of a reporting company is (i) a pooled investment vehicle; or (ii) an entity controlled by the pooled investment vehicle, based in a jurisdiction which does not fulfil the requirements referred to in clause (v) of Explanation III, the provisions of clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation III, as the case may be, shall apply.

Acting together

According to Explanation V of Rule 2(1)(h), 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’.

Shares

According to Explanation VI of Rule 2(1)(h), the instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as ‘shares’.

Significant Influence

According to Rule 2(1)(i), “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

DECLARATION BY SIGNIFICANT BENEFICIAL OWNER

Such 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.

We will discuss the declaration and other aspects of this law in other posts here, as amended by the Companies (Significant Beneficial Owners) Amendment Rules, 2019.