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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

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