Section 89 and 90 of The Companies act,2013 both are different sections. Section 89 differentiate between legal owner and beneficial owner and declaration of beneficial interest and whereas Section 90 is all about declaration of SIGNIFICANT BENEFICIAL OWNER(SBO). The only common point under both section is that both sections derive the definition of BENEFICIAL INTEREST from Section 89(10) which is inserted by Companies Amendment Act,2017. Section 89 and 90 both are not applicable to Government companies.
Now let's dive into the definition of SBO as per Revised rules of SBO.
First let us understand the meaning of "majority stake" because this word is mentioned under the definition of SBO. As per Rule 2(1)(d) Majority Stake means holding more than 50% of Voting Rights or Equity share Capital or having more than 50% right to participate in dividend.
Although the word "Acting Together" Do not have a separate definition but it is explained under Explanation V of SBO Definition under Rule 2(1)(h).
If any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be 'acting together'.
The agreement may be written or oral.The definition covers every type of arrangement but the common intent to acquire the reporting company shall be present in the essence of the arrangement.
Reporting company means the Companies who are required to comply the SBO Rules.For your reference,The individuals who are to be declared as SBO are acquiring the rights in the reporting company.It may also be called as Target Company.
Section 90(1) prescribe the magnitude of 25% to be considered as a SBO. However Section 90 also gives the power of prescribing the magnitude to Government and Government prescribe the magnitude of 10% which is lower than the former.
As per Rule 2(1)(h),
"significant beneficial owner" in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:-
(i) holds indirectly, or together with any direct holdings, not less than ten per cent. of the shares;
(Global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as 'shares')
(ii) holds indirectly, or together with any direct holdings, not less than ten per cent. of the voting rights in the shares;
(iii) has right to receive or participate in not less than ten per cent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
(iv) has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone:
("significant influence" means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies)
Explanation I - For the purpose of this clause, if an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner.
Analysis: Individual means natural person.The definition prescribe that individual shall hold INDIRECTLY in the Target Company(Reporting Company).While counting the magnitude of 10%, we shall consider indirect and direct holding both of the individual. However if a person hold share ONLY DIRECTLY then he shall not be considered as a SBO.
Now let us understand what is Direct and Indirect Holding as per rules.
INDIRECT HOLDING
AN INDIVIDUAL shall be considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company, namely: -
(i) where the member of the reporting company is A BODY CORPORATE (whether incorporated or registered in India or abroad), other than LLP, and the individual,-
(a) holds majority stake in THAT member; or
(b) holds majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of THAT member;
Analysis: The individual shall hold majority stake in that body corporate who is holding 10% in the target company.For Example:
1.
2.
3.
4.
(ii) where the member of the reporting company is a Hindu Undivided Family (HUF) (through karta), and the individual is the karta of the HUF;
(iii) where the member of the reporting company is a partnership entity(including LLP) (through itself or a partner), and the individual,-
(a) is a partner; or
(b) holds majority stake in the body corporate which is a partner of the partnership entity; or
(c) holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.
(iv) where the member of the reporting company is a trust (through trustee), and the individual,-
(a) IS A TRUSTEE in case of a discretionary trust or a charitable trust;
(b) IS A BENEFICIARY in case of a specific trust;
(c) IS THE AUTHOR or SETTLOR in case of a revocable trust.
(v) where the member of the reporting company is,-
(a) a pooled investment vehicle; or
(b) an entity controlled by the pooled investment vehicle,
based in member State of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member State is a member of the International Organization of Securities Commissions, and the individual in relation to the pooled investment vehicle,-
(A) is a general partner; or
(B) is an investment manager; or
(C) is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.
Where the member of a reporting company is,
(i) a pooled investment vehicle; or
(ii) an entity controlled by the pooled investment vehicle,
based in a jurisdiction which does not fulfil the requirements referred to in clause (v), the provisions of clause (i) or clause (ii) or clause (iii) or clause (iv) , as the case may be, shall apply.
In my previous article i explained all the Compliance requirement that SBO has to file his Declaration in Form BEN-1 and Company Shall file the return of SBO in Form BEN-2 to registrar and shall maintain the Register of SBO in Form BEN-3.
It is the responsibility of the company to identify the SBO and file a notice in Form BEN-4 to that Person for further seeking of information. The company shall file an application to tribunal if he do not give information required by notice or give non satisfactory information and the tribunal may restrict the right on shares of that person.
NON APPLICABILITY OF SBO RULES
These rules shall not be made applicable to the extent the share of the reporting company is held by,
(a)Investors Education and Protection Fund
(b) its holding reporting company:
Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.
(c) the Central Government, State Government or any local Authority;
(d) (i) a reporting company or body corporate or entity controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments;
(e) Securities and Exchange Board of India registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by the Securities and Exchange Board of India,
(f) lnvestment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.]
These rules will definitely increase the compliance burden of companies as companies need to identify the real owners behind various Nominal owners of shares.
ABOUT THE AUTHOR
Shivam Gera: Commerce Graduate from Satyawati College, University of Delhi and a Budding Company Secretary (All India Rank Holder)
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.
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