Unveiling the Hidden Hands: Demystifying Beneficial Owners and analysing implications of the 2023 amendment
Adv. Shivangi Singh
LL.M. in Corporate and Financial Laws & Policy from Jindal Global Law School, O.P. Jindal Global University
Introduction
The corporate landscape thrives on transparency, but who truly wields the strings of power behind the façade of registered shares? Enter the concept of beneficial ownership, introduced in the Indian Companies Act, 2013, and further clarified by the 2020 amendments. This crucial concept aims to shed light on the individuals who ultimately benefit from the ownership and control of companies, often hidden behind layers of intermediaries and legal structures.
Beneficial Owner: The Companies (Amendment) Act, 2017 has clarified through insertion of Section 89(10) in the Act that 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-
(i) exercise or cause to be exercised any or all of the rights attached to such share; or
(ii) receive or participate in any dividend or other distribution in respect of such share.
In simpler sense, a beneficial owner can be anyone who exercises significant influence or control over a company, despite not holding the shares directly. This influence can manifest in various ways, including:
- Direct or indirect shareholding: Owning, directly or through nominees, at least 10% of the company’s shares or voting rights.
- Control over voting rights: Exercising control over voting rights, even without direct shareholding, through agreements, contracts, or other arrangements.
- Appointment or removal of directors: Having the power to appoint or remove directors, influencing board decisions, or shaping corporate strategy.
- Right to receive dividends or profits: Enjoying the economic benefits of the company’s profits, even without formal ownership.
Background of Beneficial Interest Disclosure Requirements
The Panama scandal triggered the masses in India and made the Indian government pass rules mandating disclosure by companies about their genuine identities. This step of the Indian government came out as a resistance against individuals directly enjoying all benefits out of a security even though, on official documents, they listed themselves as a nominal or dummy owner.
India wasn’t the only country dealing with this problem; other nations also took action to identify the beneficial owners because of the issue’s hidden detrimental effects, which must be eliminated from society. For example, a number of tax havens notify the United States when any of their residents establish a shell company within their territory in an attempt to keep tabs on their financial activity.
Regulatory requirements to be complied with under the Companies Act 2013 and the accompanying rules:
By persons acquiring or transferring beneficial interest
- Where a company’s register reflects the name of a person as the holder of shares in that company but such person does not actually hold beneficial interest in such shares, it has been mandated under Section 89(1) of the Companies Act 2013 (Companies Act hereinafter) read with Rule 9(1) of the Companies (Management and Administration) Rules, 2014 (MA Rules hereinafter) that such persons must file with the company, a declaration to that effect in Form No.MGT.4, within a period of thirty days from the date on which his name is entered in the register of members of such company or, where any change occurs in the beneficial interest in such shares, the registered owner shall, within a period of thirty days from the date of such change, make a declaration of such change to the company in Form No.MGT.4. Section 89(1) of the Companies Act 2013 provides for the same and requires the person making the declaration to specify the name and other particulars of the person who holds the beneficial interest in such shares.
- Further, Section 89(2) of the Companies Act read with Rule 9(2) of the MA Rules provides that, every person who holds or acquires a beneficial ownership of share of a company shall make a declaration to such company specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the company’s books of accounts. This declaration shall be made in Form No. MGT.5 within thirty days after acquiring such beneficial interest in the shares of the company.
Separate penalties have been provided for under the Companies Act against persons failing to make declarations under Section 89 sub-section (1) or sub-section (2) or sub-section (3). Section 89(5) provides that any person making such defaults as provided in the aforesaid sub sections shall be liable to a penalty of fifty thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakh rupees.
By Company
- Section 89(6) of the Companies Act read with Rule 9(3) of the MA Rules requires the company to make a note of the declarations made by the person transferring the beneficial interest (in Form 4) and that by the person acquiring the beneficial interest (in MGT 5) in the register of members and file, within a period of thirty days from the date of receipt of declaration by it, a return with the registrar in Form No. MGT.6.
It can therefore be said that Section 89 of the Companies Act imposes two primary obligations on anyone who holds, transfers, or acquires a beneficial interest in a company’s share i.e., to declare the interest to the company, and a secondary obligation on the company to take notice of the declaration it receives and file a subsequent declaration on the beneficial interest with the ROC.
