Tag Archives: beneficial owner

Highlights of the Companies Amendment Act, 2019

The Ministry of Corporate Affairs has amended the Companies Act 2013 vide the Companies (Amendment) Act, 2019 (the “Amendment Act”) notified on 31 July 2019. The Amendment Act takes into account the amendments that were already notified in the Companies (Amendment) Ordinance, 2018, which came into force on 2 November, 2018.

The major changes under the Amendment Act are broadly aimed at:

  • to improve the existing prosecution system by imposition of stricter penalties, under various sections, on the companies as well as the officers in default. Although this will increase the monetary burden on the company but will gradually help to reduce non-compliances.
  • to re-categorize certain compoundable offences as civil defaults and remove the criminal liability attached to them. The amendment has re-categorized certain penal provisions, where defaults that were punishable with fine/ and imprisonment have been amended to penalty. Now, the offences can be easily adjudicated with the authorities without going into time-consuming application procedures.
  • to transfer some of the approval powers from NCLT to the Central government i.e. ROC to reduce the burden of tribunals.
  • to bring accountability to the CSR activities undertaken by the Companies not only in letter but in spirit too.
  • greater accountability with respect to filing documents related to creation, modification and satisfaction of charges; non-maintenance of registered office to trigger de-registration process; holding of directorships beyond permissible limits to trigger disqualification of such directors, have also been introduced in the Amendment Act. Reforms pertaining to declaration of commencement of business provision.

Key Highlights of the Amendment Act:

Sr. No.

Category Highlights on the amendments
1.

 

Approval for Change in Financial Year

Any company or body corporate which is a holding company or a subsidiary or an associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, may change its financial year with the approval of Central Government.

Prior to amendment, Tribunal’s approval was required.

2. Requirement of obtaining approval for Commencement of Business

Companies incorporated after Amendment Act, shall commence its business or exercise any borrowing powers only after filing a declaration with respect to the receipt of paid up value of the shares from the subscribers to the memorandum and the verification of Registered office within 30 days from the date of incorporation in with the Registrar of Companies. The declaration shall be filed within 180 days from the date of Incorporation.

3. Physical verification of Registered Office of the Company

Pursuant to amendment in Section 12, the Registrar is empowered to do the physical verification of the Registered office of a Company if it has reasonable cause to believe that the company is not carrying on any business or operations also to remove the name of the Company from the register of companies.

4. Approval for conversion of Public Company to Private Limited Company

Erstwhile, the Tribunal had authority approve or reject any alteration in the Articles of the Company relating to conversion of a public company into a private company. Pursuant to this amendment, the Central Government is empowered.

5. Securities to be in Dematerialized Form

A new provision has been inserted to Section 29, whereby securities of certain class or classes of unlisted companies, the securities shall be held or transferred only in dematerialized form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder.

6. Registration of Charge (due date for filing is reduced)

Section 77 has been amended whereby the extended period of 270 days has been now restricted to 60 days for filing an application to register a charge.

7. Responsibility of Identifying beneficial owner

Sub-section 4A has been inserted whereby every company shall take necessary steps to identify an individual who is a significant beneficial owner in relation to the company and require him to comply with the provisions of section 90. The introduction of this section brings more clarity for casting duty on company to identify and report on Significant Beneficial Owner to the Registrar. Further, Central Government has been empowered to make rules for the section.

8. Consequence of non-filing of Annual Return

Penalty provisions on non-filing of the annual return within the prescribed timeline have been revised and a further penalty of INR 100 per day on continuing offence subject to a maximum of 5 Lakhs has been imposed.

9. Section 117 (Resolutions and Agreements to be Filed)

The word ‘fine’ has been substituted with the word ‘penalty’ in the penalty provision and an additional penalty on continuing offence of INR 500 per day subject to maximum of INR 5 Lakhs have been imposed.

