On June 13th, 2018, a new rule was notified under The Companies Act 2013 called Companies Significant Beneficial Owners Rule, 2018. The intent seems to be to curb black money finding it’s way into investment in Equity Shares either domestically or from overseas through the much talked of ‘Shell Company route”, where the real owners hide behind a smoke screen.
Many a Regulation to curb black money
Over the recent years, we have witnessed many regulatory attempts in the form of SEBI Guidelines for disclosure of beneficial owners in listed companies where individual Corporate holdings exceed 25% or 15% of assets, Banks KYC regulations and annual update vide the FATCA declarations of company ownership, penal provisions under the Prevention of Money Laundering Act (PMLA). Notwithstanding, these many regulations, Black Money seems like a hydra-headed monster sneaking its way through the existing regulations. For example, the SEBI threshold of 25% is easily got over by an investment company holding less than 25% either individually but in concert with one or more other shell companies. This way the SEBI guidelines are beaten and it only covers listed companies which is a fraction of total companies registered. The Government post demonetization talks of 3 lac shell companies have been uncovered and the mystery remains as to who are the real owners and it appears there are 18 lac suspect Directors in the 15 odd lac companies registered in India.
What is SBO?
As per provisions of Companies Act, the 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.
SBO refers to every individual who, acting alone or together, through one or more persons or trusts, whether in our outside India, hold 10% or more shares of a company or exercises significant influence over the company would be termed as SBO.
SBO – To whom does it Apply
If your company has a shareholder who is not an Individual person, which means any Company or a Partnership or a Trust or a HUF then SBO Rules apply to you. One Person Company or Section 8 companies limited by Individual guarantee need not worry about these new rules. It is to be noted that the SBO rules apply to all companies, whether listed or unlisted, small or big.
What are the SBO Reporting Formats?
The first step is for all companies to serve notice to all it’s non-individual shareholders to submit and disclose in BEN-4 as to the real owners/holders of the shares in it. In the case of shareholders who are Individuals holding shares on behalf of another, existing provisions under Sec 89 and information on this to be submitted in Form MGT-5.
The second step is for the Investor company to reach out to all its non-individual shareholders and obtain a declaration of beneficial interest in Form BEN-1.
The third step is for the Investee company on receipt of BEN-1 to submit the same in Form BEN-2 to The Registrar of Companies within 30 days of receipt of BEN-1.
Every company is required to maintain a register of Significant Beneficial Owners in Form No. BEN-3. Also, this register shall be open for inspection during business hours.
Significant Beneficial Owners would require to provide the information in BEN1 to the company within 30 days of receiving the intimation from the company. Irrespective of whether Significant Beneficial Owner receives an intimation from the company in BEN4 or not, they are expected to furnish the information in BEN1 to the company before 13-Sep-2018. In case of any changes in the ownership details subsequently, intimation should be given within 30 days to the company.
It is a collaborative exercise between the company and its shareholders. Responsibilities are fixed on both company and shareholders to declare their ownership details.
Indian company would require to intimate the information of significant beneficial ownership details to ROC within 30 days of receipt of the declarations in BEN1.
Heavy penalties were prescribed with fine ranging from Rs. 1 lakh to Rs.10 lakhs coupled with an additional penalty of Rs.1,000 per day for continued defaults. In case of false and incorrect information or suppressing any material information, a fine with imprisonment has been prescribed.
Challenges in compliance
Obtaining information from real owners of companies in case of complex ownership structures is a real challenge, particularly from legal entities established in tax havens like the Cayman Islands, Antigua, Panama, etc. Frequent changes in the shareholdings, particularly in list companies and tracking the shareholding % periodically and updating the member register is a huge task. Hence, periodic checks would require to be built into the operating practices by the companies to ensure compliances.
The counter-argument to the introduction of these new SBO rules is that it may set India back on its ease of doing business. The moot question would be as to with whom should there be ease in doing business? As also, whether these new rules curb black money in shares or whether it finds alternate investment channels! Surely, it would increase administration obligations of company’s in managing their Member’s book.