India: The Law Pertaining To Significant Beneficial Owner In Companies

Last Updated: 27 February 2019
Article by Mini Raman

The concept of beneficial ownership of shares finds its roots in Section 90 of the Companies Act, 2013 ("Companies Act"). Section 90 seeks to provide that the Central Government may appoint one or more competent persons to investigate and report as to the beneficial ownership with regard to any shares or class of shares.

The Companies (Significant Beneficial Owner) Rules 2018 ("the SBO Rules") was notified by the Ministry of Corporate Affairs ("MCA") on June 13th 2018 requiring the declaration of beneficial ownership by companies having such ownership by September 13th 2018.

The objective of the SBO Rules is the identification of the ultimate beneficial owner of shares in myriad corporate structures.

The Old SBO Rules

The SBO Rules defined "significant beneficial owner" to mean an individual holding ultimate beneficial interest of not less than 10% but whose name is not entered in the register of members. The term "significant beneficial ownership" shall be construed accordingly.

The Explanation I to the SBO Rules clarifies that where the member is a company, the significant beneficial owner is the natural person who whether along or acting together with other natural persons, or through one or more other persons or trusts holds not less than 10% of the capital of the company or who exercises significant influence or control over the company through other means.

Further, where no natural person is identified, the significant beneficial owner is the relevant natural person who holds the position of senior managing official.

Rule 3(1) of the SBO Rules requires every person who holds significant beneficial ownership in a company to file a declaration with the concerned company by the 13th of September 2018. Rule 3(2) of the SBO Rules requires every person who acquires significant beneficial ownership in a company to make a declaration by the filing of the prescribed form within 30 days of acquiring such beneficial ownership or in the event of any change thereof.

Under Rule 4 where any declaration of significant beneficial ownership is received by a company, the company shall file the prescribed return with the Registrar of Companies with respect to such declaration. Every company is also required to maintain a register of significant beneficial owners in the prescribed form.

The New SBO Rules

On February 8th 2019, the MCA notified the Companies (Significant Beneficial Owner) Amendment Rules 2018 ("the SBO Amendment Rules").

The SBO Amendment Rules has clarified and amended the definition of "significant beneficial owner".

Under Rule 2 of the SBO Amendment Rules, "Significant Beneficial Owner" with respect to a company now means an individual acting alone or together, or through one or more persons or trust, possess any one or more of the following rights or entitlements in such reporting company namely:

  1. Holds indirectly or together with any direct holdings not less than 10% of the shares;
  2. Holds indirectly or together with any direct holdings not less than 10% of the voting rights in the shares;
  3. Has the right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in any financial year, through indirect holdings alone or together with direct holdings;
  4. Has the right to exercise or actually exercises, significant influence or control, in any manner other than through direct holdings.

The Explanations to Rule 2 of the SBO Amendment Rules then goes on to explain how significant beneficial ownership will be determined in various cases.

The SBO Amendment Rules further elaborates on the forms in which declarations of significant beneficial ownership have to be made. The forms have been simplified under the SBO Amendment Rules.

It is important to note that by virtue of Rule 8 of the SBO Amendment Rules, the said rules do not be made applicable when the shares of the reporting company are held by

  • the Investor Education and Protection Fund;
  • the holding reporting company of the reporting company;
  • the Central Government, State Government or any local authority;
  • any entity controlled by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments;
  • all investment vehicles registered with the Securities and Exchange Board of India (SEBI);
  • investment vehicles regulated by the Reserve Bank of India or Insurance Regulatory and Development Authority of India or Pension Fund Regulatory and Development Authority.

Comment: The SBO Amendment Rules have successfully simplified the process of identification of the significant beneficial owner and has removed the ambiguities that existed under the earlier SBO Rules. The non- applicability of the SBO Rules to investment vehicles registered with the SEBI is also a very welcome change.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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