10. Section 135 (Corporate Social Responsibility)

Clarification has been provided for calculation of profits in case of newly incorporated Company by inserting following words under sub-section 5 “or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years”. On the unspent amount, a provision has been added to transfer the unspent amount to a fund specified under schedule VII within six months from the expiry of financial year has been provided unless it relates to an ongoing project.

In relation to any amount being unspent which relates to an ongoing project shall be transferred to a separate account to be opened by the Company to be called as the Unspent Corporate Social Responsibility Account within a period of 30 days from the end of Financial Year and such amount shall be spent within the period of three financial years from the date of transfer and in case of failure such amount shall be transferred to a fund specified in Schedule VII within 30 days from the date of completion of third financial year.

In case of default, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default, shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.”

11. Automatic Vacation in case of Disqualification of Director

A new clause (i) has been inserted under Section 164 as “he has not complied with the provisions of sub-section (1) of section 165” which is one of the grounds of disqualification of a director where, if he/ she breaches the limits of maximum directorship allowed thereunder.

It is to be noted that falling under any of the clauses of Section 164 leads to automatic vacation of office from all the existing companies.

12. Stock options to Independent Director

Provisions pertaining to the prohibition on entitlement of stock option by independent directors. However, this omission shall not have any impact as Section 149 (9) also provides similar prohibition.

Further, the minimum fine of 1 lakh rupees and maximum fine of 5 lakhs rupees have been replaced with a penalty of INR 1 lakh for the defaulting person and in addition where any default has been made by a company, the company shall be liable to a penalty of five lakh rupees.

13. Oppression & Mismanagement

There is an insertion of 3 new sub-sections to the Section, where for the purpose of class of companies as may be prescribed the matter shall only be made before principal bench of the Tribunal and if in the opinion of Central government there exists circumstances as mentioned under sub section 3 clause (a) (b) (c) and (d), the Central Government may initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of a director or any other office connected with the conduct and management of the company.

14. Powers of Tribunal in case of Oppression & Mismanagement

A new sub-section (4A) has been inserted to cast responsibility on the tribunal to record its decision at the conclusion of hearing case in respect of sub-section (3) of section 241, specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

15. Section 243 (Consequence of termination or modification of certain agreements)

New Sub-sections (1A) and (1B) to the section has been inserted whereby in case a person is declared as not a fit or proper person pursuant to section 242(4A) under the case of oppression and mis-management, shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the said decision provided that the Central Government may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of five years.

Further, according to Section 243(1B), any person on being removed as Director or any other office connected with the conduct and management of affairs of the company, shall not be entitled to, or be paid, any compensation for the loss or termination of office.

16. Petition for winding up by Registrar

There is an amendment in sub-section (3) which enables the Registrar to present a petition for winding up under section 271 with the only exception mentioned in clause of Section 271 which talks about the situation where if the company has, by special resolution, resolved that the company be wound up by the Tribunal the Registrar may not present such petition.

17. Compounding of offences

The amendment has increased the limit of offence for compounding before the Regional Director from 5 Lakh rupees to 25 Lakh rupees in 441(1)(b). Further, it has been clarified in sub-section (6), that any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.

18. Penalty for repeated default

New Section 454A has been inserted which talks about the penalty of repeated default. In this section a company or an officer of a company or any other person shall be liable to the twice the amount of penalty, who had already been subjected to the penalty under the Act. However, the subsequent default has to be repeated within 3 years from the date of order imposing penalty for earlier default.

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Determination of Significant/Ultimate Beneficial Ownership under the Indian Laws and Laws of other jurisdictions

The global scenario was riddled with the issue of money laundering, bribery, corruption, insider trading, tax fraud, terrorist financing and other illegal activities. These global issues were suggested to be combated by the Financial Action Task Force (FATF), an inter-governmental body established in 1989. The FATF was set up with the objective to lay down standards and promulgate efficient execution of legal, operational and regulatory measures for combating these.

