1. INTRODUCTION
1.1 The Ministry of Corporate Affairs on 8 February 2019 notified the Companies (Significant Beneficial Owners) Amendment Rules, 2019 amending the provisions of Companies (Significant Beneficial Owners) Rules, 2018.
1.2 The Rules are aimed to trace the ultimate individual who holds beneficial interest, i.e., exercises rights and entitlements in the company, by looking through the complex layers of the corporate structure.
1.3 The intent of the SBO Rules, is to identify significant beneficial owners whose identity has not previously been disclosed to the concerned company. Accordingly, every individual who is considered to be a ‘significant beneficial owner’ (‘SBO’) for a reporting company, is required to file a declaration with the reporting company and the reporting company in turn is required to make filings with the concerned regulatory authority before 31st July, 2019.
2. WHO IS A SBO?
2.1 A “SBO” in relation to a reporting company means an individual referred to in, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:-
(i) holds indirectly, or together with any direct holdings, not less than 10% of the shares;
(ii) holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;
(iii) has right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
(iv) has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone.
Quick Comments
2.2 The 10% materiality threshold is calculated with reference to not only the share capital but also the voting rights in the shares and dividend or other distribution rights and has to be calculated with reference to the ultimate company of the reporting company.
2.3 Regardless of shareholding / voting rights, if any individual has a right to exercise “significant influence” or “control” other than through direct holdings alone is considered to be an SBO.
Persons holding right or entitlement in company directly only is not considered to be a SBO
2.4 The thresholds of holding shares and voting rights of a company, as discussed above, only apply to the following two scenarios: where such shares or voting rights are held purely indirectly by an individual or are held in conjunction with any direct holdings. In other words, if a person has only direct holding of shares or voting rights, he / she will not be considered to be a SBO.
2.5 An individual who holds shares in his or her name in the reporting company; or who holds beneficial interest in the shares under section 89(2) of Companies Act, 2013 and has made a declaration in that behalf, shall be considered to hold a right or entitlement directly in the reporting company.
3. WHAT IS REGARDED AS AN INDIRECT HOLDING OFA RIGHT OR ENTITLEMENT?
3.1 The amended SBO Rules prescribe different parameters for assessing ‘indirect holding’ of an individual in a reporting company depending on her/his status or relationship with the member of the reporting company
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Nature of Member of Reporting Company |
Relationship of Individual to such Member |
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A |
Where the member of the reporting company is a body corporate (Indian or foreign), other thana limited liability partnership (‘LLP’). |
An individual who: (a) holds majority stake (i.e. more than 50%) in thatmember; or (b) holds majority stake in the ultimate holding company (Indian or foreign) of that member. |
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B |
Where the member of the reporting company is a Hindu Undivided Family (‘HUF’) (throughkarta). |
An individual who is the karta of the HUF. |
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C |
Where the member of the reporting company isa partnership entity (through itself or apartner).
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An individual who: (a) is a partner; (b) holds majority stake (i.e. more than 50%) in the body corporate which is apartner of the partnership entity; or (c) holds majority stake in the ultimate holding companyof the body corporate which is a partner of the partnershipentity. |
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D |
Where the member of the reporting company isa trust (through trustee).
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An individual who: (a) is a trustee in case of a discretionary trust or a charitable trust; (b) is a beneficiary in case of aspecific trust; (c) is the author or settlor in case of a revocable trust. |
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E |
Where the member of the reporting company is: (a) a pooled investment vehicle; or (b) an entity controlled by the pooled investment vehicle; in each case, based in member country of the Financial Action Task Force (‘FATF’) on Money Laundering and the regulator of the securities market in such member country is a member of the International Organization of Securities Commissions. |
An individual in relation to the pooled investment vehicle who: (a) is a general partner; (b) is an investment manager; or is a chief executive o_icer where the investment manager of such pooled vehicle is a body corporate or a partnership entity. |
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F |
Where such member of the reporting company is: (a) a pooled investment vehicle; or (b) an entity controlled by the pooled investment vehicle; but does not satisfy the requirements set out in row (E) above. |
An individual determined under rows (A); (B); (C); or (D) above.
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4. MAJORITY STAKE
4.1 ‘Majority stake’ means holding more than 50% of the equity share capital in the body corporate, or holding more than 50% of the voting rights in a body corporate, or having the right to receive or participate in more than 50% of the distributable dividend or any other distribution by the body corporate.