Section 89(7) of the Act provides for sanctions against a company that fails to file return with the ROC under Section 89(6). The company and every officer of the company who is in default shall be liable to a penalty of one thousand rupees for each day during which such failure continues, subject to a maximum of five lakh rupees in the case of a company and two lakh rupees in case of an officer who is in default.
Recently, on December 19, 2023, an adjudication order was passed by ROC Maharashtra imposing a penalty of INR 5,00,000 upon Yepp India Automotive Systems Pvt. Ltd. along with separate penalties upon individual directors of the company under Section 89(7) and Section 89(5) of the Companies Act on account of a delay of 885 days in filing return with the ROC including declaration under Form MGT 6. In this case, an inquiry revealed that the company had beneficial owners of the company (Foreign companies- Yapp Automative Parts/ Yapp Automative Syatems/ Yapp Automative Parts (Foshan) etc). Further, from records on the MCA portal, it was revealed that since incorporation, the company had not filed FORMs containing declaration by the person. Therefore, the Company and officers and the persons who failed to make declaration were liable for action u/s 89(5) & (7) of the Company s Act, 2013.
Another similar case was noted in November, 2023 where the Ministry of Corporate Affairs had issued a penalty order for INR 6,64,000 subject to a maximum of INR 5,00,000 against BMM Testlabs India Pvt. Ltd. for violation Section 89(6) of the Companies Act. The case involved a delay of 664 days in filing of Form MGT 6.
- The Companies (Management and Administration) Second Amendment Rules, 2023 has introduced four additional rules i.e., Rule 9(4) to (8) in the MA rules. Rule 9(4) requires that every company shall designate a person who shall be responsible for furnishing, and extending co-operation for providing, information to the Registrar or any other authorised officer with respect to beneficial interest in shares of the company.
- Simultaneously, Rule 9(5) provides for who can be designated for the purposes of Rule 9(4) and Rule 9(6) makes provision for deemed designated persons until a person is designated by the company under these rules.
- Furthermore, all companies must provide the information on the Designated Person in their annual report using form MGT-7 and notify the ROC of any changes to the person designated by filing e-form GNL-2.
Implications of the 2023 amendment:
Enhanced accountability is ensured by appointing a specific individual, fostering improved information dissemination within the ROC. Additionally, this amendment underscores the importance of robust compliance measures for revealing beneficial ownership, as highlighted by the MCA signal.
The amendment shows reliance upon the “reason to believe” principle. Cooperation extended by the designated person should rely on substantiated facts rather than mere assumptions. This amendment.
Navigating Beneficial Ownership for Foreigners
Foreign nationals can benefit greatly from owning stock in Indian companies, but it’s crucial to understand the specific legal provisions governing such transactions in India. India modified its Foreign Direct Investment (FDI) policy in 2020 in response to concerns of opportunistic purchases in the context of the COVID-19 epidemic. In particular, government approval i.e., the approval of the Department for Promotion of Industry and Internal Trade (DPIIT hereinafter) is now required for investments in India coming from bordering nations.
Further, even more restrictions are imposed upon investors from Pakistan as investments in defence, space, atomic energy sector along with that in sectors/activities prohibited for foreign investment are prohibited. This policy change, which is outlined in Press Note 3 and implemented through later announcements, guarantees a more thorough review of investments coming from these specific areas.
Also, DPIIT must give its prior consent for any change in ownership of a current or prospective foreign investment in an Indian company that could, directly or indirectly, put the ownership under the aforementioned restricted category.
Conclusion
Recent amendments to the Companies Act (2023) prioritize corporate transparency and responsible conduct by addressing the issue of undisclosed beneficial ownership. Through mandatory disclosure forms, designated responsible persons, and stringent non-compliance penalties, the revised framework aims to combat financial opacity and potential malpractices. While maintaining India’s attractiveness for foreign investments, stricter regulations for FDI, particularly from sensitive jurisdictions, ensure enhanced due diligence. On the whole, these adjustments foster a more robust business environment, prioritizing genuine ownership and deterring concealed control structures.
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