The Guidance on Transparency and Beneficial Ownership released in October 2014 (which can be accessed at http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf) (“Recommendations”), noted that corporate entities such as companies, trusts, foundations, partnerships and other types of legal persons and arrangements enter into an array of activities, both entrepreneurial and commercial in nature. The Recommendations note that these entities have been misused on more than one instance in various money laundering, bribery, corruption, insider trading, tax fraud, terrorist financing and other illegal activities. An exposure of some of these activities became widely known as “The Panama Papers”. These entities made it easier to convert and camouflage the income received from these activities as a part of the revenue stream of the corporate entities and the FATF operates to unmask this camouflage and promote transparency.

The Ministry of Corporate Affairs (MCA) notified the provisions surrounding disclosure of Significant Beneficial Ownership on 6 June 2018. In addition to notifying the provisions under the Companies Act, 2013 (Act), the MCA notified the Companies (Significant Beneficial Owners) Rules, 2018 (“Rules”) on June 13, 2018. Section 90 of the Act read with the Companies (Significant Beneficial Owner) Rules, 2018 are notified with an intent to ensure adequate, accurate and timely information on the beneficial ownership of companies to the regulatory authorities and to identify and verify the identity of the individuals who ultimately own and control a corporate entity.

Legal Framework under Indian Laws

Framework under the Companies Act

The intent of Section 90 of the Companies Act, is to determine the identity of the person behind the curtain who is having a significant ownership of the company and is essentially controlling the management and daily affairs of the company. (For a more detailed reading regarding the applicable rules and the intricate nuances, please refer to our earlier post, which can be accessed here.  

Reading of the Act and the Rules together, every person who, while acting alone or together or through one or more persons or through a trust, hold beneficial interest of not less than 10% of the shares in the company with the names of such owners not being entered in the register of members of the company as the holder of such shares would qualify as significant beneficial owners and are required to make a declaration to the company in which significant beneficial ownership is held. The declaration should specify the nature of beneficial interest by way of Form No. BEN-1. The Company is under an obligation to make a filing of Form No. BEN-2 on receipt of the declaration received by the significant beneficial owner within 30 (thirty) days of receipt of the declaration. The Company is under an additional obligation to maintain a register of significant beneficial owners and keep them open for inspection by shareholders of the Company. The availability of register for inspection is in line with the original intent of promoting transparency regarding the structure of companies. The onus of disclosure regarding significant beneficial ownership has been laid primarily on natural persons holding, either directly or indirectly, independent of their domicile or residential status. The company can serve a notice seeking information under Form BEN-4. The person on whom the notice has been served is required to revert to the company within 30 days of receipt of notice. Wherein the company is not satisfied with information provided or person fails to furnish required information, is entitled to apply to the Tribunal within 15 days of expiry of the period mentioned in the notice.

Framework under other Indian legislations

The identification and reporting of significant beneficial ownership is an issue that has been earlier dealt with under other legislations as well before the Act and Rules. The various legislations that it has been dealt with under earlier are:

Prevention of Money Laundering Act, 2002 (PMLA): The PMLA puts an onus on the banks, financial institutions and intermediaries for the identification of beneficial owners of their clients. The PMLA defines a beneficial owner as “an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.”

SEBI Guidelines: The concept of beneficial ownership has been dealt under the SEBI guidelines by way of Master Circulars release by SEBI which are:

a. SEBI Master Circular No. CIR/ISD/AML/3/2010 dated December 31, 2010: This Master Circular puts a mandatory onus on all registered intermediaries to obtain all information about their clients and additionally are required to identify and verify the identity of persons who beneficially own or control the securities account as part of their Client Due Diligence policy.

b. SEBI Master Circular No. CIR/MIRSD/16/2011 dated August 22, 2011 and MIRSD/SE/Cir21/2011 dated October 5, 2011: This Master Circular mandates the identification of beneficial owners by way of Prescribed uniform Know Your Client (KYC) requirements for the securities markets.

c. SEBI Master Circular No. CIR/MIRSD/2/2013 dated January 24, 2013: This Master Circular provides uniform guidelines on identification of BO, based on Government of India’s consultation with regulator.