4.2 Instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as ‘shares’.
5. SBO MAY BE ACTING ALONE OR “TOGETHER”
5.1 It is pertinent to note that, – the term “significant beneficial owner” in relation to a reporting company is defined to mean an individual, who acting alone “or together”……
5.2 If any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be ‘acting together’.
5.3 Unlike the Takeover Code (i.e. SEBI SAST Regulations), the SBO Rules do not list the relationships which are regarded as “Deemed Persons Acting in Concert”. However, some guidance may be taken from the Takeover Code to interpret the term “acting together”. For example, individuals having blood relationship / immediate relatives having right to control the management or policy decisions of the Reporting Company may be deemed to be persons acting together to have “significant influence” or “control” over the Reporting Company, unless there is evidence to show otherwise.
6. IT IS NOT NECESSARY THAT THE INTERMEDIARY VEHICLE NEEDS TO HOLD 10% SHARES IN THE REPORTING COMPANY
6.1 It may be noted that, – even if a body corporate / Firm / Trust etc, as the case may be holds less than 10% of shares of the Reporting Company, however, if an individual in each of the below mentioned cases together with the direct holding in the Reporting Company hold more than 10% shares / voting rights / dividend entitlement in the Reporting Company then, such an individual will still be regarded as a SBO even if the intermediary vehicle holds less than 10% shares / voting rights / dividend entitlement in the Reporting Company.
i. if the individual holding majority stake in such company which is a member of the Reporting Company or the ultimate holding company of that member;
ii. if the individual is the partner of the firm, if a firm is a member of the Reporting Company or holds majority stake in the body corporate which is a partner of the partnership entity or in the ultimate holding company of the body corporate;
iii. if the individual is the karta of the HUF where the member of the Reporting Company is a Hindu Undivided Family (HUF);
iv. if the individual is a trustee / beneficiary / Author / of the Trust where the member of the Reporting Company is a Trust;
v. a general partner / investment manager / Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity if he member of the Reporting Company is,- a pooled investment vehicle or an entity controlled by the pooled investment vehicle;
Illustration
6.2 For example, – if there is a body corporate which holds only 2% shares in a reporting company. Mr. X holds more than 50% stake in that body corporate. Mr. X also holds 9% stake directly in the reporting company. Therefore the total holding of Mr. X (direct plus indirect) exceeds 11% which makes him a SBO of the reporting company judging by the literal interpretation of the SBO Rules.
7. IT IS NOT CLEAR WHETHER THE INDIRECT HOLDING HAS TO BE CALCULATED PROPORTIONATELY
Illustration
7.1 Mr. X holds 51% of equity share capital of A Ltd. A Ltd. is a member of B Ltd holding 30% shares of B Ltd.In such case it is not clear whether the indirect shareholding of Mr. X in ‘B’ Ltd has to be calculated as 51% of 30% or does it have to be taken as straight 30% only because A Ltd holds 30% shares in B Ltd.
7.2 This also poses another problem when the intermediary vehicle holds less than 10% stake in the reporting company.
Illustration
If there is a body corporate A Ltd which holds only 2% shares in B Ltd(being the Reporting Company). Mr. X holds more than 50% stake in that body corporate. Mr. X also holds 9% stake directly in the reporting company. Therefore, the total holding of Mr. X (direct plus indirect) exceeds 11% which makes him a SBO of the reporting company judging by the literal interpretation of the SBO Rules.However, if one has to calculate the indirect shareholding of Mr. X qua A Ltd on a proportionate basis then, the indirect shareholding of Mr X will be 50% of 2% (i.e. only 1% effectively).
8. IT IS NOT NECESSARY THAT THE PARTNER / KARTA BENEFICIARY / AUTHOR / TRUSTEE THE INTERMEDIARY VEHICLE NEEDS TO HOLD SHARES DIRECTLY IN THE REPORTING COMPANY TO BE REGARDED AS A SBO
8.1 It is pertinent to note that, where the member of the reporting company is a Trust / Firm / HUF etc then, individual who is a trustee / beneficiary / Author / Partner / Karta, as the case may be, who holds indirectly together with any direct holdings not less than 10% of the shares of the Company is considered to be a SBO even when such individual does not directly hold any shares in the Reporting Company.
Illustration
A Discretionary Trust ‘X’ holds 15% shares in ABC Ltd (being the Reporting Company). There is a trustee of the ‘X’ trust who does not hold any shares in ABC Ltd. However, the said trustee may still be regarded as a SBO by virtue of the indirect holding in ABC Ltd (i.e. qua the Trust) being more than 10%.
9. IMPORTANCE OF THE TERM “SIGNIFICANT INFLUENCE” AND CAN MD / CEO / CFO / DIRECTOR IS DEEMED TO BE HAVING “SIGNIFICANT INFLUENCE” IN A REPORTING COMPANY?
