BENEFICIAL OWNERSHIP – Proposed Amendment & Implication

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.

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.

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