“SIGNIFICANT BENEFICIAL OWNERS”

A project proposal made by

NAME: Priyam Raj
ROLL NO. 1353
BATCH: B.A. LLB
SUBMITTED TO:Mrs. Nandita S Jha

A final draft made in partial fulfillment of the course Corporate Law-II during the Academic
Session 2018-19, 8th Semester

CHANAKYA NATIONAL LAW UNIVERSITY

Nyaya Nagar, Mithapur, Patna

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 ACKNOWLEDGEMENT

It is my privilege to express my sincerest regards to my Corporate law faculty, Mrs. Nandita Jha,
for her valuable inputs, able guidance, encouragement, whole-hearted cooperation and
constructive criticism throughout the duration of our project. I deeply express my sincere thanks
to her for encouraging and allowing me to present the project on the topic “Significant Beneficial
Owner “at this university premises for the partial fulfillment of the requirements leading to the
award of law degree.
I take this opportunity to thank all my lecturers who have directly or indirectly helped this
project. I pay my respects and love to my parents and all other family members and friends for
their love and encouragement throughout my career. Last but not the least I express our thanks to
my friends for their cooperation and support.

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 TABLE OF CONTENTS

AIMS AND OBJECTIVES………………………………………………….……….……04

RESEARCH QUESTION…………………………………………………….…….……..04
RESEARCH METHODOLOGY…………………………………………….…….……...04
SOURCES OF DATA COLLECTION……………………………………….….…….….04
SCOPE OF THE STUDY………………………………………………………..………....04

1. Introduction to Significnt Beneficial Owner……………………….……………05-06

2. Basic Terms To Understand The Concept……………...………….……………07-10
3. Determination Of Significant Beneficial Intrest………………….….…….……11-12
4. Legal Compliances To Be Followed By Sbo And Company……………..…….13-14
5. Conclusion………………………………. …………………………………………15

BIBLIOGRAPHY

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 AIMS AND OBJECTIVE OF THE STUDY

The researcher tends to make a detailed study of the Significant Beneficial Ownership rules.
Further the researcher also tends to give conclusion and suggestion at last.

RESEARCH QUESTION

Whether the significant beneficial ownership rule is too stringent and harsh for the company?

RESEARCH METHODOLOGY

 Researcher relied upon doctrinal method e.g. books, internet, journals etc
 Researcher mainly relied upon library based study.

SOURCE OF DATA COLLECTION

 PRIMARY SOURCE- provisions of Company act, statutes, precedents & other official
judgment.
 SECONDARY SOURCE- websites, articles, books, journals etc.

SCOPE OF THE STUDY

Due to lack of time, researcher’s work is wholly based on doctrinal method. This research will be
useful for the purpose of publication.

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 CHAPTER-I

INTRODUCION TO SIGNIFICANT BENEFICIAL OWNER

The Provisions of SBO, in a different form, been part of the Companies Act, 1956, under section
180(7) (3). The new avatar comes under Section 90 of the Companies Act, 2013, as amended in
2017. The issue of the misuse of multi-layered corporate entities has grabbed attention of various
policymakers and regulators. Regulatory authorities have adopted a step-by-step approach and
tried to address this issue by enacting various legislations, notable among them being:

 Benami transaction prohibition act whose purpose is prohibition of holding property in

benami name

 SEBI Foreign Portfolio Investment Regulation requiring disclosure of beneficial

ownership

 Prevention of money laundering Act 2002 requiring identification of beneficial owner

 Companies (Restriction on number of Layers Rules 2017) restricting number of layers of

subsidiary companies.

MCA on 15th February, 2018, came out with draft of Companies (Beneficial Interest and
Significant Beneficial Interest) Rules, 2018. On June 13, 2018, MCA issued the Companies
(Beneficial Interest and Significant Beneficial Interest) Rules, 2018 (‘Final Rules’) and enforced
section 90 of the Amendment Act. On February 08, 2019, MCA issued the Companies
(Significant Beneficial Owner) Amendment Rules, 2019. These rules shall be in force from date
of Publication of Notice.

