Article. FAQs on SBO Rules. Corporate Law Services Division 16 th June, 2018

Transcription

1 FAQs on SBO Rules Corporate Law Services Division 16 th June, 2018 Check at: Copyright: This write up is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 MCA vide its Notification dated June 13, 2018 has enforced the provisions of amended Section 90 of the Companies Act, 2013 and also issued the Companies (Beneficial Interest and Significant Beneficial Interest) Rules, ( Final Rules ) in relation to Significant Beneficial Ownership ( SBO ). This is one of the most onerous provision rolled out by MCA. The purpose of this Section is to ask companies Parde ke peeche kaun hai? Saamne aao!. In this regard, the following FAQs discusses various questions relating to the provisions dealing with theamended Section 90 and the Final Rules. 1. To which companies these provisions shall apply? The provisions are applicable to all companies i.e., pubic as well as private companies. 2. What is the meaning of beneficial interest? The meaning of the term has been provided in Section 21 (iii) of the Amendment Act, which amends the provision of Section 89(10) of the Act, provides the following- beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to (i) exercise or cause to be exercised any or all of the rights attached to such share; or (ii) receive or participate in any dividend or other distribution in respect of such share." However, it is pertinent to note that the said amendment has not yet been enforced by MCA. Therefore, to give a clear picture of amended Section 90, the enforcement of the amended Section 89 (10) shall be awaited. 3. What is the meaning of Significant Beneficial Ownership ( SBO )? As per the amended Section 90 of the Companies Act, 2013 ( Act ), SBO is referred as every individual who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of 1

3 section 2 of the Act (i.e., control of at least twenty per cent of total voting power, or of business decisions under an agreement). 4. The above definition empowers the government to prescribe other threshold limit for the determination of the SBO. Is there any other threshold limit apart from the percentage mentioned above? The Ministry has provided a lower threshold limit for the determination of the SBO through the Final Rules on SBO, issued by MCA on June 14, 2018, according to which- "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; Therefore, now the threshold limit for determination of SBO has been reduced to 10 %. 5. Who shall be the SBO (a) where the member is an individual? Where the member is an individual, his/her name must not be there in the register of members of the company and he/she should hold the ultimate beneficial interest of not less than ten percent. (b) where the member is a company? In this case, the SBO 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 10% share capital of the company or who exercises significant influence or control in the company through other means and do not have its name in the register of members of the company. (c) where the member is a partnership firm? In this case, the SBO 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 10% of capital or has entitlement of not less than ten percent of profits of the partnership and do not have its name in the register of members of the company.

4 (d) where no natural person is identified under (c) and (d) mentioned above? In this case, the SBO is the relevant natural person who holds the position of senior managing official and do not have its name in the register of members of the company. (e) where the member is a trust through its trustee? In this case, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with not less than 10% interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership and do not have its name in the register of members of the company. 6. Is there any exemption provided to the companies under the Final Rules? As per the Final Rules, the provisions shall not apply to the holding of shares of companies/body corporates, in case of pooled investment vehicles/investment funds such as Mutual Funds, Alterative Investment Funds (AIFs), Real Estate Investment Trusts(REITs) and Infrastructure Investment Trusts (lnvlts) regulated under SEBI Act. 7. Understanding the provisions with the help of few illustrations: Illustration 1: An illustration of simple indirect shareholding is as follows: In this illustration, Mr. X is the direct owner of A Ltd and owns 30% shareholding. Mr. Z is an indirect owner of A ltd and owns 70% shareholding.

5 Illustration 2: An illustration of both direct and indirect shareholding is as follows: 25 % 75 % 100 Mr. A P Ltd Q Ltd % Mr. Z In this case, Mr. A is holds directly 25% in P Ltd and Mr. Z holds 75% indirectly in P ltd. Illustration 3: In this illustration, we have a seemingly an unimportant 1% owner. But, in reality, this individual is the ultimate beneficial owner, with all the profits being delivered to the UBO in merely 1% shares. However, the same is not possible in India, as subsidiaries cannot hold shares in holding company (Section 19 of the Act) But of course, it is possible for a company not being a holding company.

