Overview of Beneficial ownership in India

INTRODUCTION

Governments all over the world are deeply concerned about the need for corporate transparency. Financial crimes like tax evasion have a lack of transparency at their core, which is connected to a larger range of activities like money laundering and corruption.

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While in the corporate world the role of corporate vehicles like companies, trusts, company, foundations and other types of body corporates or any persons of legal fictions has been used for illegal purposes like tax evasion, bribery, money laundering and corruption, it plays a crucial role in maintenance of the spirit of entrepreneurship, trade, and commerce.

If regulators or the authorities had access to enough information about the beneficial and legal owner of the corporate vehicle’s assets, the rate of misuse might be reduced.

Beneficial Ownership

A beneficiary owner is defined as a natural person who owns or has control over a legal entity, such as a company, trust, or foundation, according to the OECD’s Beneficial Ownership Implementation Toolkit.[1]

The distinction between beneficial ownership and legal ownership is discussed in the 2014 FATF recommendations. However, the crucial component in the FATF definition is to take into account the idea of the actual natural person who takes control or takes advantage of the capital or assets of the legal persons. Where legal ownership refers to the natural or legal persons who have the ownership and the control to make the decisions as per the legal framework. For instance, a company may be legally owned by another company, with the second company’s beneficial owners having control over it. The inclusion of natural persons on whose behalf a transaction is being carried out, even in the absence of actual or legal ownership of a corporate vehicle, is another aspect of the FATF recommendations.

The problem with this system is that it gets harder to identify the beneficial owner and the need to determine who controls the layers the longer the chain between the entities.[2]

In case of misuse of corporate vehicles for illegal activities it has been found that it occurs when there is no regulatory framework in place for identifying beneficial ownership.

Indian Framework

Committee CLC

According to the Financial Action Task Force’s recommendations, the Company Law Committee, 2016 had been tasked with making recommendations for the more effective implementation of the Companies Act, 2013 and offering solutions for the use of business vehicles for illegal purposes, such as money laundering and or other illegal activities that utilize the corporate vehicle to hide the beneficial owner behind the complex corporate structures. Although India provided a very thorough definition through the SEBI guidelines in 2010.

Although Section 89 of the Companies Act, 2013, refers to a beneficial interest in a share, the committee acknowledged that there was no provision to maintain a separate register for the company’s beneficial owners and that the person holding the share was required to declare their beneficial interest in the company. As a result, the committee recommended:

• That the terms “beneficial interest” in a share and “beneficial ownership” within a company be defined; and
• That the Prevention of Money Laundering Act and previous SEBI circulars and guidelines be followed. While the SEBI circular advises clients to exercise due diligence in identifying beneficial owners and maintain all records with that information, the PMLA defines a beneficial owner as an individual or a person who owns or controls a client of a reporting entity or a person on whose behalf a transaction is being conducted.[3]

These suggestions had been taken into consideration in the ensuing changes to sections 89 and 90 of the Companies Act.

Section 89

In accordance with Section 89 of the Companies Act of 2013[4], a person whose name appears on the register of members as the holder of shares but does not possess a beneficial interest in those shares must submit a declaration to the company containing the name and contact information of the person who does. The business must take note of this declaration and submit it to the registrar.

The legal owner and the beneficial owner are the other two types of owners that are described in this section. According to the section, both must inform the company of the nature of their shareholding interests, and unless otherwise stated, the beneficial owner and registered owner are the same person.

Section 90[5]

Each and every person who, acting alone or through one or more trusts, holds a beneficial interest of at least 25% is required by Section 90 to submit a declaration to the company outlining his interest and other information. The Significant Beneficial Owners Amendment Rules have since changed this percentage, and Rule 2(h) now defines a Significant Beneficial Owner as a person who directly or indirectly holds no less than 10% of the total shares, no less than 10% of the voting rights, or no less than 10% of the total distributable dividend.

Once every person who is a significant beneficial owner must submit a declaration to the reporting company using Form No. BEN-1 as of the date the Significant Beneficial Owners Amendment Rules, 2019 take effect.

When a situation arises where the company has given a person notice with a deadline and either no information has been provided by the person or the information is insufficient,   within 15 days of the deadline the company must apply to the tribunal.

After hearing from both parties, the tribunal must issue an order within 60 days of receiving the application restricting the rights associated with the shares. However, the person against whom such order is passed may make an application for relaxation to If the shares are not transferred to the IEPF authority within one year of the order’s issuance, the shares will be returned to the tribunal. 

CONCLUSION

Within the general overview of Section 89 and the duty to disclose beneficial ownership is imposed by Section 90 of the Companies Act and the rules implemented are both on the company as well as the beneficial owner who is availing benefits out of the holding in the company as well as is in a position to influence the decisions made within the company without actually being a legal owner.

While the rules and disclosures within Section 90 seem cumbersome they were made in accordance to the FATF recommendations in order to lessen criminals’ use of corporate vehicles for tax evasion and money laundering. Since the disclosures completely advocate on the disclosure and declaration of the identity and the relationship of the beneficial owner with his holdings in the company, it creates a transparent atmosphere which makes it easy for the investigative agencies to investigate and also solves the problem of concealing the beneficial owner’s identity by using multiple corporate vehicles and complex structures since not making the disclosures is punishable by fine and also forfeits the benefits the legal or the beneficial owner could withdraw from the company including dividend and voting rights.

Author: Jill Singh, a student of UNIVERSITY NMIMS, Kirit P. Mehta School of Law, Mumbai, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

[1] OECD, A Beneficial Ownership Implementation Toolkit (2019), https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf.

[2] FATF, Transparency and Beneficial Ownership (2014), https://www.fatf-gafi.org/media/fatf/documents/reports/guidance-transparency-beneficial-ownership.pdf.

[3] MINISTRY OF CORPORATE AFFAIRS, Report of The Companies Law Committee (2016), https://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf.

[4] Companies Act, 2013, S.89, No. 18, Acts of Parliament, 2013 (India)

[5] Companies Act, 2013, S.90, No. 18, Acts of Parliament, 2013 (India)