Beneficial Ownership Under Companies Amendment

Act, 2017
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A giant step has been taken by the Ministry of Corporate Affairs (MCA) by its notification
dated 13/06/2018, notifying the Companies (Significant Beneficial Owners) Rules, 2018
along with Section 90 of the Companies Act, 2013 as amended by the Companies
Amendment Act, 2017 to eradicate money laundering, avoidance and evasion of laws and
rules and regulations by companies.

The purpose of this article is to bring to the fore certain contentious issues that arise for
consideration which required a serious thought. For this purpose we shall dissect the
section and the rules for the sake of clarity and understanding.

Pertains to: Companies (Significant Beneficial Owners) Rules, 2018

Section: 90 of the Companies Amendment Act, 2017

Before starting with the topic let us understand what “significant beneficial owner”
means:

“significant beneficial owner” means an individual referred to in sub-section (1) of

section 90 holding ultimate beneficial interest of not less than ten per cent read with sub-
section [10J of section 89, but whose name is not entered in the register of members of a
company as the holder of such shares, and the term ‘significant beneficial ownership’ shall
be construed accordingly;

Implication: An individual who holds ultimate beneficial interest of not less than 10% of
the paid up share capital (either Equity or Preference or Both) of the company shall be
noted as its significant beneficial owner.

Explanations:

For the purpose of this clause, the significant beneficial ownership, in case of persons other
than individuals or natural persons, shall be determined as under

(i) where the member is a company, the significant beneficial owner is the natural person,
who, whether acting alone or together with other natural persons, or through one or more
other persons or trusts, holds not less than ten per cent. share capital of the company or
who exercises significant influence or control in the company through other means;

Implication: In case of company being a member, the significant beneficial owner will be
the natural person who alone or with other natural person or more other persons or trusts is
holding less than 10% of share capital of the company or exercises significant influence
or control in the company.
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The Term ‘Control’ has been defined in clause (27) under Section 2 of the Companies
Act, 2013.

As per clause (27) of section 2 – “control” shall include the right to appoint majority of the
directors or to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting agreements or in
any other manner.

(ii) where the member is a partnership firm, the significant beneficial owner is the natural
person, who, whether acting alone or together with other natural persons, or through one or
more other persons or trusts, holds not less than ten percent. of capital or has entitlement of
not less than ten per cent. of profits of the partnership;

Implication:In case of partnership firm being member, the significant beneficial owner will
be the natural person who alone or with other natural person or more other persons or
trusts is holding less than 10% of share capital of the company or has not less than 10% of
the entitlement of profits of the partnership.

(iii) where no natural person is identified under (i) or (ii), the significant beneficial owner is
the relevant natural person who holds the position of senior managing official;

Implication: where there are no natural person under(i) or (ii), the significant beneficial
owner will be the relevant natural person holding the position of senior managing official.

The Term Senior Managerial Position shall include:As per the general customary
practice senior managerial personnel shall include employees’ who have been power by
the company to act as such other officer of the company, as it may deem fit from time to
time, within the definition of Key Managerial Personnel as per section 203 of the
Companies Act, 2013.

(iv) where the member is a trust (through trustee), the identification of beneficial owner(s)
shall include identification of the author of the trust, the 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;

Implication: In case of trust being member, the beneficiaries will be the trustee who holds
not less than ten percent interest in the trust and any other natural person exercising
ultimate effective control over the trust through a chain ofcontrol or ownership.

It has been clarified by the central government that instruments in the form of global
depository receipts, compulsorily convertible preference shares or compulsorily convertible
debentures shall be treated as shares for the purpose of this clause.

ENABLING PROVISION OF THE ACT:

SUB-SECTION (1) OF SECTION 90– Every individual, who acting alone or together, or
through one or more persons or trust, including a trust and persons resident outside India,
holds beneficial interests, of not less than twenty-five per cent. or such other
percentage as may be prescribed, in shares of a company or the right to exercise, or the
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actual exercising of significant influence or control as defined in clause (27) of section 2,
over the company (herein referred to as “significant beneficial owner”), shall make a
declaration to the company, specifying the nature of his interest and other particulars, in
such manner and within such period of acquisition of the beneficial interest or rights and
any change thereof, as may be prescribed:

Provided that the Central Government may prescribe a class or classes of persons who
shall not be required to make declaration under this sub-section.

Implication:Every Individual alone or through other persons holding beneficial interest of

not less than 25% or such other percentage (not less than ten per cent) in shares of the
company or have right to exercise control as defined in clause (27) of section 2over the
company shall be referred to as significant beneficial owner.

The Central Government has the power to prescribe class or classes of persons who will
be covered under this sub-section. The same has been provided in the Rules by the CG.

The meaning of the significant beneficial owner is now quite clear from the above
discussion.

The required compliances for the above mentioned section are as follows:

√ Declaration of significant beneficial ownership in shares:

FORM TIME PERIOD BY WHOM TO WHOM

BEN- Ninety days from Every significant beneficial Company in which he

1 commencement date i.e. owner holds the significant
13.06.2018 beneficial ownership
AND

within thirty days in case of

any change in his significant
beneficial ownership

BEN- Within thirty days in case Every individual who acquires Company in which he is
1 ofacquiring such significant shares after the going to hold the significant
beneficial ownership commencement date i.e. beneficial ownership
OR 13.06.2018

In case of any change in

such ownership.