6 Illustration 4: An illustration of simple indirect shareholding is as follows: In this illustration, there are multiple levels of indirect ownership. The three beneficiaries are clearly highlighted P2, P3 and P4. P2 has a 32% interest in the Target Co. (50% x 65% = 32%), P3 has 14%, and P4 has 50%. Note that P3 has both a direct and indirect interest in P Ltd. Illustration 5: Mr. A holds beneficial interest in P Ltd, which vertically owns Q Ltd, R Ltd, S Ltd and T Ltd. Should A disclose to each of them? Mr. A P Ltd Q Ltd R Ltd S Ltd T Ltd Yes. Illustration 6: Mr. A holds 60% of P Ltd, which holds 60% of Q Ltd. Can Mr. A claim that I have complied with my obligation having disclosed to P Ltd, and P Ltd should have disclosed my indirect holding to Q? Can Mr. A say that he has no idea about P s holding of Q?

7 No. The SBO should provide the declaration of its beneficial interest in all the companies. It is pertinent to note that the one who has control or significant influence cannot plead unawareness. Therefore, right upto the vertical spectrum, Mr. A will have to keep disclosing. Illustration 7: Mr. A holds 60% of P Ltd. Now, P Ltd holds 60% of Q Ltd, and Q Ltd holds 60% of R Ltd. Mr. A holds some 5% directly into R Ltd. So, should Mr. A disclose to P Ltd, Q Ltd and R Ltd? Yes. The definition of beneficial interest covers both direct as well as indirect holding. Therefore, the Mr. A should provide the declaration to all the companies. Illustration 8: Holds more than 10% Mr. A 1% Z Ltd. 9.5% Y Ltd. In this case, Mr. A shall be the SBO of Z ltd. Illustration 9: AIF 100% Z Ltd. In this case, the entire share capital is held by an AIF, therefore, there is no SBO (as per the exemption provided in Rule 8). 8. Is the Rules made for those AIFs (or pooled investments) which are organized as companies?

8 Mr. A 10% AIF 15% Z Ltd No. Rule 8 provides clear exemption to pooled investments. Therefore, the pooled investments operate as a blinker, there is no need to look beyond them. 9. In Para (i) to Explanation I of SBO Rules, what all will be considered to compute 10% of share capital? As per Explanation II of Rule 2 (e) of SBO Rules, instruments in the form of GDRs, CCDs, CCPs shall be treated as shares for the purpose of this clause. Accordingly, share capital shall also be construed. Eg: Capital Structure of X Ltd comprises of Equity Rs 100; CCPS Rs. 150 and CCDs Rs 50. Mr. A beneficially holds Rs. 25 of Equity in X Ltd and his name reflects in the register of members. X Ltd holds 50% of Equity in Z Ltd. Now we ascertain if Mr. A can be regarded as SBO for Z Ltd: Mr. A Holds Rs. 25 of Equity X Ltd. Equity Rs. 100; CCPS Rs. 150 & CCDs Rs. 50 Holds 50% Equity Z Ltd. So, Mr. A s % of share capital held in X Ltd (corporate member of Z Ltd) = 25/ ( ) i.e. 25/300 = 8.33% Therefore, Mr. A will not be regarded as SBO of Z Ltd. 10. Can there be a situation where a natural person is not an SBO for one company but is an SBO for another Company? Case 1 Mr. A X Ltd Y Ltd 10% 15% (registered owner)

