BENEFICIAL OWNERSHIP - Proposed Amendment & Implication

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.

Partner with “LexisNexis for Practical Guidance on Indian Company Law"

We are highly pleased to inform you about our partnership with “LexisNexis” ( an international publication house). We are one of the Indian Company Law partner of “Lexis Nexis” to their product “Lexis® Practical Guidance” which is an online workflow based practical solutions.

We are supporting in drafting/updation or modifications of various chapters of the Companies Act, 2013 and Insolvency and Bankruptcy Code, 2016 such as Setting up of Company, Alterations in Charter Documents, Raising of funds, Holding Meetings, appointment of board members/ managerial personals, Corporate Resolution & liquidation etc as applicable to a listed or an unlisted company in India.

Practical Guidance on Indian Company Law is a unique combination of content and technology that is designed to perfectly complement your day to day work and which will be accessed anytime and anywhere and which in turn save significant time and effort of professionals.

Our contribution as a partner with them has added an immeasurable paragon of knowledge and precious experience to our firm.We would like to extend our heartfelt gratitude for continuous encouragement, valuable advices put forth by you time to time in order to achieve such milestones.

CROSS BOARDER MERGER- AN ADVANCE MOVE FOR INDIAN COMPANY

By maintaining its persistence efforts in making India as an active participant in development of world economy, the Central Government (Ministry of Corporate Affairs), has notified section 234 of the Companies Act, 2013 with effect from April 13, 2017 which states provisions for cross boarder merger. In order to supplement the said section, the MCA has also notified corresponding amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules 2016, by inserting a new Rule 25A to be effective on and from 13 April 2017. Through this article we try to provide you a quick peep into the newly notified section 234.

Cross Boarder Merger- newly permitted arena for Indian Company:

With effect of this notification, an inbound merger as well as outbound merger will be possible, while the former covers a merger of foreign company into an Indian company, where an Indian company turned out to be the continuing company and the later covers the merger of an Indian company into foreign company, where the foreign company will be the continuing company.

The permitted jurisdiction for cross border merger:

The notified section 234 has permitted certain jurisdictions where the Indian company may merger with the surviving foreign company, these include:

•  whose securities market regulator is a signatory to the International Organisation of Securities Commission's Multilateral Memorandum of Understanding (MoU) (Appendix A signatories) or a signatory to the bilateral MoU with Securities and Exchange Board of India (SEBI); or

o  Whose central bank is a member of the Bank for International Settlements; and a jurisdiction which is not identified in the public statement of Financial Action Task Force (FATF) as:

                                                              i.      a jurisdiction having strategic 'Anti-Money Laundering or Combating the Financing of Terrorism' deficiencies to which counter measures apply; or

                                                            ii.      a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

The prominent provisions of section 234:

The provisions as provided under Sections 230 to 232 of 2013 Act (which are applicable in case of a merger of Indian companies) and the corresponding provisions under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 to be complied with in the case of cross border mergers.

Key Compliance checks for cross border merger:

a.      the transferee company should ensure that its valuation is:

• conducted by such valuers who are members of recognised professional body in their country, and
• in accordance with internationally accepted principles on accounting and valuation.

b.      The valuation declaration has to be filed along the application to Reserve Bank India for prior approval.

c.       Prior approval of Reserve Bank of India, before filing an application with the National Company Law Tribunal under section 230-232 of the Act.

d.      The consideration for merger to the shareholders of the Indian merging company may be paid in cash or depository receipts or partly in cash and partly in depository receipts.

e.       Other compliances pertaining to conducting meeting of shareholders/creditors, notification to Income-tax authorities along with other sector specific regulators etc.

In Conclusion:

The Central Government has positively addressed the need of letting the Indian company to merge or amalgamate with the foreign company for exploring new avenues of business, however, there are still some points which need a consideration in the notified section and rules thereunder, for instance there is a requirement of introduction of necessary changes in the Income Tax Act, Foreign Exchange Management Act and provisions relating to Indian Depository Receipt to enable merger of an Indian Company with foreign entity. Secondly, the tax implication on capital gains arising out of outbound merger need to be introduced in Income tax law. Lastly, the notified section speak much about cross border merger, however, there is no provision for effectuating the demerger of such foreign company. Nonetheless, the ministry may introduce the appropriate changes after encounter them in eventual face of implementation of notified section.