√ Return of significant beneficial owners in shares:

FORM TIME PERIOD BY WHOM TO WHOM

Within a period of thirty Where any declaration is received With the Registrar in
BEN- days from the date of receipt by the company, the company shall respect of such
2 of declaration by the file a return in the prescribed form. declaration in
company. prescribed form.

√ Register of significant beneficial owners:

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 FORM TIME BY WHOM TO
PERIOD WHOM

The company shall maintain a register of significant beneficial owners in

BEN- —- the format as prescribed by central government. —–
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The register shall be open for inspection during business hours, at such reasonable
time of not less than two hours, on every working day as the board may decide, by
any member of the company on payment of such fee as may be specified by the
company but not exceeding fifty rupees for each inspection.

√ Notice seeking information about significant beneficial owners:

FORM TIME BY WHOM TO

PERIOD WHOM

A company shall give notice seeking information regarding Register of

BEN- —- significant beneficial owners in the prescribed form. —-
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√ Notice by the company to the person believed to be the ‘’significant beneficial

owners’’:

Sub section (5) of section 90 provides that:

A Company shall give notice to any person for whom the company has reasonable cause
to believe:

That the person is a significant beneficial owner of the company

That the company has knowledge of the identity of such person or some other
person have such knowledge about such person.
Such person who is not registered as a significant beneficial owner with the company
but have been the same at any time during the three years immediately preceding
the date on which the notice is issued.

√ Reply to the company’s notice:

Sub section (6) of section 90 provides that:

Concerned person as defined under sub-section (5) shall give the information required by
the notice within a period not exceeding 30 days of the date of the notice as given by the
respective company.

√ Failure of person to reply to the notice by the company:

As per sub section (7) of section 90:

The company shall –

Where the person fails to give notice within the specified time or,
Where the information given by that person is not satisfactory

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apply to tribunal within 15 days from the date of expiry of period specified in the
notice, for an order of

Restrictions with regard to transfer of interest,

Suspension of all rights attached to the shares and
Such other matters as may be prescribed by CG.

√ As per rule 7 of the Companies (Significant Beneficial Owners) Rules, 2018

Application to the Tribunal :

The company may apply to the Tribunal in accordance sub-section (7) of section 90,for
order directing that the shares in question be subject to restrictions, including –

(a) restrictions on the transfer ofinterest attached to the shares in question;

(b) suspension ofthe right to receive dividend in relation to the shares in question;

(c) suspension ofvoting rights in relation to the shares in question;

(d) any other restriction on all or any ofthe rights attached with the shares in question.

√ Order by tribunal:

As per sub section (8) of section 90:

On any application made under sub-section (7), the Tribunal may, after giving an
opportunity of being heard to the parties concerned, make such order restricting the rights
attached with the shares within a period of sixty days of receipt of application or such other
period as may be prescribed.

√ Application by company/person to tribunal for relief:

As per sub section (9) of section 90:

The company or the person aggrieved by the order of the Tribunal may make an
application to the Tribunal for relaxation or lifting of the restrictions placed under sub-
section (8).

PENALTIES:

As per sub section (10) of section 90:

There are penalties as well if such person fails make such disclosure. A penalty of Rs. 1 to
10 lakhs plus upto Rs. 1000 for every day of delay can be levied. False disclosures can
result even in prosecution.

As per sub section (11) of section 90:

If a companyfails to comply with sub-section (2) and (4) or denies inspection as provided
therein, then the penalties shall be as follows:

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For company & officer in default of the company – Rs. 10-50 lakhs plus up to Rs. 1000
for every day of delay can be levied.

As per sub section (12) of section 90:

If any person wilfully furnishes false or incorrect information or suppresses any material
information of which he is aware in the declaration made under this section, shall be liable
to action under section 447.

Non-Applicability of the section / rules:

These rules are not made applicable to the holding ofshares of companies/body
corporates, in case of pooled investment vehicles/investment funds such as Mutual Funds,
Alterative Investment Funds (AIFs), Real Estate Investment Trusts (REITs) and
Infrastructure Investment Trusts (lnv ITs) regulated under SEBI Act.

Conclusion: In the above article we have tried to encapsulate the content of the law,
brought to the fore some issues which engage attention.

From the above explanations we can conclude that the implications of the amendmed
section and newly notifed rules are quite wide. The compliance burden of the companies
will also increase remarkably, but the same has made it bring to the fore certain
contentious issues that need serious thought to eradicate money laundering, avoidance
and evasion of laws and rules and regulations by companies.

Authors: CS Rahul Harsh & Ms. Aparna Singh are from Kolkata and are currently
working with Peerless Group of Companies. They may be reached at:
csrahulharsh@gmail.com & singhaparna59@gmail.com

DISCLAIMER: The Authors have taken utmost care while drafting the article but it may
occur that certain error creeps in. This article is for academic purpose and should not
be treated as a professional advice. The readers are advised to refer the Bare Acts and
Rules before making any judgment.

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