Beneficial Ownership Disclosure: Rules Of The Game Get Clearer

Misuse of corporate vehicles has prompted regulatory authorities world over to lay down mechanisms to identify real owners behind these structures. For instance, the English company law was amended in 2015 to require certain companies and limited liability partnerships to create and maintain a ‘Persons with Significant Control’ Register and make it available to public.

India too had taken the first step towards this in January last year by amending section 90 of the Companies Act, 2013 to say that every individual – acting alone or together- who is a significant beneficial owner (SBO) must disclose this fact. But the rules, notified in June last year, to identify SBOs were unclear, open to interpretation and onerous. This had prompted the Ministry of Corporate Affairs to extend the disclosure deadline in September last year.

Now the revised rules, issued last week, are amply clear in their scope and companies have four months to disclose individuals who are their significant beneficial owners.

There is a much clearer articulation of how one determines a significant beneficial owner when the shareholding is held through various corporate structures like a company, trust, partnership firm or a pooled investment vehicle etc, Bharat Vasani, partner at Cyril Amarchand Mangaldas said.

Clear Trigger And Scope

Last year’s version of SBO rules had posed two challenges for industry – absence of certain definitions and the calculation of trigger for these rules. Both have now been addressed by the ministry.

Now, a significant beneficial owner has been defined to include any individual who, acting alone or together through one or more persons or trust, indirectly holds in the reporting company:

• More than 10 percent of its shares, or
• More than 10 percent of voting rights, or
• Right to receive more than 10 percent of distributable dividends in a year.

Any equity or quasi-equity instrument - which can be converted into equity at a later stage - will be considered in counting this 10 percent, Vasani explained.

Any direct holdings of such an individual will also be added to the indirect holdings to determine threshold breach. But if an individual meets any of these thresholds ONLY through direct holdings, no disclosure is required under these rules.

If an individual doesn’t meet these numerical thresholds but exercises control or significant influence over the reporting company, then too disclosure will need to be made.

Control will need to be determined as per the company law. And significant influence, which wasn’t defined in the 2018 version, will mean the power to participate- directly or indirectly- in the financial and operating policy decisions of the reporting company such that it doesn’t amount to control or joint control.

Vasani pointed out to the 2018 amendment of the Companies Act, 2013 for a better understanding of ‘significant influence’. The amendment had stated that ‘significant influence’ means control of at least twenty percent of total voting power, or control of or participation in business decisions under an agreement.

Applicability To Structures

The revised rules prescribe detailed triggers for disclosure when there’s a company, partnership, trust or a pooled vehicle between the reporting company and the individual.

As detailed in the chart below - where the intermediate entity is a company, an individual will be a significant beneficial owner if he

• owns a majority stake in this company or
• holds majority stake in the ultimate holding company – registered in India or abroad- which in turn is a member of the reporting company.

Majority stake is defined to mean more than 50 percent shares, voting rights or right to receive more than 50 percent of distributable dividends.

The thresholds become irrelevant if the individual exercises significant influence or control over the reporting company.

To reiterate, SBO rules won’t be triggered if the numerical or significant influence/control thresholds aren’t met.

Unlike the 2018 version, the revised rules specifically lay down who would be the significant beneficial owner where the intermediate entity is a trust of any kind- discretionary or charitable trust, specific trust or a revocable trust.

The revised rules offer significant relief to foreign private equity funds. Earlier, the concern was that foreign private equity funds may need to disclose the individual behind the General Partners. Now, the rules specify that if the intermediate entity is a pooled investment vehicle based in a Financial Action Task Force or FATF compliant jurisdiction, then the general manager, investment manager or chief executive officer can be disclosed as the significant beneficial owner.

Exemptions Widened

Under last year’s rules, the exemption was applicable if the intermediate vehicle was a mutual fund, Alternative Investment Fund, Real Estate Investment Trust and Infrastructure Investment Trust regulated by market regulator Securities and Exchange Board of India.

Now, the list has been expanded to include:

• An authority constituted by the government for administration of the Investor Education and Protection Fund.
• Central government, state government or any local authority.
• Investment vehicles regulated by RBI, IRDAI or the pension regulator.

Interplay With Other Laws

The requirement to disclose the ultimate beneficial owner is mandated under various other legislations – SEBI’s ICDR Regulations, benami law, the income tax law, and prevention of money-laundering law, Vasani pointed out. This would require companies to view these disclosures comprehensively and the declaration under the company law will need to be in conformity with these other statutes as well, he added.

And then there is the interplay with Benami law. The Benami Act exempts certain categories of persons from the purview of benami transactions but disclosures under company law isn’t one of them. Vasani explained that if the consideration of shares is paid or provided by others and shares are held for the benefit of the person who provided the consideration, then the authorities will have the right to acquire the shares unless it can be shown that shares were held in a fiduciary capacity.