The Amendment Act and the SBO Rules were introduced pursuant to the Financial Action Task
Force's (FATF) ‘Guidance on Transparency and Beneficial Owners’ guidelines of 2014. The
FATF is an inter - governmental body that was set up in 1989 by its member jurisdictions to set
standards and measures to combat money laundering and terrorist financing, among other things.
This is done through a series of recommendations that are recognized as the international
standards for combating money laundering and other related threats. To stand in par with the
FATF Recommendations, India complied with recommendations 24 and 25 issued by the FATF,
which recommendations specifically deal with transparency and beneficial ownership. According

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to the guidelines, countries were expected to clearly define and demarcate what constitutes
‘significant beneficial ownership’. There were two approaches which were suggested for the
same:

1) the threshold approach and

2) the majority interest approach.

It is important to note that the FATF Recommendations do not specify as to what threshold may
be considered appropriate. However, it clearly states that a threshold must be adopted that is
appropriate, clear, practicable, workable and enforceable depending on country accepted norms.1

Subsection (1) of section 90 define significant beneficial owner. Every individual who holds
beneficial interests, of not less than twenty-five per cent or such other percentage as may be
prescribed (reduced to ten percent by rules), in shares of a company or the right to exercise, or
the actual exercising of significant influence or control as defined in clause (27) of section 2,
over the company is Significant Beneficial Owner.2

Such significant beneficial ownership of an individual may be by acting alone or together, or

through one or more persons or trust, including a trust and persons resident outside India.

Rule 2(1)(e) of the Companies (Significant Beneficial Owners) Rules 2018 further explain that
“significant beneficial owner” means an individual referred to in sub-section (1) of section 90
(holding ultimate beneficial interest of not less than ten per cent) read with sub-section (10) of
section 89, but whose name is not entered in the register of members of a company as the holder
of such shares.3

1
http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf visited on
02/03/2019 at 2:30 p.m
2
Section 90(1) ,The Company Act,2013
3
Rule 2(1)(e),The Companies (Significant Beneficial Owners) Rules,2018

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 CHAPTER-II

BASIC TERMS TO UNDERSTAND THE CONCEPT

Registered Owner:

Registered owner means a person whose name is entered in the register of members of a
company as the holder of shares in that company but who does not hold beneficial interest in
such shares. In general words, this person are not an actual owner of shares. Only his name is
entered into register of members. He is not entitled to dividend, officer for right issue of shares,
bonus shares etc. However, this person having voting rights in the Company, Vote on poll.His
name shall be entered in registered of member. He is entitle to sign proxy form and shall be
count for the quorum etc.

Example:

Mr. A holds shares of XYZ Private Limited. However, Name of Mr. B entered into registered of
members as registered member. In this case Mr. B is registered owner of Shares of XYZ Pvt Ltd.
But the actual Owner is Mr. A.

Beneficial Owner:

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, in shares of a
company or the right to exercise, or the actual exercising of significant influence or control.In
general words, Beneficial owner is actual owner of the shares. Only his name is not entered in
register of members. He is entitled to all beneficial interest as mentioned below.

Example:

Mr. A holds shares of XYZ Private Limited. However, Name of Mr. B entered into registered of
members as registered member. In this case Mr. A is beneficial owner of Shares of XYZ Pvt Ltd.
But the Mr. B name mentioned in Registered of Members.

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Beneficial Interest:

Beneficial Interest under the company law commonly used to mean as holding share as nominee
(read trustee) of another person usually a body corporate, mostly to satisfy requirement of
minimum shareholders. Newly, inserted sub – section (10) of section 89 define beneficial
interests for the purposed of Sections 89 and 90. 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.”.

First clause of the definition gives it a wider meaning. Such right may be any right which may be
attached with such shares – security interest, dividend, bonus, trust, bailment, pledge, right
related to sale or purchase, pre-emption, succession, actionable claim and so on.4

Control

Meaning of Term “Control” ‘Control’ has been defined in clause (27) under Section 2 of the
Companies Act, 2013 “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.5

Significant Beneficial Ownership:

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
10% in shares of a company or the right to exercise, or the actual exercising of significant
influence or control as defined in clause (27) of section 2, over the company. (The act has

4
Section 89(10) ,The Companies Act ,2013
5
Section 2(27) ,The Companies Act .2013

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provided for a upper limit of 25% holding in shares – however as specified in the rules 10%
holding in shares is taken into account).