RBI Master Direction on KYC, 2016 (Master Direction) and Rule 9 of the PML (Maintenance of Records) Rules, 2005: The Master Direction defines a beneficial owner as “a natural person(s), who, whether acting alone or together, or through one or more juridical person, has/have a controlling ownership interest or who exercise control through other means”. The Master Direction defines controlling ownership interest as ownership of/entitlement to more than 25 per cent of the shares or capital or profits of the company and control as the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

Legal framework under other jurisdictions[1]

Jurisdiction Term used Governing legislation Definition
United Kingdom Person with significant control Companies Act, 2006[1] Designated ‘person with significant control’ (PSC) defined as individual who holds directly or indirectly more than 25% of shares/voting rights in company; has right to appoint or remove majority of board of directors; or has right to exercise/actually exercises significant influence or control over company/trust/ firm.
United States of America Beneficial Owner FinCEN’s Beneficial

Ownership Rules[2]

Any individual who, directly or indirectly, owns 25 percent or more of the legal entity customer; and One individual who has “significant responsibility to control, manage, or direct the legal entity.
Brazil Final beneficiary The Brazilian Federal

Revenue’s Normative

Instruction[3]

An individual that holds control or significantly influences the legal person to be registered, which occurs when the individual (i) holds, directly or indirectly, percentage superior to 25% of the corporate capital of such person or (ii) holds or exercises great influence, directly or indirectly, on the corporate deliberations and has the power to appoint the majority of the managers of the legal entity, even without controlling it.
European Union Beneficial Owner European Commissions

Anti-Money Laundering

Directive[4]

Any natural person who ultimately owns or controls customer, and/or natural person on whose behalf transaction or activity is conducted.

[1] Section 790C read with Schedule 1A of the Companies Act, 2006

[2] Section 1010.230(d), FinCEN’s Beneficial Ownership Rules

[3] Article 8, The Brazilian Federal Revenue’s Normative Instruction 1634

[4] Paragraph 13, Directive (EU) 2015/849 of the European Parliament and of the Council, 20 May 2015

Key Differences between Indian and legislations from other jurisdictions

Key Points of Legislations under other jurisdictions Indian Legislation Differences
United Kingdom i.    Individual who holds directly or indirectly more than 25% (twenty-five) of shares/ voting rights in company;

ii.   has right to appoint or remove majority of board of directors; or

iii.  has right to exercise/ actually exercises significant influence or control over company/ trust/ firm.

i.    the natural person who holds 10% (ten) of the share capital of the Company;

ii.   who exercises significant influence;

iii.  control through other means

The provisions in UK and India differs in:

i.    the threshold of the shareholding percentage.

ii.   An additional qualification regarding the right to appoint or remove majority of board of directors in the UK legislation.

United States of America i.    Individual who, directly or indirectly, owns 25 percent or more of the legal entity customer; and

ii.   One individual who has “significant responsibility to control, manage, or direct the legal entity.

The point of difference between the US and Indian provisions is the threshold of the share holding percentage.
Brazil Individual that holds control or significantly influences the legal person to be registered, which occurs when the individual:

i.    holds, directly or indirectly, percentage superior to 25% of the corporate capital of such person or

ii.   holds or exercises great influence, directly or indirectly, on the corporate deliberations and has the power to appoint the majority of the managers of the legal entity, even without controlling it.

The points of difference between the Brazil and Indian provisions are:

i.    the threshold of the share-holding percentage.

ii.   The Indian provision lays an emphasis on the concept of control whereas in the Brazilian provision, a person may be deemed as a final beneficiary if influence is exercised even without there being the presence of control.

European Union Any natural person who ultimately owns or controls customer, and/or natural person on whose behalf transaction or activity is conducted.

The key point of difference between the EU provision and the Indian provision is that where a prescribed threshold has been provided under the Indian law, the EU legislation lacks one. The EU lays an emphasis on who the ultimate owner behind the corporate veil is without prescribing a minimum threshold as a qualification.

