India – Significant Beneficial Owner – An Oversight.

20 August, 2019

 

The concept of significant beneficial ownership is not a new concept (whether in India or otherwise) and yet it has gained immense popularity in India due to the recent developments and amendments in the Law in this regard.

 

The most prominent reasons behind this introduction and amendment is to identify and prevent the multi-layered structures aiding money laundering or tax evasion, as well as to create transparency amongst corporates. A need was felt to regulate the corporate sector and find out who was ultimately beneficial owner of a particular security or property.

 

The (old) Companies Act 1956, had a shadow of the new provisions, requiring the persons holding shares in a company but not the beneficial interest in such shares (the same being held by another person), to make declaration in that regard to the company. These provisions however did not specify any threshold for determining beneficial interest and are in that sense very different (and differently intended) from the provisions of Section 89 and Section 90 of the (new) Companies Act, 2013.

 

Sections 89 and Section 90 of the Companies Act, 2013 are two sections under the Companies Act currently dealing with the concept and declaration of beneficial ownership in shares of a company. Section 90 of the Companies Act, 2013 is enforced to identify individuals, who directly or indirectly, hold beneficial interest over the company and whose names do not reflect in the register of members as holder of such shares. Further to the introduction of Section 90, the Ministry of Corporate Affairs on June 13, 2018, issued the Companies (Beneficial Interest and Significant Beneficial Interest) Rules, 2018 and enforced section 90 of the Companies (Amendment) Act, 2017.

 

Prior to the Companies (Amendment) Act, 2017, the loosely worded Section 90 of the Companies Act, 2013 did not specify what exactly comprises the term 'beneficial ownership' as well as what would constitute the threshold to determine a 'significant beneficial owner'. Subsequently, the Amendment Act introduced a 25% threshold to determine a significant beneficial owner. Later, the Companies (Beneficial Interest and Significant Beneficial Interest) Rules, 2018 were introduced, wherein this threshold of 25% was reduced to 10% or more shareholding/ownership in a company. The threshold was clearly reduced to make the disclosures even more stringent and the transparency more acute.

 

Even though the term 'significant beneficial interest' is a newly introduced term under the Companies Act, 2013, the very concept always existed and was in use in the form of 'beneficial interest' under the Prevention of Money-Laundering Act, 2002 and the Rules framed thereunder. Similarly, the concept 'ultimate beneficial interest' existed under the Financial Action Task Force's (FAFT) Guidelines. The term 'beneficial interest' as provided under the Rules framed under the Prevention of Money-Laundering Act, 2002 means "the natural person who ultimately owns or controls a client and or the person on whose behalf a transaction is being conducted, and includes a person who exercises ultimate effective control over a juridical person".

 

From a wider comparison between the Companies Act and the Prevention of Money-Laundering Rules, it appears that the concept of beneficial ownership is in fact narrowed down under the Companies Act, 2013. While under the Prevention of Money-Laundering Rules the term 'beneficial interest' includes every natural person exercising ultimate effective control over a juridical person, under the Companies Act, 2013 a person is said to be a significant beneficial owner, if such person is not a registered shareholder of the company and either individually or jointly owns not less than 10 percent of the share capital of the company; or directly or indirectly exercises significant influence or control over the company.

 

Having said that, when compared to what is followed globally as a thumb rule, the threshold for determining a significant beneficial owner is made far more stringent in India at 10% as opposed to 25% adopted by the European Union Anti – Money Laundering Directive, the United States of America and Singapore. Clearly India has taken a more stringent stance for determining and declaring significant beneficial ownership, in comparison to globally followed norms. While the threshold of 25% was introduced by the Companies Act, 2013, under the power delegated to the Ministry of Corporate Affairs, the Ministry reduced the percentage to 10%, thereby tightening the legislation regarding significant beneficial ownership in India.

 

The attempt to curb various issues relating to money laundering, corruption, tax evasions and increase corporate holding transparency is a welcome move.