1. INTRODUCTION
1.1 The provisions relating to declaration of significant beneficial ownership ("SBO") were introduced in the Companies Act, 2013 ("Act") with effect from June 2018, to prevent misuse of corporate vehicles for the purpose of evading tax or laundering money for corrupt or illegal purposes. While the introduction of section 90 of the Act and the Companies (Significant Beneficial Owners) Rules, 2018 ("SBO Provisions") sparked a lot of discussion and debate over compliance initially, it settled down shortly thereafter. The level of compliance reduced over time with many organizations in a complex web of structures concluding that they were not required to look further up the layers based on the shareholding test under the SBO Provisions. Similarly, Indian companies which sent notices to its shareholders felt that their job was done and did not probe further.
1.2 This continued until the Registrar of Companies ("RoC") took suo moto action against certain companies and passed two recent orders, reigniting the discussion around compliance with SBO Provisions. We review two such orders in this article being (a) order by RoC of NCT of Delhi & Haryana dated May 22, 2024 ("LinkedIn Order") in the matter of LinkedIn Technology Information Private Limited which deals with a complex corporate holding structure and the (b) order by RoC of NCT of Delhi & Haryana dated May 06, 2024 ("Leixir Order") in the matter of Leixir Resources Private Limited which deals with a private equity funded company.
2. THE LINKEDIN ORDER
2.1 In the LinkedIn group ("LinkedIn") structure, LinkedIn Technology Information Private Limited ("LinkedIn India") was owned through layers of holding corporations that led up to its ultimate holding company being Microsoft Corporation ("Microsoft"). Curiously, even though LinkedIn Corporation didn't feature in the chain of ownership of LinkedIn India (post takeover by Microsoft), LinkedIn India continued to report LinkedIn Corporation as its holding company in its financial statements. Mr. Ryan Roslansky is the chief executive officer ("CEO") of LinkedIn Corporation and designated 'global CEO' of the LinkedIn as per the statements provided by the representatives of LinkedIn India. Based on Mr. Roslansky's position and certain statements he made in news articles, YouTube interviews, U.S Securities and Exchange Commission ("SEC") filings and publicly available documents, including by-laws, the RoC concluded that he should have been declared as an SBO of LinkedIn India by applying the test of reporting channel and by the 'right to exercise' control or significant influence over LinkedIn India.
2.2 RoC also stated that the ultimate holding company of LinkedIn India is Microsoft and Mr. Satya Nadella being its CEO as per the by-laws of Microsoft has general charge and supervision, and accordingly, the RoC deduced that he also has control applying the test of reporting channel (with Mr. Roslansky ultimately reporting to Mr. Nadella) and regarded Mr. Nadella as an SBO of LinkedIn India. Thereafter, the RoC traced the chain of reporting up to Mr. Roslansky and Mr. Nadella.
2.3 While the counsels of LinkedIn India argued that it is a professionally run company and that its directors are in charge of its affairs, the RoC was not convinced. The RoC looked at the directors of LinkedIn India and figured out that certain directors were also employees of the ultimate holding corporations of LinkedIn India. The RoC opined that directors who are employees of holding companies are not deemed independent, coupled with the fact that holding corporations have the ability to reject and appoint such directors in the reporting company.
2.4 Another interesting observation in this regard is that such directors were considered nominee directors under section 161(3) of the Act.
3. THE LEXEIR ORDER
3.1 In the Leixir Order, a private equity funded company, Leixir Resources Private Limited ("Leixir India") was owned through a chain of holding companies by Leixir Holdings LLC which in turn was owned by two limited partner entities ("LPs"), being the pooled investment vehicles ("PIVs"). The two LPs had a sole general partner ("GP") and the GP designated the management of the two LPs to an investment advisor ("IM"). It is to be noted that the LPs and GP were body corporates.
3.2 SBO in a PIV
3.2.1 The SBO Provisions defines SBO in relation to a pooled investment vehicle as an individual who is a general partner, investment manager or a CEO where the investment manager is a body corporate or partnership. 1 . However, the RoC applied a purposive interpretation to interpret this broadly and deemed that Mr. Michael Falk (who is the CEO of the IM) is the SBO, because he is, in essence, the CEO of the PIV in the absence of the PIVs having their own individual CEOs.
3.2.2 It was argued by the counsels of Leixir India that the explanation to the rule is clear that the individual in relation to the PIV who is regarded as an SBO shall be the CEO of the PIV in case the IM is a body corporate or a partnership entity. However, the RoC went to great lengths to determine the factum of control, including reviewing SEC filings, the website of the private equity fund and interpreting foreign laws applicable to limited partners and general partners in the USA. The RoC was not convinced by the argument that the CEO of the IM was engaged in a professional capacity and investment decisions were taken by the investment committee.
4. KEY TAKEAWAYS
4.1 Few other important takeaways from the above RoC orders include: (a) the expectation from the reporting companies extends beyond the mere obligation to issue a notice in Form BEN-4 but to actively take necessary steps to identify an SBO including reporting to the National Company Law Tribunals if information is not provided to their satisfaction; (b) the RoC has designed its own tests, such as the test of holding-subsidiary (including the test to determine the ultimate holding company), the test of reporting channel and the test of financial control, to determine whether an individual is an SBO; (c) control or significant influence includes the 'right to exercise' control or significant influence; (d) it is not necessary for someone to exercise control over the day-to-day affairs of the subject company in order to be regarded as an SBO; and (e) the terms 'control' and 'significant influence', both have subjective elements, and the RoC is inclined to impute a broad interpretation to these terms. It is pertinent to note that the definition of significant influence under the SBO Provisions has been borrowed from the Indian Accounting Standard 282 ("Ind AS 28"). The Ind AS 28 mentions instances through which 'significant influence' can clearly be established which includes for example, the existence of direct or indirect (i.e., through subsidiaries), 20% (twenty per cent) or more of the voting power in an entity; representation on the board of directors or equivalent governing body of the entity; participation in policy-making processes, including participation in decisions about dividends or other distributions, etc. Further, it is to be noted that 'control' under the Act has a high threshold. However, the RoC established the 'right to exercise' significant influence or control by Mr. Roslansky by taking a broad interpretation of the definitions of 'control' and 'significant influence'.
4.2 The above RoC orders beg a few questions, particularly on: (i) whether the RoC has made an overreach in interpreting the law, applying principles of interpretation like a court of law, particularly in light of the objectives with which the SBO Provisions were codified; (ii) whether it has acted like an expert on foreign laws; (iii) whether the 'CEO' moniker is a buzzword for control in the RoC's mind, and; (iv) do global corporations now need to be more mindful about their publications in light of how the RoC may perceive them in relation to the SBO provisions.
4.3 Whatever be one's point of view, it has become clear that companies need to pay more careful attention to compliance with SBO Provisions and there is no leniency afforded to large global corporations having a broad-based shareholding or even private equity / venture capital funds having a broad limited partners' base. Case to case, fact-based analyses must be done by companies in India in order to comply with the SBO Provisions. The quantum of penalties imposed by the RoC in these orders, however, are not significant and ignite the question of how seriously companies will take the compliance.
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