Demystifying Significant Beneficial Ownership under Companies Act - Part II
Mr. Mukesh Kumar (Director, M2K Advisors)
U Jithesh (Assistant Manager)
In Part I of this series, the authors delved into the intricacies of the overall scheme of Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’), and elaborated on how to determine who an SBO is, in different situations.
Now in this part, they discuss the consequences of non-compliance with SBO provisions, exemptions in certain cases, and give a brief overview of Forms BEN 1 and BEN 2.
4. Consequences of non-compliance with the SBO provisions
Following are the consequences of non-compliance with the SBO provisions:
Non-compliance | Provisions dealing with | Consequence and subsequent action | Impact on |
Non-furnishing of information or furnishing of non-satisfactory information | Section 90(7) to (10) | Tribunal may issue order directing the shares in questions be subject to restrictions with regard to transfer of interest or receipt of dividend or suspension of voting or all rights attached to shares, etc.
However, Tribunal will have to give opportunity of being heard to the parties concerned before passing an order.
The Reporting Co or the person aggrieved can make an application to the Tribunal for relaxation or lifting of the restrictions, within one year from the date of such order. If no such application is made, the said shares shall be transferred to the Authority constituted under Investor Education and Protection Fund (IEPF).
| a) Reporting Co - it would have to incur significant time and cost to apply to Tribunal
b) SBO - Such shares would trigger restrictions
c) SBO – Such shares shall be transferred to IEPF and hence loss of ownership of shares |
Individual fails to make a declaration in Form BEN 1 | Section 90(10) | He shall be punishable with:
- Imprisonment for a term which may extend up-to one year; or
- Fine not less than Rs 1 lakh but may extend up to Rs 10 lakhs; or
- Both
- Additional fine up to Rs 1,000 per day of default, if the failure is continuing one (after the first).
| SBO |
Non-maintenance of register (Form BEN 3) or denies inspection or non-filing of Form BEN 2
| Section 90(11) | The company and every officer shall be punishable with fine of not less than Rs 10 lakhs but may extend up to Rs 50 lakhs. Further, additional fine of up to Rs 1,000 per day of default shall be levied if the failure is continuing one (after the first).
| Company and every officer |
5. Exemptions/ non-applicability of SBO provisions in certain cases
The following are the cases wherein the SBO Rules shall not be applicable to the Reporting Co to the extent the shares are held by:
S. No. | Share held by | Conditions/ remarks |
1 | IEPF |
|
2 | Holding reporting company | Provided that the details of such holding company are reported in Form BEN 2. This would bring relief as only holding reporting company would be required to comply the provisions in full. However, where the shares are not held 100% by the holding company, then to that extent SBO Rules would trigger.
|
3 | The Central Government, State Government or any local authority or an entity controlled by the Central Government or State Government or partly by the Central or one or more State Government
| From the plain reading of the rules, one would note that indirect holding by local authority is not exempted from the applicability of the SBO Rules. |
4 | Investment Vehicles such as Mutual funds, Alternative investment funds (AIF), Real estate investment trust (REITs), Infrastructure Investment Trusts (InVITs) | Provided they are registered with or regulated by Securities Exchange Board of India (SEBI), as the case may be. |
5 | All the Investment Vehicles | Provided they are regulated by the Reserve Bank of India, or Insurance Regulatory Authority of India, or pension Fund Regulatory and development Authority.
|
6. Brief overview of Form BEN 1 & Form BEN 2
Form BEN 1:
The key information required to be provided by the individual in Form BEN 1 are as follows:
1) Along with the name, date of birth and other basic details, the member must disclose his passport Number (in case of foreign national).
2) Details of indirect holdings i.e. name, type (such as Company / LLP / body corporate/ Trust, etc.), address, nature, status of each of member entity holding shares or rights in the Reporting Co. In other words, if the individual holds share in the Reporting Co through 5 multilayered entities, the details of each such entity shall be provided in Form BEN 1. In case the member entity is a company or LLP incorporated in India, the CIN or the LLPIN shall also be disclosed.