From the comparison elucidated above, it can be seen that the threshold for determination of significant beneficial ownership is more stringent in India as compared to the legislations of other jurisdictions. The lower threshold increases the scrutiny of ultimate ownership. It would help if there is clarity on “exercising control through other means” constitute.

Author: Mr. Spandan Saxena

 

[1] Disclaimer: It is recommended that the reader refer the laws of the analyzed jurisdictions and consult a person who is an expert in the following jurisdictions. The aforementioned jurisdictions have merely been used for an analytical purpose and do not constitute a legal opinion in any manner whatsoever.

[2] Section 790C read with Schedule 1A of the Companies Act, 2006

[3] Section 1010.230(d), FinCEN’s Beneficial Ownership Rules

[4] Article 8, The Brazilian Federal Revenue’s Normative Instruction 1634

[5] Paragraph 13, Directive (EU) 2015/849 of the European Parliament and of the Council, 20 May 2015

Significant Beneficial Ownership: Who is the real owner of the shares?

The recent changes to Section 90 of Companies Act, 2013, is to determine the identity of the person behind the curtain who is having a significant ownership of the company and is essentially controlling the management and daily affairs of the company. The Ministry of Corporate Affairs notified the Companies (Significant Beneficial Owners) Rules, 2018 (“Rules”) on 13 June 2018. These Rules were made in exercise of powers provided under Section 90 of the Companies Act, 2013 (Act) which was notified on 6 June 2018.

At present, there are two separate definitions for the determination of a significant beneficial owner. The first, as per Section 90 of the Act, an individual who holds at least 25 (twenty-five) percent of beneficial interest in the company would be categorised as a significant beneficial owner. Such individual can hold beneficial interest either alone or together or through one or more persons, with such person or persons including person resident outside India, or a trust, with such trust including a trust outside India.

The second definition of significant beneficial ownership has been provided under the Rule 2(e) of the Rules, which ascribes the categorisation of a significant beneficial owner to an individual. However, a major deviation under the Rules from Section 90(1) is that the threshold provided for an individual being classified as a significant beneficial owner is 10 (ten) percent in contrast to the threshold of 25 (twenty-five) percent prescribed under the Act. Moreover, the definition as per the Rules provide for an additional condition that the name of such individual who is holding beneficial interest should not be entered in the register of members.

Both definitions have deemed a necessary condition that an individual must be holding beneficial interest in the company to be deemed as a significant beneficial owner. The term beneficial interest has been defined under Section 89(10) as the right of entitlement of a person alone or together with any other person, indirectly or directly, through any contract or arrangement, to exercise any or all rights attached to the shares; or to receive or participate in any dividend or any such distribution in respect to shares held.

Despite the contradiction in the threshold for determination of significant beneficial ownership in a company, the threshold specified in the Rules would be considered as the applicable threshold. This is because Section 90 of the Act provides that the beneficial interest should not be less than 25 (twenty-five) percent or any other percentage as may be prescribed. Therefore, the threshold of 10 (ten) percent as prescribed under the Rules would be the final threshold percentage to determine significant beneficial ownership.

The application of the Rules extends to companies which has shareholders apart from individuals and natural persons with such shareholders holding beneficial interest in the company as per prescribed limits. The application of these rules however, does not extend to holding of shares in instances of pooled investment vehicles or investment funds such as AIFs (Alternative Investment Funds), Real Estate Investment Trusts, Mutual Funds, Infrastructure Investment Trusts.

The Rules elucidate that a beneficial interest would include right of entitlement held either alone or jointly with another person, be it directly or indirectly under any contract or arrangement. The right of entitlement would include the right to exercise any or all rights attached to such shares and receive or participate in any dividend or other distribution. Beneficial owners would be such persons holding a beneficial interest.

The rules deem significant beneficial owners to be such individuals, who while acting alone or together or through one or more persons or through a trust, hold beneficial interest of not less than 10% of the shares in the company with the names of such owners not being entered in the register of members of the company as the holder of such shares.

