Ashok Shah and Amrita Bhatnagar
N A Shah Associates LLP
The issue of the misuse of multi-layered corporate entities has grabbed attention of various policymakers and regulators. Regulatory authorities have adopted a step-by-step approach and tried to address this issue by enacting various legislations, notable among them being:
Recently, Ministry of Corporate Affairs (MCA) notified Rules on significant beneficial ownership which aim to fix the gap in existing provisions.
Under the Companies Act 1956 and under the Companies Act 2013, a registered and beneficial owner is required to file a declaration with the company, if the registered shareholder was not the beneficial shareholder.
The company, in turn, was required to file a declaration with the Registrar of Companies (RoC). However, the provision did not provide a mechanism to identify the ‘significant beneficial owners’, which imposed difficulties on regulatory authorities to verify the identity of individuals who ultimately owned and controlled the company.
Amendments relating to disclosure of beneficial holding:
Companies (Amendment) Act 2017 has replaced the provision relating to Significant Beneficial Owners by amending section 90 of the Companies Act.
Ministry of Corporate Affairs (MCA) has notified Companies (Significant Beneficial Owners) Rules 2013. This rule came into effect on June 14, 2018.
The obligation of Significant Beneficial Owner:
1. The obligation on every individual who (i) holds the beneficial interest of not less than the prescribed percentage in the shares or (ii) has or exercises significant influence or control over the company to provide a declaration to the company.
2. The provision applies to the (i) individual who is acting alone or together with one or more persons (ii) includes a trust (iii) person resident in India or outside India.
3. "Significant influence" in relation to an associate company means control of at least 20 percent of total voting power, or control of or participation in business decisions under an agreement.
4. "Control" shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
The above declaration is to be made within 90 days of the introduction of the provision i.e. by September 14, 2018, or within 30 days of a change in the beneficial ownership.
Obligations of the Company:
The company receiving the declaration has to maintain a register of significant beneficial owners.
The company has to file a return of significant beneficial owners of the company and changes therein with the Registrar within 30 days from the date of receipt of the declaration.
In the event, the Significant Beneficial Owner is not registered, the company has to give a notice within 30 days to the person who (a) the company knows or has reasonable cause to believe is a significant beneficial owner of the company or ; (b) has knowledge of the identity of the significant beneficial owner or another person who is likely to have such knowledge; or (c) might 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.
In the event, any person fails to give the required information or gives unsatisfactory information, the company has to apply to National Company Law Tribunal within 15 days of the expiry of the time period for an order directing that shares in question:
a. Be subject to the restriction on transfer
b. Suspension of all rights attached to shares example voting rights, dividend etc.
The significant beneficial owner is to be determined as under:
Some of the issues which will arise in complying with the provisions:
- Since rules are silent as regards LLP being a member, how would such membership be treated
- How would Company determine Significant Beneficial Owner where shares/interest is held Instruments in form of global depository receipts, compulsory convertible debentures or preference shares
- How the percentage threshold will be calculated in case of compulsory convertible debentures i.e on basis of the existing total share capital or resultant share capital, post-conversion.
- In case of listed companies where the share transfer is very common, to keep a watch on change of shareholding and file forms on change of significant beneficial ownership may result in an increase in compliance cost and effort.
- Though section 90 mentions beneficial ownership of not less 25% or other specified percentages, the Rules prescribe threshold of not less than 10%. The necessity of prescribing 25% threshold is not clear when this is immediately followed by “or other specified percentages”. Taking a lower threshold in Rules will increase the cost of compliance
- Whether the limit stated above shall apply to a particular class of shares or to all shares together held by a significant beneficial owner is not clear.
Pooled investment vehicles/ investment funds such as Mutual funds, Alternative Investment funds, Real Estate Investment Trust which are regulated by SEBI are exempted from the declaration.
These provisions will increase the cost of compliance significantly. There will be many practical difficulties in obtaining the required information. It would have been better if sufficient time was made available to the companies and shareholders to understand the compliance requirements.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.