9 Case 2 a. Whether Mr. A is an SBO for X Ltd? No, as he is the registered owner. b. Whether Mr. A is the SBO for Y Ltd? Yes. as per Para (i) of Explanation I of Rule 2 (e) of SBO Rules, Mr. A is the natural person who holds 10% in X Ltd. Therefore, Mr. A will be regarded as SBO in Y Ltd. c. Who has the onus to declare to Y Ltd? In the aforesaid case, it will be the onus of X Ltd to obtain declaration from Mr. A to be submitted to Y Ltd. Mr. A X Ltd Y Ltd Z Ltd 10% 90% 15% (registered owner) a. Whether Mr. A is an SBO for X Ltd? No, as he is the registered owner. b. Whether Mr. A is the SBO for Y Ltd? Yes. As per Para (i) of Explanation I of Rule 2 (e) of SBO Rules, Mr. A is the natural person who holds 10% in X Ltd. Therefore, Mr. A will be regarded as SBO in Y Ltd. c. Whether Mr. A is the SBO for Z Ltd? No. As per Para (i) of Explanation I of Rule 2 (e) of SBO Rules Mr. A holds 9% (10% of 90%) in Y Ltd which is the corporate shareholder of Z Ltd. Therefore, Mr. A will not be regarded as SBO for Z Ltd. 11. Can there be a situation where a natural person is a registered owner as well as SBO? Mr. A X Ltd Y Ltd 5% 95 % (registered owner) 15% Mr. A s direct holding in X Ltd: 5 %. However, as per Para (i) of Explanation I of Rule 2 (e) of SBO Rules, Mr. A is the natural person who holds 10% or more in Y Ltd but his name is not entered in the register of members of the company as the holder of such shares (for 15%). In this case, Mr. A is registered owner as well as SBO.

10 12. Will the shareholding of the relatives also be considered in determining the SBOs? The definition of SBO refers to every individual who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India holds beneficial interests. Therefore, for computing threshold of 10%, the combined holding of the person along with the holding of such other persons having common interest shall also be considered. 13. Are non-residents also covered by the said provisions? The definition of SBO includes non-residents as well. Therefore, the non-residents shall also be covered by the said provisions. 14. How does the law apply itself to those who are not within Indian jurisdiction? As per the amended provision of Section 90(5), The obligation is not only on the holder, but also on the companies, as they have to seek information from the person whom the company knows or has reasonable cause to believe to be: a) to be a significant beneficial owner of the company; b) to be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or c) to have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued, and who is not registered as SBO with the company as required under this section. 15. Whether Section 89 & 90 shall apply in case of the followings: (a) Pledge: Yes, if the all the rights attached thereto are also transferred (b) Transfer pending registration: Yes (c) Pooling of voting rights: Yes 16. What will be the case if the beneficial interest holder s name is borne on the register of members? In this case, the entire provision of Section 89 and 90 shall not be applicable. 17. What is the timeline for declaration by SBO?

11 Every significant beneficial owner is required to file a declaration in Form No. BEN- 1 to the company in which he holds the significant beneficial ownership: (a) on the date of commencement of the Final Rules within ninety days from such commencement; (b) Thereafter, within thirty days in case of any change in his significant beneficial ownership. Further, every individual, who, after the commencement of these rules, acquires significant beneficial ownership in a company is also required to file a declaration in Form No. BEN-1 to the company, within thirty days of acquiring such significant beneficial ownership or in case of any change in such ownership. 18. Is there any requirement of intimating the Registrar of Companies regarding the SBO? The declaration of beneficial interest received by the company, is required to be filed in Form No. BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of declaration by it, by the company. 19. Will the company have to keep any record of the SBOs? Every company is required to maintain a register of SBOs in Form No. BEN-3. Also, this register shall be open to for inspection during business hours, at such reasonable time of not less than two hours, on every working day as the board may decide, by any member of the company on payment of such fee as may be specified by the company but not exceeding fifty rupees for each inspection. 20. How will the company seek information from various persons about SBOs? Company is required to give notice seeking information in accordance with Section 90 (5) of the Act, in Form No. BEN Is there any exemption provided to equity listed companies or wholly owned subsidiaries of such companies? The draft rules provided exemption from compliance under the said section where the registered owner was a body corporate whose equity shares were listed on any stock exchange or was a wholly-owned subsidiary of such body corporate. Foreign listed companies were also proposed to be exempted. However, the Final Rules withdrew the proposed exemption.

12 22. Are the forms available in e-version? The format of the forms has been provided in the Final Rules. However. The e-version of the forms are still awaited.