This article focuses on the substantive provisions relating to the declaration of beneficial ownership in a company.
Sections 89 and 90 of the Companies Act, 2013 (Act) deal with ascertaining the beneficial owner of the shares held in a company and disclosures in relation thereto. Both sections are applicable to all companies.
Beneficial Ownership Provisions
Section 89 deals with the declaration with respect to a beneficial interest in any share. Section 89 of the Act requires a person to make disclosure where his name is entered in the register of company members as the holder of shares but who does not hold a beneficial interest in such shares. Such a person is required to give disclosure in the prescribed format to the company, specifying the name and other particulars of the person who holds the beneficial interest in such shares.
The said section also requires a person who is the beneficial owner but not the legal owner to make a declaration to the company. The declaration in the prescribed form should specify the nature of interest held by the beneficial owner, the particulars of a person who is a legal owner, etc.
It is to be noted that both the legal owner and beneficial owner must declare to the company in a prescribed format.
Sub-section (10) of Section 89 of the Act defines beneficial owner in an inclusive manner that 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:
- exercise or cause to be exercised any or all the rights attached to such share; or
- receive or participate in any dividend or other distribution with respect to such share.
Thus, the above definition envisages two persons, one who is a legal owner of the share and another who has the right or entitlement to deal with such share through any contract, arrangement or otherwise.
Significant Beneficial Owners (SBO) in a company
Section 90 deals with provisions related to SBO and was originally enacted by the Companies Act 2013. It was replaced by the Companies (Amendment) Act 2017 and the amended section was made effective from 13 June 2018. Simultaneously, Companies (Significant Beneficial Owners) Rules, 20l8 (Rules) were notified on 13 June 2018.
Provisions relating to SBO seek to identify the individual (whether Indian or foreign resident) who holds a beneficial interest of 25% or such other percentage as may be prescribed in the shares of the company. The Rule lowered the threshold of shareholding to 10% from 25%. Apart from the percentage criteria, there is a subjective test also wherein the individual shall be considered as SBO where he has the right to exercise or the actual exercising of significant influence1 or control over the company in any manner.
As per Rules 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, possess one of more of the following rights or entitlements in such reporting company:
- holds indirectly, or together with any direct holdings, not less than 10% of the shares;
- holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;
- has the right to receive or participate in not less than 10% ten 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 holding alone.
It is clarified that if an individual does not hold a right or entitlement indirectly under (i) to (iii) above, then he shall not be considered as an SBO.
Only direct holdings are excluded from the provisions of SBO. Direct holding is clarified where the individual is holding an investment in his name directly or he is holding beneficial interest in such shares and a declaration to that effect is reported to the company.
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Footnote
1. "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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.