3) Where the SBO holds any direct holding or right in the Reporting Co, he shall also disclose the nature of holding (i.e. by virtue of shares or voting rights or rights on distributable dividend or exercise of control or exercise of significant influence). In case of exercise of control or significant influence, the copy of the agreement shall also be enclosed.
Form BEN 2:
1) Form BEN 2 captures all the information required to be disclosed by the individual in Form BEN 1. Further, Form BEN 1 has to be attached along with Form BEN 2 while submitting with the Registrar.
2) Form BEN 2 can be filed in respect of multiple individuals and hence one could consolidate all the declaration received from individuals and file the same in one form. However, it needs to be ensured that Form BEN 2 is filed within 30 days of receipt of declaration and hence while consolidating the BEN 1 declaration, this aspect needs to be considered.
3) Form BEN 2 needs to be certified by practicing professional (either Chartered Accountant or Company Secretary or Cost Accountant).
7. Challenges
Though the revised SBO Rules (as compared to the previous rules) define categorically the individual who is considered to hold a right or entitlement indirectly in the Reporting Co, however,they do not address all such scenarios (as highlighted in Part I) resulting in ambiguity / multiple interpretations/ non-compliance.
The issue becomes even more complex in case of multilayer companies as the Reporting Co or its officers may not be aware of the ultimate shareholders/ company beyond its parent entity/ shareholder as there is no obligation so far for such companies to collect the said information. Further, the shareholder or the ultimate holding company would be hesitant to disclose the said information to the Reporting Co due to confidentiality or any other commercial reasons.
There are various phrases used in the Act and the Rules such as ‘acting together’, ‘through one or more persons’ which have not been defined, and hence could lead to multiple interpretation. Hence, the Government may clarify the meaning of these phrases in order to avoid multiple views or litigation surrounding the same.
The term ‘Significant influence’ has been defined in clause (i) of Rule 2 of the SBO Rules to mean power to participate, directly or indirectly, in the financial and operating policy decisions of the Reporting Co but is not control or joint control of those policies. A literal interpretation of the same may include the board of directors or key managerial persons (who may not hold any shares or voting rights) and thereby may trigger the provisions of SBO though the intent is to only identify the beneficial owners of the company.
Further, there could be practical issues in determining the effective holding of the individual as highlighted in scenario 5 in Part I where the shares are held by multiple parties through-out the holding chain.
The concept of ‘beneficial ownership’ has gained significant importance even under other laws such as Income-tax Act, 1961, Foreign Exchange Management Act, 1999, SEBI, Insolvency and Bankruptcy code (IBC) etc. Therefore, reporting of details in Form BEN 1 & Form BEN 2 would require a revisit under such laws to determine if there would be any consequential impact, if not factored earlier.
8. Concluding remarks
There is a famous rule “Let a hundred guilty be acquitted, but one innocent should not be convicted”. However, the SBO Rules prove to the contrary as they would significantly impact Companies who would be required to go through this cumbersome compliance and procedure, and this would impact the ease of doing business in India. Introduction of severe penal provisions (including imprisonment) and restriction on transfer of shares or any other rights is adding fuel to the fire. Further, making the Reporting Co. apply to Tribunal on non-receipt of information or receipt of non-satisfactory information would lead to increase in time and cost for Companies and consequent litigation before the Tribunal.
It is recommended that the Government clarify some of the open issues or issue FAQs and relax some of the penal provisions for the initial period till such time the corporates digest this draconian provision. Further, the Government should introduce a redressal or advance ruling mechanism whereby corporates or individual can clarify the determination of the SBO provisions in order to be on the right side of the law and not to trigger any penalty or restrictions. This would help genuine corporates to apply the provisions more fruitfully and would also meet the intent of the Government to track the real beneficial owners by compliance with provisions of the law.