Is Corporate India ready for compliance with Significant Beneficial Ownership norms?

As the due date for compliance with filing of Significant Beneficial Ownership (SBO) is fast approaching, the question that creeps around is whether Corporate India and its shareholders are ready for the various SBO compliances.

Rules imposing determination of Significant Beneficial Owner is not a new concept as it was always in place under various other statutes like SEBI, RBI by way of KYC compliances or Rule 9 of Prevention of Money Laundering Rules, 2005.  However, the final rules under Companies Act, 2013 have created a lot of ripples in minds of shareholders, compliance officers and board room in terms of the challenges posed while determining the significant beneficial owner. 

Some of the challenges which corporate India is grappling with are discussed hereunder:

Section 90 of the Companies Act, while determining the threshold limit mentions the words “alone or together” in respect of an individual.  The word ‘together’ would be taken to read as along with relatives, joint account holders, promoter group, etc. is not clearly described. Whether the holding to be combined only if there is an agreement to that effect or only because they happen to be part of family, it should be taken together. Suitable clarification is required in this regard. Further MCA may consider permitting  the disclosures to be made  based on collective holdings like the one in SEBI Takeover code regulations where in person acting in concert are disclosed collectively.

In case of multiple layer structure as also direct holding, there exists no clarity as to how the prescribed threshold will be determined. The same can be explained by example as under:

X Ltd. has following shareholding:

ABC Ltd. has following shareholding:

Whether A’s & B’s shareholding in X Ltd. should be considered as 27.5% (5% + 90% of (25%)) after considering the direct and indirect holding or only direct holding in X Ltd. The problem gets compounded if ABC Ltd. has issued convertible instruments under which on post dilution basis, the holding of A & B will be below 5% resulting in direct and indirect holding being reduced below reportable threshold limit of 10%.

Where the shares of a company are held by a trust, as per the Rules of identification, SBO means (a) beneficiaries with not less than 10% interest in the trust, (b) trustees, the author of the trust, in case there are no beneficiaries of 10% or more or in case the beneficiaries cannot be identified, the trustees would be regarded as SBO. The provision is extensive enough to cover wide range of people within its ambit. The rights exercised by the trustee in their fiduciary capacity cannot be equated with the legal ownership and benefit derived.  In case of multiple beneficiaries, especially in cases of trust created for purpose of benefit of employees or in case of discretionary trust, where the quantum of benefit is not ascertainable at the time of filing may lead to a lot of challenges and incorrect representation & disputes. Further the forms contemplate filing of declaration on an individual basis and not combined basis. In case of discretionary trust having more than one trustee, no one trustee can be said to be SBO. Even if the artificial rule has to be applied, all the trustees should be declared as having SBO in fiduciary capability.

In the above example, if ‘A’ was holding the shares in capacity as Trustee of family Trust (the beneficiaries are other than A/B/C/D and the share of beneficiaries is not determinate), ‘A’ will be deemed to have 27.50% (on the basis of calculation as aforesaid) even though ‘A’ is having only 5% beneficial ownership.

The issue also becomes complex if the shareholder is a Charitable trust as no trustee can even remotely be said to have SBO. Exemption as given in case where shareholders are pooled investment vehicles (REIT /InvIT, Mutual Funds, AIFs) should also be extended to public charitable trust.

If no SBO is identified in case where the member is a company or a partnership firm, the senior managing official of the company is to be regarded as an SBO.   It is not clear whether it is the senior most official of the company or person with designation of senior manager to be considered.  Also, tracking of shares is PAN based, falsely assuming senior managing official as SBO would again fail in tracking and matching his PAN with the shareholding. 

In case of quasi equity instruments, shareholding on diluted basis is to be considered while making disclosure.  Also, in certain complex cases where quasi equity instruments like CCDs with an option to convert into CCPs first and then ultimately into equity are issued, may pose severe challenges in computing diluted share capital and shareholding of ultimate beneficial owner.  It may result in faulty disclosure, as SBO prior to conversion of such instrument may be totally different from the SBO, post conversion.

The form for disclosure of beneficial interest by the SBO to the company (Form BEN-1) requires the particulars of such instrument/document showing transfer of beneficial interest, sharing of such confidential documents and such information being available for public viewing may compromise the confidentiality aspects in majority companies.

As per the Rules, every SBO is required to file declaration in Form BEN 1 with the company in which he holds significant beneficial ownership, within 90 days from the date of commencement of these rules and within 30 days in case of any change in the significant beneficial ownership.  However, what constitutes significant change is not defined and is very subjective.  If any change has happened within 90 days, subsequent filing will be treated as delayed as date of original SBO will be date of notification.   Further, in case of corporate actions or rights issues, where shares of demerging entity or amalgamating company is allotted, period of 30 days from the date of allotment is insufficient as the gap between intimation of allotment of shares is given and due date for filing the declaration will be very less.

The above is not an exhaustive list of the practical challenges. It is very imperative for the law makers to issue further guidelines or FAQs to address issues and challenges for timely compliance and disclosure requirements.

On a positive note, MCA will revise Form BEN 1 incorporating amendments proposed by various stake holders and has enhanced the time limit for filing BEN-2 which would now be 30 days from the date of deployment of the form on the MCA-21 portal with no additional fees.

• This article is co-authored by Vaibhav Gandhi (Associate,N.A Shah Associates LLP)