Following the recommendations of the Financial Action Task Force, India has introduced a statutory requirement for the identification and disclosure of significant beneficial owners (SBOs), whether Indian or foreign, of every company incorporated in India.
This is a landmark development which will lead to a significant push towards transparency.
Indian companies are regulated by the Companies Act 2013. While the act, as originally enacted, contained the requirement to disclose the person holding 'beneficial interest' (if such person was not the registered owner) in shares of Indian companies, this provision was deemed inadequate to ascertain the ultimate beneficial owner of the shares.
As a result, in 2017, Section 90 of the act was replaced with a detailed provision on the identification and disclosure of SBOs of Indian companies. The Companies (Significant Beneficial Owner) Rules 2018 (SBO Rules) were notified in June 2018, providing further details about the SBO regime. However, these rules were largely unclear and were therefore amended in February 2019.
In addition, the Securities and Exchange Board of India (SEBI) (the Indian securities market regulator) issued a circular dated 7 December 2018 (modified on 12 March 2019) requiring all listed entities to disclose details pertaining to SBOs in the prescribed format, as part of the quarterly filing of its shareholding pattern with stock exchanges, effective from 30 June 2019. The definition of 'SBO' in the SEBI circular has the same meaning as specified in the SBO Rules.
Reading the act together with the amended SBO Rules, the salient features of the SBO regime can be summarised as follows.
Determination of an SBO
An SBO, in relation to an Indian company (the reporting company) (subject to certain exceptions), means an individual who, acting alone or together with one or more persons or a trust:
- holds (indirectly or together with direct holdings) at least 10% of the shares or voting rights of the company or has the right to receive at least 10% of the distributable dividend (the interests); or
- has the right to exercise significant influence or control over the reporting company.
If the individual holds the interests only directly (and not indirectly), then they will not be regarded as an SBO.
An individual will be considered to hold interests indirectly in the reporting company if they satisfy the prescribed criteria in respect of the direct member of the reporting company. Where the member of the reporting company is a company or a trust, the following individuals will be regarded as holding indirect interests in the reporting company:
- where the member is a company, the individual who holds the majority stake in that member or in the ultimate holding company (whether incorporated or registered in India or abroad);
- where the member is a discretionary trust, the individual who is a trustee;
- where the member is a determinate or specific trust, the individual who is a beneficiary; and
- where the member is a revocable trust, the individual who is the author or settlor.
Every SBO must file a declaration of their SBO status to the reporting company within 90 days from the date of commencement of the SBO Rules amendment (ie, 8 February 2019). Every individual who subsequently becomes an SBO must file a declaration with the reporting company within 30 days. Every change in SBO status must be declared within 30 days. Following the receipt of such declaration, the reporting company is required to file a return in respect of each such declaration with the registrar of companies within 30 days.
The reporting company is required to maintain a register of SBOs which would be open for inspection by the members of the reporting company on payment of a nominal fee.
Failure to disclose
If an SBO fails to make the requisite declaration or if the information given is not satisfactory, there are two main consequences.
First, the reporting company must give notice to any person who the reporting company knows or has reasonable cause to believe to be an SBO; if the recipient fails to give the company the information required, the reporting company must apply to the National Company Law Tribunal (NCLT) for an order directing that certain restrictions be imposed on the shares, including restrictions on transfer and suspension of the right to receive dividends or to vote. The NCLT may, after hearing from the parties concerned, make such an order restricting the rights attached to the shares, within a period of 60 days of the receipt of application.
Second, the SBO shall be punishable, for either failure to file declarations or for wilfully furnishing false information or suppression of material information, with imprisonment, a fine or both.
While the February 2019 amendments to the SBO Rules have largely clarified the way that an SBO must be determined, certain questions and gaps remain. Two key issues arise in the context of discretionary trusts.
First, the SBO Rules expressly provide for a situation in which the first layer above the reporting company (ie, the member) is a trust, but they do not contemplate a multi-layered hybrid structure with a company as the direct member and a trust as the ultimate holding entity.
Second, the SBO Rules do not set out the way to determine an SBO if a discretionary trust is a member of the reporting company and the trustee of such trust is not an individual. As a result, a vacuum exists in respect of those discretionary trusts whose trustee is a private trustee company or professional trustee.
There has been a recent shift towards hybrid structures and trusts, including with sole corporate trustees, and, accordingly, depending on the factual situation, disclosures for such structures will bear further consideration.
The SBO provisions represent a watershed moment for disclosure and transparency in India, and it appears that there is regulatory will to implement the provisions. Global advisers and service providers, when dealing with an estate or corporate structure which includes interests in Indian companies, would be well advised to prioritise the analysis on the impact of the SBO provisions in respect of such structures.
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