This article is written by Mr. Ravi Karan Kakkar, a sales and finance strategist who has a rich experience of working in India, Singapore, Saudi Arabia, and Indonesia. Ravi is currently on an assignment in Jakarta, Indonesia, and is pursuing Diploma in Companies Act, Corporate Governance and SEBI Regulations with LawSikho.com.

Introduction

In the year 1989, a group of countries collectively known as G-7 deliberated on an idea to combat the menace of money laundering. The issue insight gave birth to a forum known as Financial Action Task Force (herein after referred to as “FATF”).  A few years later, as various other countries enrolled in this task force, it was decided to include measures to combat terrorist financing as well in the mandate. While a series of recommendations have been proposed by FATF, special importance has been given to identify and verify beneficial owners.

Who is a Beneficial Owner?

FATF recommendation document defines “Beneficial Owner” as the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. It is important to note here that beneficial owners are not the named owners of the shares or other property.

Who is a Significant Beneficial Owner (herein after referred to as SBO) as per Companies Act 2013?

Recent amendments to the Companies (SBO) Rules 2018 explains SBO as an individual who holds directly or indirectly greater than or equal to 10% of the shares/voting rights/total distributable dividend in the shares of the company. The definition is vast and includes various other scenarios/cases that will be discussed in detail later.

Before this amendment, as per Section 90 of the companies act 2013, the limit was set to
25% to identify SBO. However, there is a provision in the aforementioned act that enables the central government to change the threshold limit as per their discretion. Thus with the
recent amendment to the rules, there is a drastic decrease in share-holding pattern to
identify SBO’s.

The threshold limit of 10% shareholding in the company has certainly been a topic of debate on within the Indian entrepreneurial system. Although the action taken by Indian lawmakers falls in line with the recommendation of FATF to identify SBO, however some may argue that setting a threshold limit of 10% may invoke un-necessary compliance requirements to minority share-holders.

Governments in other countries such as the USA, the European Union have set 25% as the bench-mark to identify SBO’s. While the limit set by Indian law-makers has certainly raised
eyebrows of many, nevertheless the intent is right to combat money laundering that has caused severe dent to the Indian economy.

Introduction of companies (SBO) Amendment Rules, 2019, replaced almost entire provisions of 2018 rules barring a few of them. The most significant change has been the range of individuals that is being covered under SBO now.

Direct holding of Individuals

If shares of the reporting company are in the name of an individual, or gives a declaration that he/she acquires a beneficial interest in the shares of the reporting company.

Indirect holding of individuals

• If shares of the reporting company are in the name of body corporate (other than LLP), and individual holds a majority stake in the body corporate or in the ultimate holing company of the body corporate.
• If shares of the reporting company are in the name of HUF (through karta) and the individual is the karta of the HUF.
• If shares of the reporting company are in the name of partnership entity and the individual is the partner or holds majority stake in the body corporate or in the ultimate holding company of the body corporate which is a partner of the partnership entity.
• If shares of the reporting company are in the name of the trust (through trustee) and the individual is a trustee (in case of a discretionary or charitable trust) or beneficiary (in case of a specific trust) or author/settlor in case of revocable trust.
• If shares of the reporting company are in the name of a pooled investment vehicle or entity controlled by that vehicle situated in the member state of the FATF, security market regulator of such state is a member of International organization of securities commission, and individual concerned is a general partner/investment manager/CEO.