Non Applicability: Individual does not include – Mutual Funds, Alterative Investment Funds,
Real Estate Investment Trusts and Infrastructure Investment Trusts regulated under SEBI Act.

Shares means: Global depository receipts, compulsorily convertible preference shares or

compulsorily convertible debentures.

Explanation II of Rule 2(1)(e) say instruments in the form of global depository receipts,
compulsorily convertible preference shares or compulsorily convertible debentures shall be
treated as ‘shares’ for the purpose of this clause. An instrument (GDR, PS, or Debentures)
compulsorily convertible to equity shall be treated shares. Any other instrument and optionally
convertible instruments are not shares under this definition.6

6
http://www.mca.gov.in/Ministry/pdf/CompaniesSignificantBeneficial1306_14062018.pdf visited on 04/03/2019 at
08:20 p.m

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 CHAPTER –III

DETERMINATION OF SIGNIFICANT BENEFICIAL INTREST

The question of beneficial interest and significant beneficial interest shareholding of an

individual may be settled easily. Tough question arises when shares, beneficial interest or
significant beneficial interests is hold by a body corporate, trust or partnership and more so, if
held by in layers. Explanation I of Rule 2(1)(e) of the SBO Rules helps:

Beneficial interest through a company

Where the member is a company, the significant beneficial owner is the natural person, who,
whether acting alone or together with other natural persons, or through one or more other persons
or trusts, holds not less than ten per cent share capital of the company or who exercises
significant influence or control in the company through other means.

Beneficial interest through a partnership

Where the member is a partnership firm, the significant beneficial owner is the natural person,
who, whether acting alone or together with other natural persons, or through one or more other
persons or trusts, holds not less than ten per cent of capital or has entitlement of not less than ten
per cent of profits of the partnership.

Beneficial interest through a company

Where no natural person is identified under (i) or (ii), the significant beneficial owner is the
relevant natural person who holds the position of senior managing official.

Beneficial interest through a Trust

Where the member is a trust (through trustee), the identification of beneficial owner(s) shall
include identification of the author of the trust, the trustee, the beneficiaries with not less than ten
per cent interest in the trust and any other natural person exercising ultimate effective control
over the trust through a chain of control or ownership.7

7
https://www.icsi.edu/media/portals/2/ppt/Madaan-11.08.2018-SBO.pdf visited on 04/03/2019 at 10:30 p.m

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 CHAPTER-IV

LEGAL COMPLIANCES TO BE FOLLOWED BY SBO AND COMPANY

Compliance required on part of “SBO”

A significant beneficial owner shall make a declaration to the company specifying such an
interest within an appropriate time. Every significant beneficial owner shall file a declaration in
Form No. BEN-1 to the company in which he/she holds the significant beneficial ownership on
the date of commencement of the SBORs within 90 days from such commencement and within
30 days in case of any change in their significant beneficial ownership. The declaration includes
disclosure of details regarding the quantum and particulars of the holding of significant
beneficial ownership, mode of acquisition, etc. Correspondingly, within 30 days of receipt of the
above form, the company is to file a return in Form No. BEN-2 with the Registrar of Companies,
along with prescribed fees.

Compliance required on part of “Company”

The company is required to maintain a register of significant beneficial owners in Form No.
BEN-3, which shall be open for inspection at all business hours. The company is under the
obligation to give a notice (under Form No. BEN-4) to any person whom the company
reasonably believes to be a significant beneficial owner of the company, or knowing that there is
a person who has such holding/control and is yet to be registered as a significant beneficial
owner with the company. If such persons do not make a disclosure (or the information provided
in such disclosure is insufficient) the company can refer the matter to the tribunal within a period
of 15 days of the expiry of the period specified in the notice, for directions that may include
restrictions over the transfer of interests in such shares, suspension of right to receive
dividends/voting rights, or any other restriction on all or any of the rights attached to the shares.
All formats in which the above forms are to be made/ filed are provided in the SBORs.8

If a Significant Beneficial Owner (SBO) of a corporate gives inadequate or wrong disclosure

about his or her ownership, s/he could face strict action under the Company Law, as it makes
such offence a fraud. With the Ministry of Corporate Affairs amending the rules for SBOs

