ROC’s strict interpretation of beneficial ownership norms puts MNCs in spot

ROC pass an order against Linkedin in May this year

A series of notices from the Ministry of Corporate Affairs (MCA) has created confusion amongst India’s multi-national companies regarding beneficial ownership disclosures. The ministry is learnt to be adopting a strict interpretation of beneficial ownership by insisting on disclosures as to who has control,  say legal experts.

Until now, the practice has been to identify beneficial owners primarily through economic ownership. The MCA’s stance has left several MNCs unsure about as to what can be construed as ‘control’ and whether this entails reporting key executives of the foreign parent company as beneficial owners of Indian subsidiaries, say experts.

On May 22 , the registrar of companies (ROC) fined LinkedIn and Satya Nadella, the chief executive of LinkedIn’s parent company Microsoft, for breach of Significant Beneficial Ownership (SBO) norms. Similarly, an Indian subsidiary of Korean giant Samsung was fined by ROC for violation of SBO rules. Both companies had declared they did not have any beneficial owner.

Linkedin and Nadella has not challenged the order by approaching the courts till now, said market participants. The MCA had levied a total penalty of Rs 27 lakh on LinkedIn and nine of its key functionaries including Nadella.

“The positioning on control looks a bit subjective in recent notices and hence it is critical that MCA issues detailed guidelines to place parameters on SBO especially on the control aspect.” said Neha Aggarwal Jain, partner, Deloitte India.

An email sent to MCA remained unanswered.

Rules say that the beneficial owner of a company can be determined using two different criteria: economic interest and control.  In terms of economic interest, beneficial ownership has clear thresholds: anyone owning 10 percent or more equity in the company has to be reported as a SBO.

Until now, companies normally used the 10 percent threshold to determine SBOs. But now, MCA has taken a view, in some cases, that even a professional executive who is in control of the company is a beneficial owner. Control is a subjective concept and is determined using several tests like right to appoint board members, right to call board meetings or any special veto rights, among others.

“The recent RoC orders are identifying professional executives as SBOs and such a determination by the RoC is widening the scope of ‘control’ and ‘significant influence’ as laid down under the Companies Act and SBO Rules. Also, the orders may not be a purposive reading of the legal provisions as it results in conflating managers with SBOs.” said Sreetama Sen, partner, Cyril Amarchand Mangaldas.”

“For now, these orders as well as notices are open to challenge and the determination of SBOs definitely requires further clarification to be issued by the Ministry, in order to remove these ambiguities around its construct,” she added.

Also, in cases where the foreign parent of the MNC is a listed entity, Indian subsidiaries used to undertake the beneficial ownership test until the listed company level. Since the listed entity is not an individual person or group of persons acting in concert, they used to declare the company had no SBO. But now the ROC orders have pointed out that the CEO of the listed entity is in control of the company and hence he is also in control of Indian subsidiary making him SBO under the rules.

“The recent actions against MNCs specifically foreign companies with respect to beneficial ownership declarations of individual CEOs and MDs is bound to hurt investor confidence and reputation of MNCs, thereby, impacting market dynamics and creating an inevitable hurdle for foreign companies and investors from executing any expansion plans in India,” said Amit Verma, partner designate, Hammurabi and Solomon.

This regulatory action by the ROC pertaining to beneficial owners is in-line with the steps that are being taken by other regulators including Indian market regulator Sebi to bring about more transparency in terms of reporting by foreign companies and funds. In the last one year, several norms pertaining to foreign ownership of Indian entities have been tightened, say experts.

“The approach of finding the highest ranking officers as being significant beneficial ownership (as observed in the Linkedin case) will surely lead to a lot of uncertainty in multi-layered organisations, and will require companies to scrutinise their current corporate governance structures to exhibit no control being exercised by outside stakeholders,” said Yash Kumar, managing counsel, Spark Legal.