The Registrar of Companies ('RoC') recently penalised LinkedIn India for non-compliance with Companies (Significant Beneficial Ownership) Rules, 2014 ("SBO Rules"), which caused a stir in the Indian corporate world. In this article, we shall attempt to demystify the concept of Significant Beneficial Ownership ('SBO') in India and the obligations thereunder.
What is SBO?
The meaning of SBO can be derived from section 90 of the Companies Act, 2013 ("Act") and Rule 2 of SBO Rules.
As per the definition of SBO under Rule 2(h) of the SBO Rules, an SBO in relation to a company is an individual who, either acting alone or in concert or through one or more persons or trusts, possesses either one or more of the following in a company:
- holds indirectly, or together with any direct holdings, not less than 10 per cent, of the shares;
- holds indirectly, or together with any direct holdings, not less than 10 per cent, of the voting rights in the shares;
- has the right to receive or participate in not less than 10 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
- has the right to exercise, or actually exercise, "significant influence" or "control" in any manner other than through direct holdings alone.
Where significant influence shall mean the power to participate, directly or indirectly, in the financial and operating policy decisions of the company but is not control or joint control of those policies.
Further, control shall mean the definition provided under section 2(27) of the Act, i.e., 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.
There is a duality regarding the ascertainment of the status of SBO, i.e., an objective test and a subjective test. While the objective test scrutinises the percentage of shares, voting rights and dividend rights, the subjective test requires the ascertainment of significant influence or control.
Regulatory Compliances
Every company must actively investigate to determine if any individuals hold significant ownership in the company. If such individuals are identified, the company shall have them complete a declaration using Form BEN-1.1 According to Section 90(5) of the Act, the company is required to notify in Form BEN-4 any person, it knows or suspects to be a significant beneficial owner, even if they are not a member of the company. Once the company receives the declaration per rule 3, it must submit a return in Form No. BEN-2 to the Registrar within thirty days of receiving the declaration.2
What is a UBO?
There is a similar concept of Ultimate Beneficial Owner ("UBO") in legislations issued under the aegis of RBI viz. Master Direction – Know Your Customer (KYC) Direction, 2016 and Prevention of Money-Laundering (Maintenance of Records) Rules 2005 ("PML Rules"). PML Rules, to identify UBO, require determining if there are individuals 'acting together' or through one or more juridical persons and meeting the threshold ownership of more than 10% of shares/capital/profits or controlling the appointment of a majority of directors or controlling the management or policy decisions in the reporting company. Furthermore, if no individual can be identified through the afore-mentioned criteria, an individual who holds the position of senior managing official shall be considered as UBO.
Conclusion
While there might be some overlapping similarities between the concept of UBO and SBO, some underlying differences remain between them. Owing to these differences, entities applying for registrations and approvals from RBI find themselves in a difficult place, as the RBI often asks them to provide detailed information vis-à-vis their UBO and SBO.
Footnotes
1. Rule 2A, Companies (Significant Beneficial Ownership) Rules, 2014
2. Rule 4, Companies (Significant Beneficial Ownership) Rules, 2014
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.