Compliance Requirement

Cases	Compliance from Individual	Compliance from company	Punishment to individual	Punishment to company
Case 1- Sec 89 of the companies act 2013 states that a registered owner is a person whose name is entered in the register of members of the company, as a share-holder but that person does not hold beneficial interest in the shares.	As per sec 89, registered owner has to file a declaration in Form No. MGT-4 to the company within a period of 30 days from the date on which the name is entered in the register of members of the company. Any change/modification in the beneficial interest of such shares shall also be filed in Form No. MGT-4.	Declaration made by Registered owner to the company, shall be noted in the register of members by the company, and a return in Form No MGT-6 should be filed with registrar within 30 days of the receipt of declaration.	Failure to make declaration may result in fine anywhere of up to INR 5000, and INR 1000 every day after first during which the failure continues.	Failure to file return of the declaration may result in a fine to the company and every officer concerned of the company for anywhere between INR 500 and INR 1000, INR 1000 every day after first during which the failure continues.
Case 2- Sec 89 of the companies act 2013 states that beneficial owner is a person who has beneficial interest in the shares of a company, but shares are not registered in his/her name.	As per sec 89, beneficial owner has to file a declaration in Form No. MGT-5 to the company within a period of 30 days from the date on which the name is entered in the register of members of the company. Any change/modification in the beneficial interest of such shares shall also be filed in Form No. MGT-5.	Declaration made by Registered owner to the company, shall be noted in the register of members by the company, and a return in Form No MGT-6 should be filed with registrar within 30 days of the receipt of declaration.	Failure to make declaration may result in fine of anywhere up to INR 5000, and INR 1000 every day after first during which the failure continues.	Failure to file return of the declaration may result in fine to company and every officer concerned of the company for anywhere between INR 500 and INR 1000, INR 1000 every day after first during which the failure continues.
Case3–Incase individual owns directly/indirectly >=10% shares in the company->then as per definition that would be considered as SBO	Following Rule 3 of the companies (SBO) Rules 2018-SBO should file a declaration in Form No BEN-1 to the reporting company within ninety days of commencement of Companies (SBO) Amended Rules 2019.Any change/modification shall also be declared in Form No BEN-1 within 30 days of such change. Also new amendment (2019) (Rule 2A) to the rules of SBO gave a responsibility to the reporting company to identify the SBO and ask for a declaration from him/her in Form No BEN-1.	Declaration made by SBO to the company, shall be noted in the register of significant beneficial owners. Company to follow the format of FORM No BEN-3 to maintain records in this register. Company to file a return in FORM No BEN-2 with the registrar regarding the declaration made by SBO under Rule 3 within 30 days of receipt of such information by SBO.	Failure to make declaration by a person may result in imprisonment for a term which may extend to one year or/and fine between INR 1 lakh to INR 10 lakhs. And INR 1000 every day after first during which the failure continues. fine of anywhere up to INR 5000, and INR 1000 every day after first during which the failure continues. Sec447 (Punishment for fraud) may also be invoked in case person gives incorrect information or hides any information in his/her declaration.	Failure to maintain register or file return may result in fine of anywhere between INR 10 lakhs to INR 50 lakhs to the company and every officer of the company who is at default. And INR 1000 every day after first during which the failure continues. Sec447 (Punishment for fraud) may also be invoked in case person gives incorrect information or hides any information in his/her declaration

Notice by the company

A company shall ask for requisite information in the form of notice from any person that they believe to be SBO or connected to SBO. The notice should be in the format of FORM NO BEN-4.

Such notice shall be sent to following category of persons

• Company knows or believes the person to be SBO of the company.
• Company finds the person who may have information about SBO of the company or the person knows someone who possesses the knowledge of SBO.
• Company is of the opinion that the person was a SBO of the company during any time in the past three financial years, and the person has not registered as SBO at that time.

The information asked for in FORM NO BEN-4 should be shared by the person within 30 days of the receipt of such notice.

Application to the Tribunal

In case the individual does not furnish the necessary information to the company upon receipt of notice in FORM NO BEN-4 within specified time limit, or the information shared is not satisfactory then company can apply to the tribunal within 15 days of the period expired of such notice. The company may ask the tribunal to restrict the transfer of shares, suspend the right to receive dividend, suspend voting rights, and any other restriction related to shares in question.

Conclusion

The intention is to make SBO’s investment worthless if he/she has not made any declaration about the same.

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