Beneficial Owner Rules contradict Section 90; need urgent amendment
The ultimate intent of Section 90 of the Companies Act, 2013 is to identify natural persons who hold beneficial interest in a company or exercise significant influence or control over the company. Beneficial interest, as explained in Section 89 (10), includes direct exercise of rights attached to shares. Accordingly, on a parallel reading of Section 90 (1) and Section 89 (10) any person who directly exercises rights attached to such shares beyond a particular threshold should be regarded as a Significant Beneficial Owner (SBO).
 
While the meaning of SBO has been clearly explained in Section 90 (1), Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules) provides a definition of SBO.
 
Confusing definition in SBO Rules
SBO, as defined in SBO Rules stresses on such names that are not entered in the register of members:

“(e) "significant beneficial owner" means an individual referred to in sub-section (1) of section 90 (holding ultimate beneficial interest of not less than ten per cent.) read with sub-section (10) of section 89, but whose name is not entered in the register of members of a company as the holder of such shares, and the term 'significant beneficial ownership' shall be construed accordingly;”
 
This results in a strange situation. The company is to identify such a natural individual who holds more than 10% of shares of the company on a diluted basis and whose name is not reflecting in the register of members. Does that mean the natural persons who, alone or together with other persons, hold 10% of shares in the company are not the SBO? Consider following example:
The shareholding pattern of X Pvt Ltd is as under:
 
Mr. A: 50%; Mr. B: 40%; Z Ltd: 10%
 
Why will Company X not regard Mr. A and Mr. B as SBO? Why will a company disregard such natural persons whose names reflect in the register of members?
 
The difficulty will not end there. If there is no natural person identified behind Z Ltd, the senior managing official of X Ltd will be required to be identified as the SBO as per the Explanation to Rule 2 (e) of SBO Rules . 
The declarations filed will not reflect the true and fair position.
 
 
Nature of amendment required
1. Definition of SBO given in Rule 2 (e) needs to be substituted with following:
(e) "significant beneficial owner" means an individual referred to in sub-section (1) of section 90 holding ultimate beneficial interest, as explained in sub-section (10) of section 89, of not less than ten per cent. read with sub-section (10) of section 89, but whose name is not entered in the register of members of a company as the holder of such shares, and the term 'significant beneficial ownership' shall be construed accordingly;
 
Explanation I: Where no natural person is identified under sub-section (1) of section 90, the significant beneficial owner shall be the relevant natural person who holds the position of a senior managing official in the company.
 
2. Form No. BEN 1 needs to be amended to address the concerns specified above.
 
Since time is already ticking away and initial compliance is required to be ensured within 90 days from June 13, 2018 the need of the hour is to carry out the necessary amendments at the earliest in order to enable companies to appropriately identify and report their SBOs.
  Explanation l. - For the purpose of this clause, the significant beneficial ownership, in case of persons other than individuals or natural persons, shall be determined as under-
(i) where the member is a company, the 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 trusts, holds not less than ten per cent share capital of the company or who exercises a significant influence or control in the company through other means;
 
(ii) where the member is a partnership firm, the 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 trusts, holds not less than ten per cent of capital or has entitlement of not less than ten per cent of profits of the partnership;
 
(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 a senior managing official;
 
(CS Vinita Nair is Partner at Vinod Kothari & Company)
 

 

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    COMMENTS

    Rama Sr

    1 year ago

    i) Is it applicable to a company incorporated outside India, since they are not coming under 'company' definition of the Act and they are body corporate.
    ii) Should the company will be required to write to all shareholders other than Individuals (holding 10% or more share capital) to disclose who is the SBO?
    Lot of confusions .. clarifications required from the MCA.

    REPLY

    Vinita Nair

    In Reply to Rama Sr 1 year ago

    You may refer our FAQs at http://vinodkothari.com/blog/faqs-on-sbo-rules-2018/

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