Companies Act declarations – corporate shareholder pitfalls

By Ravi Singhania & Manish Kumar Sharma, Singhania & Partners

The Ministry of Corporate Affairs (MCA) recently notified certain provisions relating to the disclosure of significant beneficial owner in the Companies Act 2013, through the Companies (Amendment) Act 2017, and simultaneously notified relevant rules.

RAVI SINGHANIA 辛加尼亚律师事务所 管理合伙人 Managing Partner Singhania & Partners
Ravi Singhania
Managing partner
Singhania & Partners

Notification of the new provisions has not only raised concerns among stakeholders, but also caused a lot of confusion due to likely conflicts in the provisions of the act vis-à-vis the above-mentioned rules. The new provisions, requiring disclosure by significant beneficial owners, have been notified by substituting section 90 of the act with a completely new section.

It may be pertinent to note that the act already has provisions relating to disclosure by beneficial owners under section 89. That section requires a declaration to be made by a person entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares. Similarly, the person who holds or acquires a beneficial interest in shares of a company is also required to make a declaration to the company in a prescribed form.

What is beneficial interest in shares? The act does not define beneficial interest. However, the Companies Amendment Act 2017 proposes to add the following definition of “beneficial interest” to sub-section (10) of section 89 of the act: “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: (1) exercise or cause to be exercised any or all of the rights attached to such share; (2) receive or participate in any dividend or other distribution in respect of such share.”

As the above definition is not exhaustive, the meaning can be much wider. Who is a significant beneficial owner? With the amendment of section 90 by the Companies Amendment Act 2017, the MCA has introduced the concept of significant beneficial owner, and further notified the Companies (Significant Beneficial Owners) Rules 2018 on 13 June 2018. The term significant beneficial owner was defined both under section 90 as well as under the rules.

Manish Kumar SharmaPartnerSinghania & Partners
Manish Kumar Sharma
Singhania & Partners

Section 90 refers to an individual as “significant beneficial owner” who holds (alone or together, or through one or more persons, or a trust) beneficial interests of not less than 25% or such other percentage as may be prescribed, in the shares of a company, or the right to exercise, or the actual exercising of significant influence or control as defined under section 2(27) of the act, over the company. Whereas the rules, while defining the term “significant beneficial owner”, refer to an individual as referred to in section 90 holding “ultimate” beneficial interest of not less than 10%, but whose name is not entered in the register of members of a company as the holder of such shares.

The rules further provide that where no natural person is identified, the significant beneficial owner is the relevant natural person who holds the position of senior managing official. The rules, however, do not make it clear that the senior managing official of which entity should be treated as significant beneficial owner where there is more than one entity in the chain of shareholding structure of the registered shareholder. Further, the term senior managing official has not been defined and is left open for interpretation.

Applicability of the provisions where the registered and beneficial owner is a company or a corporation: after reading the provisions of section 90 and the rules, a question arises of whether there is a requirement to make disclosure under the said provisions where shares are held by a corporate entity in its own name as a beneficial owner. In other words, there is a requirement to find individual(s) who are the ultimate beneficial owners of the shares, so held by a corporate, as beneficial owners of those shares.

The answer appears to be yes. Provisions in section 89 already deal with disclosure by a nominee, as well as the person holding the beneficial interest in shares, irrespective of the percentage of shares held. Section 90 appears to look behind the corporate entity that is registered as beneficial owner of those shares and identify the natural person holding ultimate beneficial interest in the shares through that corporate entity.

It may reasonably be interpreted that the provisions of both section 89 and 90 of the act are independent of each other and will accordingly require disclosures under respective sections, as applicable. There may be a situation where filings will be required under sections 89 and 90 in respect of the same shareholding.

The wording of the sections and rules could have been better to avoid the possibility of different interpretations. Now that the MCA has done away with form BEN-1 as notified initially, and will be issuing a new form soon, it is expected that there will be more clarity on the applicability once the new form is notified.

Ravi Singhania is the managing partner and Manish Kumar Sharma is a partner at Singhania & Partners

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