Redefining The Beneficial Owner

Every company is required to maintain the Register of Members (ROM) in Form no. MGT-1.
Every Company is required to add the name of the legal owner of the share of the company in the ROM. Register of members describes the ownership of the company. Many Promoters were engaged in using illicit fund in Shell Companies by entering Fictitious names in the ROM. These companies were used for tax evasion and money laundering.

In order to curb these practices, The Government of India introduced Section 89 and 90 in Companies Act, 2013. Now before starting Section 89 and 90, let us first understand the meaning of beneficial owners and how it is different from legal owner or nominal owner.
According to Black’s Law Dictionary, Beneficial owner is a legal term where specific property rights ("use and title") in equity belong to a person even though legal title of the property belongs to another person.
Nominal Owner is the person whose name is entered in the ROM but he is simply an owner for the namesake purpose.
A beneficial owner is not the nominal owner but just hold the benefits of the ownership rights like voting rights, participation in dividend or exercising the controlling power of the company.
For Examples: A partner can hold share in his name but the actual beneficial owner may be the partnership firm, a Karta may hold share in his name but the beneficial owner may be HUF.

Section 89 describes Declaration in respect of the beneficial interest in any share and Section 90 describe Register of SIGNIFICANT Beneficial owner. Both sections have their individuality and shall not be mixed together. Section 89 gives the definition of beneficial interest. Section 89(10) which is inserted by The Companies (Amendment) Act, 2017, talks about What is Beneficial Interest? Section 90 talks about the Magnitude of beneficial interest which is considered as Significant.

Text of Section 89(10)

For the purposes of this section and section 90, a beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

(i) exercise or cause to be exercised any or all of the rights attached to such share; or
(ii) receive or participate in any dividend or other distribution in respect of such share. 

As per section 89, any person whose name is in ROM but does not hold the beneficial interest is required to file Form No. MGT-4 within 30 days from the date on which his name is entered in ROM. Where any declaration is given under section 89 to the company, the company shall make such respective entry in ROM and file FORM NO. MGT-6 to Registrar within 30 days of such declaration. NOTE: Section 89 shall not apply to government companies.

Section 90 mandates filing of beneficial interest of the significant beneficial owner. Section 90(1) defines the magnitude of beneficial interest to be considered as significant beneficial owner.

Text of Section 90(1) 
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 percent or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the 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 a declaration under this sub-section

Section 90 describes the magnitude of 25% of shares or control of the business decision. However, the Government describe the definition of SIGNIFICANT BENEFICIAL OWNER in clear and concise words in Companies (Significant Beneficial Owners) Rules,20l8 as amended by Companies (Significant Beneficial Owners) Amendment Rules,20l9

"significant beneficial owner"(SBO) 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:- 

• holds indirectly, or together with any direct holdings, not less than ten percent. of the shares; 
• holds indirectly, or together with any direct holdings, not less than ten percent. of the voting rights in the shares;
• has the right to receive or participate in not less than ten percent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings
• has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone

Explanation I - For the purpose of this clause, if an individual does not hold any right or entitlement indirectly in above-mentioned points, he shall not be considered to be a significant beneficial owner.

Now it is clear that indirect holding is required to be considered as a SBO.In a general sense, Direct holding means holding share by acquiring directing and control directly held by the buyer of the reporting company. On the contrary, Indirect holding means having an investment vehicle who further invest in the share of the target company (reporting company). Now let us understand the meaning of direct and indirect which is given by Companies (Significant Beneficial Owners) Amendment Rules,2019

Considered as direct holding if it satisfies any of the following criteria

• If he held shares in his own names 
• If he had made a declaration of beneficial interest as per section 89(2) 

Considered as indirect holding if it satisfies any of the following criteria

• If the member is a body corporate other than LLP, the individual shall hold the majority stake in that body corporate.
• If the member is a HUF, the Individual is Karta of HUF.
• If the member is a partnership firm the individual is a partner or hold the majority stake in that firm.
• If the member is a trust, the individual is a trustee or beneficiary.
• If the member is pooled investment vehicle, the individual is a general partner or investment manager or CEO of that Investment vehicle.

Now it is clear that individual who shall be treated as SBO shall hold the position of indirect holding as given above.

#On the date of commencement of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, every individual who is a significant beneficial owner in a reporting company, shall file a declaration in Form No. BEN-1 to the reporting company within ninety days from such commencement.

#Every individual, who subsequently becomes a significant beneficial owner, or where his significant beneficial ownership undergoes any change shall file a declaration in Form No. BEN-1 to the reporting company, within thirty days of acquiring such significant beneficial ownership or any change therein.

#Upon receipt of the declaration, the reporting company shall file the return in Form No. BEN-2 to the registrar within 30 days of receipt of the declaration.

# The company shall maintain a register of significant beneficial owners in Form No. BEN-3.

The rules cast responsibility on the company to take necessary steps to take identify the SBO and give notice to them for seeking further information in Form No. BEN-4.

Conclusion: It is evident from the above description of the new rules that the Government is trying to unveil the company to identify the actual owners of the company. It cast responsibility on both the company and the individual to declare the beneficial interest. Section 89 and 90 cast penalty on non declaration.

For better understanding of the SBO definition in a illustrative way : (Click Here)

.     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 a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.

This article is a property of lawthoro and no part of it shall be reproduced in any manner without our explicit permission.

We invite professionals or students who have passion to write Legal Blogs. You can send your article at lawthoro@gmail.com and it will be published after appraisal.