Significant Beneficial Owner (SBO) under Companies Act, 2013
The Companies Act, 2013, introduced the concept of Significant Beneficial Owners (SBOs) through Section 90. This aims to enhance transparency and accountability by identifying individuals who exert substantial influence or control over a company, even if their names do not appear on the register of members.
Importance of SBOs
1. Transparency and Accountability:
Identifying SBOs reveals the true ownership structures of companies, discouraging conflicts of interest and promoting better corporate practices. This allows stakeholders to make informed decisions based on a clear understanding of who controls the company.
Enhanced transparency reduces the risks of fraudulent activities and ensures that companies operate within the legal framework.
2. Compliance with FATF:
SBO reporting aligns India with international efforts to combat money laundering and terrorist financing by identifying individuals who might be hiding their involvement in a company.
This alignment with the Financial Action Task Force (FATF) standards enhances India's global standing and promotes a more secure financial environment.
Identifying SBOs: A TwoPronged Approach
Section 90 outlines two tests for identifying SBOs:
1. Objective Test (Quantitative):
An individual is considered an SBO if they directly or indirectly hold at least 10% of the shares or voting rights in the company, or receive at least 10% of the dividends or other distributions.
This clear numerical threshold simplifies the identification process, making it easier for companies to comply with the regulations.
2. Subjective Test (Qualitative):
This test focuses on influence or control. An individual can be an SBO if they have the right to exercise, or are currently exercising, significant influence or control over the company, even without holding a majority stake directly.
Influence or control can be exerted through various means such as controlling entities that hold significant shares, influencing management decisions, or having veto power over key transactions.
This test ensures that individuals who may manipulate or direct company operations without direct ownership are identified and reported.
Challenges and Recent Judgements
Despite its benefits, SBO identification faces challenges:
1. Complex Ownership Structures:
Companies with intricate webs of subsidiaries, partnerships, and trusts can make it difficult to definitively identify all SBOs.
This complexity requires companies to perform thorough investigations and maintain detailed records of their ownership structures.
2. Defining “Significant Influence or Control”:
The ambiguity surrounding what constitutes “significant influence or control” can lead to uncertainty and potential disputes.
Clearer guidelines and precedents are needed to help companies interpret and apply these terms accurately.
Case Examples
While there are no reported judgments solely on SBO identification yet, some recent cases shed light on the interpretation of “control” under the Companies Act:
1. In the Matter of LinkedIn Technology (Order for Penalty):
This order from the Ministry of Corporate Affairs (MCA) highlights that exercising control doesn’t necessarily involve direct decisionmaking authority.
In this case, the MCA considered the CEO and Managing Director of a parent company to be SBOs of the Indian subsidiary due to their significant influence over the subsidiary’s operations.
Governing Laws and Rules
1. Section 89 of the Companies Act, 2013
2. Section 90 of the Companies Act, 2013
3. Companies (Significant Beneficial Owner) Rules, 2018
4. Companies (Significant Beneficial Owners) Second Amendment Rules, 2019
Meaning of Beneficial Interest
As per Section 89 (10) of the Act, beneficial interest in a share includes, directly or indirectly, the right or entitlement to:
1. Exercise any or all of the rights attached to such share.
2. Receive or participate in any dividend or other distribution in respect of such share.
Definition of SBO
As per Rule 2(h) of the Companies (Significant Beneficial Owner) Rules, 2018, an SBO is an individual who, alone or together with others, possesses one or more of the following rights or entitlements in a reporting company:
1. Holds indirectly, or together with direct holdings, not less than 10% of the shares.
2. Holds indirectly, or together with direct holdings, not less than 10% of the voting rights.
3. Has the right to receive or participate in not less than 10% of the total distributable dividend or any other distribution in a 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 alone.
Procedural Requirements for SBOs
1. Declaration by SBO:
Individuals identified as SBOs must file a declaration in Form BEN1 to the reporting company within 90 days of the commencement of the rules, or within 30 days of becoming an SBO or any change therein.
This declaration must detail the nature of the interest and other relevant particulars.
2. Company's Responsibility:
The reporting company must file a return in Form BEN2 with the Registrar within 30 days of receiving the SBO declaration.
The company must also maintain a register of significant beneficial owners in Form BEN3, ensuring that this information is readily available for inspection.
3. Notice to Members:
The company must give notice in Form BEN4 to any person it believes to be an SBO, or to have knowledge of an SBO, requiring them to provide information within 30 days.
This proactive approach ensures that companies diligently identify and document all SBOs.
Application to the Tribunal
If a person fails to provide the required information or provides unsatisfactory information, the company must apply to the Tribunal (NCLT) within 15 days for an order restricting the rights attached to the shares, including:
1. Transfer Rights: Restrictions on the transfer of shares.
2. Voting Rights: Suspension of voting rights.
3. Dividend Rights: Suspension of rights to dividends.
The tribunal, after giving both parties an opportunity to be heard, will pass an order within 60 days of receiving the application. If no application for relaxation or lifting of restrictions is made within one year of the order, the shares may be transferred to the Government's account (IEPF Account).
Non-Applicability
The SBO Rules do not apply to shares held by:
1. The authority constituted under Section 125(5) (IEPF).
2. Its holding reporting company (details to be reported in Form BEN2).
3. Central or State Governments or local authorities.
4. SEBI registered Investment Vehicles like mutual funds, AIFs, REITs, and InvITs regulated by SEBI.
Enhancing Transparency and Governance
SBO reporting is a significant step towards improving transparency and accountability in Indian corporate governance. By identifying and disclosing the true controllers of companies, India aligns with international standards, thereby fostering investor confidence and promoting a more robust investment climate. However, to navigate the challenges of SBO identification, particularly in complex corporate structures, the government should provide clear guidelines and leverage technology driven solutions for efficient implementation.
Future Directions
To further enhance the effectiveness of SBO reporting, the following measures could be considered:
1. Clearer Guidelines:
The government should issue detailed guidelines and FAQs to help companies navigate complex ownership structures and accurately identify SBOs.
These guidelines should include case studies and examples to illustrate various scenarios.
2. Technological Solutions:
Utilizing advanced data analytics and blockchain technology can streamline the process of identifying SBOs and maintaining accurate records.
Technology can also facilitate realtime updates and ensure compliance with regulatory requirements.
3. Stakeholder Collaboration:
Collaboration between the government, industry bodies, and companies can lead to the development of best practices and continuous improvement in SBO reporting.
Regular workshops and training sessions can help stakeholders stay updated with the latest regulations and compliance strategies.
4. International Cooperation:
Engaging in international cooperation and sharing best practices with other countries can help India strengthen its regulatory framework and combat financial crimes more effectively.
Participation in global forums and adherence to international standards will enhance India's reputation as a transparent and compliant business environment.
By focusing on these improvements, India can leverage SBO reporting to not only enhance transparency and investor confidence but also position itself as a leader in adopting best practices for corporate governance.
Fri, 28-Jun-2024