8
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/News%20Articles/18091
1_A_MCA-notifies-beneficial-ownership-rules.pdf visited on 05/03/2019 at 11:40 p.m

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under the Companies Act, 2013, corporates are now mandated to take necessary steps to
identify such owners and obtain a declaration from them. According to consultancy Deloitte,
the spirit of the amended rules is to bring in more clarity, and is in alignment with the
government’s drive to inculcate transparency and accountability in the corporate set up.
Hence, SBOs who fail to make a declaration regarding their ownership could face fine,
imprisonment or both under the Companies Act. If such beneficiaries have willfully provided
incorrect information, it would be considered a fraud under the Act. The onus is not just on
the beneficiaries. Companies that fail to maintain registers of significant beneficial owners
would also face action. Apart from providing more clearer definitions for determining
whether an individual or an entity has Significant Beneficial Ownership, corporates would be
required to provide the details in a more elaborate manner.9

Listed companies will have to

make disclosures about details pertaining to significant beneficial owners in a prescribed format,
markets regulator Sebi said . This will come into effect from the quarter ended March 31, 2019.
As per Sebi, listed entities need to disclose details such as name, PAN and nationality of the
significant beneficial owner as well as registered owner. Among other disclosures are details of
the shares in which significant beneficial interest is held by the beneficial owner and date of
acquisition of significant beneficial interest. The move is aimed at bringing transparency to
investors. 10

9
http://www.newindianexpress.com/business/2019/feb/11/significant-beneficial-owners-to-face-music-for-wrong-
disclosures-1937276.html visited on 06/03/2019 at 06:30 a.m
10
https://economictimes.indiatimes.com/markets/stocks/news/significant-beneficial-owner-sebi-comes-out-with
disclosure-format/articleshow/66989964.cms?from=mdr visited on 06/03/2019 at 07:45 a.m

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 CHAPTER-V

CONCLUSION

The concept of significant beneficial owner is similar to that of benami transaction. In benami
transaction the real owner of the property is not known in the same way in significant beneficial
ownership the person having significant beneficial interest in company is not known. India has
followed the recommendations of the FATF organization that deals to combat money laundering
and terrorist financing. The main problem that the organization are facing is that there were
several companies that were dealing worldwide and having 25 percent share in the company and
even their names are not in the register of members .These members having 25 percent share has
influence over the company ,have voting rights etc. and have different layers which makes it
difficult for the government organizations to recognize who is engaged in these activities of
terrorist funding .This was in order to promote transparency among investors in a company and
to have effective management of a company .MCA in2019 has come with the rule of significant
beneficial ownership and section 90 was made effective.

The main problem regarding this is the identification of the significant beneficial owner. Any
person having beneficial interest through a company, trust ,partnership firm or a body corporate
having 10 percent share in the company and is having effective control over the company, trust
or partnership firm is the significant beneficial owner. His name is not entered in the register of
members. After the MCA rule, it is not only the onus on the part of the company to give
declaration about the SBO but a duty is also on the SBO of the company to furnish details of the
significant beneficial ownership. The company issue notice to the SBO to give declaration and
this is to be filled in BEN-I form. The company gives the details to the registrar and it is to be
filled in BEN-II form. It has to be given within 90 days from the first date of notification and
after that if any change is there then within 30 days that change has to be recorded. In case the
SBO of a company wilfully is not giving the details and the company has reason to believe that
the person is having significant beneficial interest in the company and is the significant
beneficial owner, the company may approach to the tribunal. In case the legal compliances are
not followed by the company and the SBO then both are liable to fine. From the above, it can be
concluded that these stringent additions in the provisions of the Law are to find out about the

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actual owners having significant influence in Companies or having Control under the entities
registered under the law by lifting of veil on such shareholding”.

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BIBLIOGRAPHY
WEBSITES

 www.irccl.in
 www.newindianexpress.com
 www.economictimes.indiatimes.com
 www.nishithdesai.com
 www.mca.gov.in
 www.taxguru.in
 www.fatf-gafi.org

STATUTES

 Companies Act,2013
 Companies (Significant Beneficial Ownership) Rules,2018

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