The link to the notification effecting section 234 of the Companies Act, 2013-

http://www.mca.gov.in/Ministry/pdf/section234Notification_14042017.pdf

The link to the relevant rule 25A in the Companies (Compromises, Arrangements and Amalgamations) Rules 2016- http://www.mca.gov.in/Ministry/pdf/CompaniesCompromises_14042017.pdf

A Giant Step to Boost Indian Economy: Demonetization of High Value 500 and 1000 Rupee Banknotes

The demonetization of 500 and 1000 rupee banknotes is a step taken by the Government of India on 8th November 2016 to fight corruption and black money issues in the country. Starting from midnight of 8 November 2016, all 500 and 1000 rupee notes ceased to be accepted as a form of legal tender in India. The announcement was made by the Prime Minister of India, Mr. Narender Modi in a live televised address to the nation. In the announcement, Mr. Modi declared circulation of all 500 and 1000 rupee banknotes (approximately $7.50 and $15 USD respectively) as invalid and announced the issuance of 500 and 2000 Rupee banknotes in exchange for the old banknotes.

On 28 October 2016, the total currency in circulation in India was Rs. 17.77 Lakh Crore (US$260 billion). In terms of value, the annual report of Reserve Bank of India of 31 March 2016 stated that total bank notes in circulation valued to Rs. 16.42 lakh crore(US$240 billion) of which nearly 86% (i.e. Rs. 14.18 lakh crore (US$210 billion)) was 500 and 1000 rupee notes. In terms of volume, 24% (i.e. 2,203 crore) of the total 9,026.6 crore banknotes were in circulation.

Globally, this is not unusual. Central banks of several countries pump massive amounts of cash into the economy, mostly in very large denominations. Across countries, most of this cash has been supporting underground black economies.Governments have been minting money for centuries. Government-issued money promises a strong backing, but history shows that such promises have been hollow. Governments have flooded markets with currency at their whims to hide their failures. The resulting inflation has eaten away the hard work and savings of their own citizens.

Why it is done?

It was found by government of India that fake currency notes of the specified bank notes have been largely in circulation and it has been found to be difficult to easily identify genuine bank notes from the fake ones and that the use of fake currency notes is causing adverse effect to the economy of the country.

The demonetization was done in an effort to curb financing subversive activities such as drug trafficking and terrorism, causing damage to the economy and security of the country.

This is a major setback to the parallel black money economy because a lot of currency operating outside the system will now have to be brought into the banking system. The government believes that this decision has been welcomed everywhere. This major step will help India's credibility. It will help lower the cash circulation in the country which is directly related to corruption in the country. Moreover, it will eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in India.

Impact of the move

It is a big reform which no one expected and will have a huge impact on people who are hoarding money and not disclosing money for tax purposes. This is overall a positive move that is lauded by a lot of people and could bring more confidence in Indian markets by overseas investors.

It's perhaps the most significant move ever taken to curtail the parallel economy. It will give a sharp boost to all formal channels of payments (a shift from cash economy to cashless digital economy) which in turn will help the formal economy to grow at a faster clip in the long term.

Mr. Modi has made the right investment for the next generation. This move should improve India's position on transparency and corruption in the global league table enabling higher capital flow (FDI/FII) into India.

Also, demonetization will increase bank's deposits by a huge margin. This will also increase the lending activity because banks have a CRR (cash reserve ratio) to maintain and with more deposits they can do more lending. Credit (loans) will become easier and interest rates may come down. Thus, it will attract more foreign investors to do business in India.

Further, the move may push down Real Estates prices, including land prices as investors will not be able to utilize their cash in real estate and thereby forcing builders& developers to sell at lower prices. Greater transparency in Indian real estate sector will assist in improving the country's image and attract more foreign investments.

Such a move of government will support overall economy in long run and particularly technology, financial & banking, logistics, Renewable Energy, Oil & Gas, Roads & Infrastructure and many more. It is also expected that India will get positive ranking in terms of curbing the corruption practices and will move upward in doing business in India index published by World Bank every year. 

FOREIGN DIRECT INVESTMENT ( FDI) BONANZA TO INDIAN ECONOMY : 2015

India is the fastest growing economy among major Nations. The World Bank has improved India's ranking by 12 places in the 2016 Study of Ease of Doing Business. The Central Government has expressed its commitment towards three pillared aim of liberalization, ease of doing business and investor friendly business environment.

