Recently, the Indian government has introduced several new reporting obligations under the Companies Act, 2013 (the "Act") for Indian companies in respect of their registered office address and dealings with micro and small enterprises ("MSEs"). Additionally, the reporting requirements for significant beneficial ownership have been revised. This update discusses the implications of the new reporting requirements.
Reporting requirements for significant beneficial ownership
In June 2018, the Indian government notified the Companies (Significant Beneficial Ownership) Rules, 2018 (the "SBO Rules") imposing reporting obligations on individuals having significant beneficial ownership in companies (see our update on this at https://www.majmudarindia.com/insight/impact-of-the-new-reporting-requirements-under-indias-foreign-investment-regulations-and-company-law/). However, the SBO Rules did not provide a great deal of clarity on the nature and extent of disclosure, and therefore, the reporting obligation was put on hold.
Pursuant to consultations with various stakeholders, the Indian government has notified the Companies (Significant Beneficial Ownership) Amendment Rules, 2019 the ("SBO Amendment Rules"). Now, a "significant beneficial owner" will mean any individual (acting alone or together or through one (1) or more persons or a trust) who possesses one (1) or more of the following rights in an Indian company (the "Reporting Company"):
- holds indirectly, or along with any direct holdings, at least 10% of the shares;
- holds indirectly, or along with any direct holdings, at least 10% of the voting rights in the shares;
- holds indirectly, or along with any direct holdings, the right to receive at least 10% of the total distributable dividend or any other distribution in a financial year; or
- has the right to exercise or actually exercises significant influence or control other than by virtue of his or her direct shareholding. For this purpose, "significant influence" has been defined as the power to participate in the financial and operating policy decisions of the Reporting Company.
In respect of the foregoing rights, the SBO Amendment Rules clarify that an individual cannot be considered as a significant beneficial owner if he or she holds the above mentioned rights or entitlements directly. Further, the SBO Amendment Rules define the term "indirectly" in respect of each possible category of member of a Reporting Company apart from an individual. For instance, if the member is a body corporate, the individual must hold either a majority stake in that body corporate or a majority stake in the ultimate holding company of such body corporate. For this purpose, a "majority stake" will mean holding:
- more than 50% of the equity share capital of the body corporate;
- more than 50% of the voting rights in the body corporate; or
- the right to receive more than 50% of the distributable dividend or any other distribution by the body corporate.
The deadline for significant beneficial owners to report significant beneficial ownership interest to their respective Reporting Companies under Form No. BEN-1 has been set as May 9, 2019. This reporting obligation is not applicable, among others, to alternate investment funds, real estate investment funds and government owned entities or local authorities. Upon receipt of the disclosure, the Reporting Company will have to comply with obligations of maintaining registers and filing returns as per the SBO Rules.
In our view, the SBO Amendment Rules provide much needed clarity on the meaning of significant beneficial ownership, enabling such owners and Reporting Companies to identify whether their interest is required to be reported. Moreover, while the compliance burden still remains, the streamlining of the definition of indirect holdings has exempted a large number of individuals who were previously considered to be included under the purview of the SBO Rules.
Verification of registered office address
The Indian government has introduced a reporting requirement for verification of the details of the registered office of an Indian company. Pursuant to the new requirement, all companies incorporated on or before December 31, 2017 will be required to file Form INC-22A on or before April 25, 2019 and provide the following:
- latitude and longitude of the registered office address;
- photograph of the registered office showing the inside and outside of the building;
- photograph of at least one (1) director or key managerial personnel, who will affix his or her signature on the form, while such director or key managerial personnel is inside the registered office;
- e-mail address of the company; and
- details of the current statutory auditors, cost auditors, company secretary, chief financial officer and directors of the company.
This requirement will not apply to companies which: (i) have been struck off from the register of companies; (ii) are in the process of being struck off; (iii) are under liquidation; or (iv) have been amalgamated or dissolved.
If a company fails to file Form INC-22A before the due date, it will not be permitted to file various other e-forms mandatorily required under the Act until Form INC-22A has been duly filed along with a penalty of INR10,000 (Indian Rupees Ten Thousand).
The objective behind introducting this reporting requirement is to ensure that companies maintain active and operational registered offices. In our view, this reporting requirement is unlikely to achieve this objective, as practically speaking, there is no way for the authorities to verify whether the address provided by a company actually continues to function as the registered office over a period of time. Moreover, the requirement for providing photographs of the director and the office building appear to be unnecessary and cumbersome.
Reporting for dealings with MSEs
In November 2018, the Indian government had directed all companies who receive goods or services from MSEs (which are defined based on capital investments and turnover thresholds) and have delayed payments to such MSEs beyond forty-five (45) days from the date of acceptance of such goods or services to file a half-yearly return disclosing the details of such pending dues.
Now, the Indian government has directed all companies to provide details of amounts due to MSEs beyond forty-five (45) days as on January 22, 2019 in MSME Form 1 along with reasons for the delay in payment. This reporting will have to be made within thirty (30) days of the date on which the Indian government notifies MSME Form 1, which is pending to be notified as on date.
Moreover, companies will also be required to file details of pending dues by October 31 of each year in respect of dues outstanding during the period from April to September and by April 31 for the period from October to March.
This reporting requirement has been introduced to ensure that MSEs, which do not have access to a large amount of capital, receive payment for their goods and services in a timely manner. However, in our view, the requirement for filing the return every six (6) months will increase the compliance burden on companies.
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