Background
The
Government of India in order to strengthen the transparency norms has proposed
an altogether new section 90 in the Companies (Amendment) Bill, 2017 which
proposes to identify significant beneficial owner(s) of a company as any person
or trust. The ministry, addressing the recommendation as given by financial
action task force (FATF), has proposed a new amended section 90 which aims to
identify the natural personcontrolling a
corporate entity, directly or indirectly, in order to curb various money
laundering, corrupt illegal practices and other tax evasion activities.
\
The
concept of beneficial interest usually comes into picture when the certain
interest or right accrues to the registered
owner/legal owner but may be vested in some other party i.e. beneficial owner.
Generally,
registered owner and beneficial owner are one and the same person, however, in
certain cases they may be different i.e. there may be a case where the person
whose name is entered in the register of members of a particular Company is
different and the person who actually enjoys the right of ownership is
different. This article covers the implications of the proposed section
and the questions which still remain unanswered.
The
definition of beneficial interest has
been proposed to be included vide amended section 89which will
widen the scope of beneficial interest and includes right & entitlement of
a person alone or together with any other person to exercise rights attached to
such share or receive or participate in any dividend or distribution in respect
of such share.
The
term Significant beneficial ownership has been
defined under section 90 where every
individual, who acting alone or together, or through one or more persons or
trust, including a trust and persons resident outside India, holds beneficial
interests, of not less than twenty-five per cent or such
other percentage as may be prescribed, in shares of a company or the right to
exercise, or the actual exercising of significant influence or control.
Implications of the Proposed Amendment
Prior
to the proposed amendment section 90 prescribed provisions regarding
investigation of beneficial ownership of shares in certain cases.However, the
proposed amendment will widen the scope of this new substituted section and
will cast various responsibilities on the company as well as significant
beneficial owner ( Individuals).
What
implications will it have on significant beneficial owners?
Every
individual who together with other person or trust exercises or holds not less
than 25 % of shareholding of such company, either individually or jointly, will
now have to give declaration about the nature of interest in prescribed manner
to the concerned company.
ü Further
if the beneficial owner does not disclose the information as required by
company, the tribunal may restrict the rights attached with the shares.
What
implications will it have on the companies?
ü The
companies are now mandated to maintain register of significant beneficial
owners.
ü Each
company would be required to ask details of individual, holding or exercising
rights over 25% of shareholding in the company from its corporate / trust /body
corporate members.
The
requirement on the part of companies to file a return of significant beneficial
owners and changes therein with the Registrar of Companies.
ü Further
the Companies have now been provided wide powers to seek information from any
person where the company has reasonable cause to believe such person to be a
beneficial owner of the company.
ü Companies
also now have the power to approach the Tribunal in case of non-receipt or
inadequate response from the members and non-members;
ü If
a company, required to maintain register and file the return fails to do so or
denies inspection as provided therein, the company and every officer of the
company who is in default shall be punishable with a fine.
Conclusion
The
proposed section 90 although will certainly bring the transparency and reveal
the true identity of the real owner under the complex structures, however certain
questions still remain unanswered, which is expected to be resolved through
rules as may be prescribed by government after notification of this amendment:
(i) The
proposed amendment has nowhere defined any criteria with respect to disclosure
of change in the significant beneficial ownership, so the question which arises
is as under
What
percentage of change in significant beneficial ownership is to be disclosed or
whether even a minor change say less then 1 % in significant beneficial
ownership is to be reported?
(iii) Also
no provision or penalties have been specified, if companies purposely do not
cause to conduct any enquiry with respect to significant beneficial ownership.
What
are implications which the company will have to face if it does not conduct an
enquiry where it has reasonable cause to believe a person to be significant
beneficial owner?
(iv) Also,
nothing in the section has been specified about the transition period i.e.
if the companies will be provided time to understand the intricacies of
such amendment:
Whether
any transition period will be provided to the companies in order to comply with
the requirements of this section or whether such requirement needs to be
complied with immediate effect?
(v) Further
it is not clear from the proposed amendment that :
Where
more than one individual jointly holding significant beneficial interest in a
company through another company , in such case whether each individual has
to give disclosure along with other individuals or only that individual holding
majority shares will be required to disclose ?
For
instance, if there is a company XYZ ltd. which has three shareholders A, B and
DEF Private limited, where DEF Private ltd. holds 26% of total paid up share
capital of XYZ ltd. and Mr. E and F holds 40% and 60% respectively in DEF
Private Ltd.
Now
question which arises here is that in this case, whether Mr. E and F both have
to disclose to the company about its beneficial interest or only Mr. F would be
required to disclose being a majority shareholder of DEF Private Limited ?
It
is expected that rules to be prescribed by government of India will clarify the
position and resolve most of pending issues. But for sure, this provision will
impact each company operating in India with complex shareholding structure,
where it has been almost impossible for government to know the real natural persons
controlling the company.