To take its initiative further, the Government has brought in FDI related reforms and liberalisation touching upon 15 major Sectors of the Economy. The salient measures covering these areas are:

i.                     Limited Liability Partnerships, downstream investment and approval conditions.

ii.                   Investment by companies owned and controlled by Non-Resident Indians (NRIs)

iii.                  Establishment and transfer of ownership and control of Indian companies.

iv.                 Agriculture and Animal Husbandry

v.                   Plantation.

vi.       Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities.

vii.                Defence.

viii.              Broadcasting Sector.

ix.                 Civil Aviation.

x.                   Increase of sectoral cap.

xi.                 Construction development sector.

xii.                Cash and Carry Wholesale Trading / Wholesale Trading (including sourcing from MSEs).

xiii.              Single Brand Retail Trading and Duty free shops.

xiv.              Banking-Private Sector; and

xv.               Manufacturing Sector 

Steadfast on its aims the Government in last few months has introduced many FDI policy reforms in a number of sectors prominent amongst these are Defence, Rail Infrastructure, Construction Development, Insurance, Pension Sector, Medical Devices, White Label ATM Operations, Investments by NRIs on non-repatriation basis and has introduced composite cap for foreign investment. These amendments are path breaking and has unfolded an opportunity for foreign investment regime in India.

Details of changes in some key areas are as mentioned below:

Construction Sector

i.              Conditions of area restriction of floor area of 20,000 sq. mtrs in construction development projects and minimum capitalization of US $ 5 million to be brought in within the period of six months of the commencement of business have been removed.

ii.           A foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed. Further, transfer of stake from one non-resident to another nonresident, without repatriation of investment will neither be subject to any lock-in period nor to any government approval. transferring, or enabling the enjoyment of, any immovable property.

Defence Sector:

FDI enabled up to 49 % under automatic route and beyond that through the FIPB's approval. The government has done away with requirement of mandatory permission from the Cabinet Committee on Security for such projects. Portfolio investment and investment by FVCIs will also be allowed up to permitted automatic route level of 49 %.

Civil Aviation:

The Investment limits has raised from 74 % to 100 %, thus allowing foreign general aviation charter operators and large ground handling companies to set up their fully owned bases in India without going for joint ventures. The government has also allowed FDI up to 49 % for regional air transport services.
It has now been announced that Regional Air Transport Service will also be eligible for foreign investment up to 49 % under automatic route.

Single Brand Retail Trading:

The government has also announced the easing of several conditions for single brand retail trade and e-commerce. It has been decided that in case of state of art and cutting edge technology, sourcing norms i.e. 30 % of value of goods will have to be purchased from India - can be relaxed subject to government approval. The government also permitted entities who have been granted permission to undertake single brand retail through e-commerce. 

Limited Liability Partnerships:

100% FDI has been allowed under the automatic route in LLPs in sectors where 100% overseas investment is allowed. Further such LLP will also be allowed to make downstream investment in such entities where 100% overseas investment is allowed with no FDI linked conditions.

Plantation Activities including Coffee, Rubber, Cardamom etc:

 In line with Tea Plantation sector, the government has decided to open certain other plantation activities namely; coffee, rubber, cardamom , palm oil tree and olive oil tree plantations also for 100% foreign investment.

Broadcasting Sector:

The government has announced that100% FDI is now allowed (upto 49% automatic route and beyond that through government route) in teleports, direct to home, cable networks, mobile TV, headend in the sky broadcasting service and cable networks. FDI also increased to 49 per cent in FM radio through the government route.

Investment by Companies/Trusts/Partnerships Owned & Controlled by NRIs:

All investment by NRI’s and companies / trust/ partnerships owned and controlled by NRI’s under schedule 4 of FEMA (Transfer or issue of Security by Persons Resident Outside India) Regulations is deemed to be domestic investment at par with the investment made by residents.

Companies not carrying on any operations:

The Companies, which are not carrying on any operations are now allowed to undertake automatic route activities and can raise FDI without approval of Government. It has now been decided that for infusion of foreign investment into an Indian company, which does not have any operations and also does not have any downstream investments, Government approval would not be required, for undertaking activities, which are under automatic route and without FDI-linked performance conditions, regardless of the amount or extent of foreign investment.

Accordingly, the Government is moving towards its decided vision to make India a Global Manufacturing Hub.