9.1 The term “significant influence” is defined to mean
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“the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies”
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9.2 This definition is quite broad and covers the right to participate in financial and operating policy decisions of the reporting company, without necessarily having any control over them.
9.3 Every Company is managed by a Board of Directors wherein every director participates in the financial and operating policy decisions of the Company. Many companies appoint Managing Director / CEO / CFO who participate in the financial and operating policy decisions of the Company. The question then arises whether can these persons be regarded as SBOs? Going by a literal interpretation, the answer would be yes. In our opinion, however, judging by the intention of the SBO Rules, this should not be the case as such persons by virtue of the position they hold are statutorily conferred with such powers. Therefore, it is obvious that they will hold such powers by which they have a significant influence over the reporting company. Secondly, the names of these persons are already known to the Reporting Company and available in public domain, and the intention of the SBO Rules is to identify significant beneficial owners whose identity has not previously been disclosed to the concerned company
10. IMPORTANCE OF THE TERM “CONTROL”
10.1 The SBO Rules define the term control as under:
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“control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.”
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10.2 The term control is widely defined and includes a situation where the management or policy decisions can be controlled by way of management rights or in any other manner. Therefore, it is not necessary that, – control can be established by way of shareholding alone. Also, the aforesaid event of exercising control / significant influence can be exercised directly also (by way of management rights or in any other manner except by way of direct shareholding), unlike the criteria of holding 10% shares / voting rights / dividend which has to be only “indirectly”.
11. CAN NEGATIVE CONTROL / AFFIRMATIVE VOTING RIGHTS MEAN CONTROL?
11.1 In most of the investment transactions, the investors nominate non-executive directors on the Board who are given affirmative voting rights wherein certain important financial / operating decisions cannot be taken without the prior written consent of such Investor nominee director.This becomes a serious concern for the private equity fund and venture capitalists community because these rights are commonly granted to Investors under investment agreements entered into by them with target companies. Furthermore, most investors consider these rights critical in order to have some level of supervision over the target company’s operation and management.
11.2 In such cases, a question arises whether such directors can be considered to behaving “control” over the concerned reporting company?In our opinion, that cannot be the case because having affirmative voting rights signify a ‘negative’ control and not an active controlling power to drive the affairs of the Company.
11.3 Inference can be drawn from the judgment by the Hon’ble Securities Appellate Tribunal (SAT) in the case of Shubhkam Ventures, wherein it was held that, – “control”, as per the definition of the term in the Takeover Code, was a proactive and not a reactive power. The SAT in its order held that control really means creating or controlling a situation by taking the initiative. Power by which an acquirer can only prevent a company from doing what the latter wants to do is by itself not control.
11.4 Considering that the definition of the term “control” as given under Companies Act, 2013 is identical as the definition given under the Takeover Code, the two statutes may be read as being parimateriawith each other and accordingly, basis the aforesaid judgment, one can forcefully argue that the “control” inferred under the SBO Rules signify positive control and not negative control.
12. SEEMINGLY CONTRADICTION OF THE TERM “CONTROL” WITH THE TERM “SIGNIFICANT INFLUENCE”
12.1 The SBO Rules define the term “significant influence” to mean “the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies”
12.2 On the other hand, the Rules also stipulate to the extent that, – if a person is having “control” over the Reporting Company then he will be regarded as a SBO. The language of the said definition of the significant influence therefore seem to be contradicting with the definition of the term “control” and renders unclear the intention of the Legislature.
13. NON-APPLICABILITY OF THE SBO RULES IN CASE THE SHARES OF THE REPORTING COMPANY IS A SUBSIDIARY AND LIMITATION ON EXCLUSION THEREOF
13.1 Rule 8 (1)(b) of the SBO rules state as under:
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“These rules shall not be made applicable to the extent the share of the reporting company is held by its holding reporting company: Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.”
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13.2 The significance of using the words “to the extent” means that to the extend you have SBOs of the ultimate holding company determined on the basis of majority shareholding, then you don’t need to make separate reporting for the subsidiary reporting company. It does not however mean that there cannot be any other different SBO for any of the subsidiary company based on the parameter of “significant influence” or “control”.
13.3 “Control” / “Significant Influence” is not necessarily established on the basis of shareholding alone.Not all matters require approval of shareholders.
13.4 There may be persons who would having the right to participate in the financial and operating policy decisions of the reporting company regardless of the miniscule shareholding they would hold in the reporting company.
Illustration
13.5 Say, for example, Mr. ‘X’holds only 2% shares in the Reporting Company has entered into a management or any other agreement with the Reporting Company wherein he has got power to participate in or control the management or policy decisions of such company, he will still be regarded as a SBO.