In cases where the beneficial interest is possessed by persons other than individuals or natural persons, the significant beneficial ownership would be determined as follows:

  1. Where the member is a company – the significant beneficial owner would be the natural person who holds 10 (ten) percent of the share capital of the Company or who exercises significant influence or control in the company through other means.
  2. Where the member is a partnership firm – the significant beneficial owner would be the natural person who holds 10 (ten) percent of the share capital or has entitlement of not less than 10 (ten) percent of profits of the partnership.
  3. Where no natural person can be identified – where no natural person is identifiable for a company or a partnership firm, the senior management official of the entity would be deemed as the significant beneficial owner.
  4. Where the member is a trust through a trustee – for the purpose of identifying the significant beneficial owner, the process would include identification of the author of the trust, trustee, the beneficiaries with not less than ten per cent. interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.

The Rules explicitly exempt the applicability of certain funds and investment vehicles that are registered under the SEBI Act. The Rules however, do not deal with the funds that are foreign based and not registered under the SEBI Act. Therefore, if an Indian company has a foreign fund as an investor and has an ownership qualifying under the definition of a significant beneficial owner, it is not clear whether such foreign fund would be required to make a declaration.

The filing compliance under the rules are as follows:

  1. A declaration is required to be filed to the company in which significant beneficial ownership is held within 90 days of commencement of the rules and in case of any change in the significant beneficial ownership, declaration is to be made to the company within 30 days of such change under Form BEN-1.
  2. The company is required to file Form BEN-2 with respect to such declaration within 30 days of receipt of declaration under Form BEN-1.
  3. A company is required to maintain a register of significant beneficial owners under Form BEN-3.
  4. The company can serve a notice seeking information under Form BEN-4. The person on whom the notice has been served is required to revert to the company within 30 days of receipt of notice. Wherein the company is not satisfied with information provided or person fails to furnish required information, is entitled to apply to the Tribunal within 15 days of expiry of the period mentioned in the notice.

As per the Rules, the companies were required to make a filing of Form BEN-2 on receipt of Form BEN-1 within 30 days. However, the Ministry of Corporate Affairs (MCA) be way of a general circular no. 07/2018 dated 6 September 2018 have clarified that the 30-day time limit for filing Form BEN-2 would commence from the date of the e-form being available on the MCA-21 portal rather than with 30 days of receipt of declaration by the company under Form BEN-1. The MCA further clarified that no additional fee would be applicable subject to the case that the company makes the filing of Form BEN-2 within 30 days of the form being available on the MCA-21 portal.

Source: http://www.mca.gov.in/Ministry/pdf/CompaniesSignificantBeneficial1306_14062018.pdf

http://www.mca.gov.in/Ministry/pdf/GCCircularBen_10092018.pdf

Regulatory Update: SEBI- Investment by Foreign Portfolio Investors (FPI) through primary market issuances

SEBI (Foreign Portfolio investors) Regulations, 2014 (“Regulation”) mandated that the purchase of equity shares of each company by a single portfolio investor or an investor group shall be below 10 (ten) percent of the total issued capital of the company. Further the Regulation required that in case the ultimate beneficial owner(s) invest through multiple entities, such entities shall be treated as part of the same investor group and the investment limits of all the entities shall be clubbed as applicable to a single portfolio investment.

SEBI through this circular IMD/FPIC/CIR/P/2018/114 dated 13 July 2018 has ensured compliance of the above, at the time of allotment during primary market issuances. The Registrar and Transfer Agents (RTAs) shall:

  • Use Permanent Account Number (PAN) issued by Income Tax Department of India for checking compliance for a single portfolio investor; and
  • Obtain the validation from the depositories for the foreign portfolio investor who have invested in the particular primary market issuance to ensure there is no breach of the investment limit.

Further the circular also mandates for the depositories to put in place the necessary systems for sharing information with RTAs within the timelines for issue procedure, as prescribed by SEBI.

(Source: https://www.sebi.gov.in/legal/circulars/jul-2018/investment-by-foreign-portfolio-investors-fpi-through-primary-market-issuances_39539.html )