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Guide to identification of SBO in your Company CS Vinita Nair

[email protected] Corporate Law Services Division [email protected]

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Article

Guide to identification of SBO in your Company ...................................................................... 1

Ambit of Section 90 .................................................................................................................................. 1

Individuals identified in case of indirect holding ...................................................................................... 3

Who are not required to disclose? ............................................................................................................. 4

Excluded shareholdings ............................................................................................................................ 4

Onus of the SBO ....................................................................................................................................... 4

Date of creation/ acquiring Significant Beneficial Interest ....................................................................... 4

Obligations of the Reporting Company .................................................................................................... 5

Filing of BEN-2 by Subsidiary Companies .............................................................................................. 5

Guide to identification of SBO in your Company

CS Vinita Nair, Partner, M/s Vinod Kothari & Company

[email protected]

Ministry of Corporate Affairs (MCA) vide notification issued on February 8, 2019 made

significant amendments in Companies (Significant Beneficial Owner) Rules, 2018 („SBO

Rules‟). The timeline provided under SBO Rules for furnishing declaration to the reporting

company is within 90 days of commencement of Companies (Significant Beneficial Owners)

Amendment Rules, 2019 on the basis of significant beneficial interest held on the date of such

commencement. Prior to this, there was no requirement to declare significant beneficial interest

in a company under Companies Act, 2013 as well as SEBI Regulations.

Ambit of Section 90

The ambit of “significant beneficial interest” in Section 90 has been substantially changed by the

SBO Rules, as amended. The amended Rules bring two major changes. First, “indirect” holding

is recognised only where the individual has majority interest in the body corporate holding stake

in the “reporting company”, or in the ultimate holding entity of such body corporate. Second,

purely direct holding (that is, there being no indirect holding at all), or direct control, or direct

significant influence, are not to be reported as significant beneficial interest under the Rules.

Therefore, the direct holding of interest by an individual is relevant only if the direct holding

may be clubbed with indirect holding. This is irrespective of the magnitude of direct holding.

As per the SBO Rules, beneficial interest held in the reporting entity will be determined on the

basis of following:

Holding indirectly or together with direct holdings, to the extent of 10% or more of

shares in the reporting company

o Shares would mean equity shares, CCPs, CCDs and GDRs.

o Accordingly, computation shall be based on equity shares held on diluted basis after

taking into consideration conversion of aforesaid securities.

Holding indirectly or together with direct holdings, to the extent of 10% or more of

voting rights in the reporting company.

o Voting rights, if acquired on all resolutions placed before a company by a shareholder

holding redeemable preference shares pursuant to non-payment of dividend for 2

years or more, shall also be considered.

o Voting rights locked in case of pledge of shares should not be regarded as those

exercisable by the pledgee as this will result in incorrect identification of SBO.

Right to receive or participate in not less than ten per cent. of the total distributable

dividend, or any other distribution, in a financial year through indirect holdings alone,

or together with any direct holdings;

o Dividend in this case should be in relation to shares included within the scope of SBO

Rules i.e. equity shares, CCPS, CCDs and GDRs.

o Dividend payable on Optionally Convertible or Redeemable Preference Shares shall

not be considered for this purpose.

o Dividend parked in escrow account, if any, case of pledge of shares should not be

regarded as those exercisable by the pledgee as this will result in incorrect

identification of SBO.

Right to exercise, or actually exercises, significant influence or control, in any manner

other than through direct-holdings alone.

o Significant influence by virtue of holding of equity shares will not be included under

this. Significant influence exercised indirectly either pursuant to control of

shareholder entities or pursuant to an agreement is required to be reported.

o The copy of agreement is also required to be enclosed with the declaration given.

Thus, a natural person may be a significant beneficial owner by virtue of holding:

(a) Indirectly holding alone: An individual having indirect holding, by virtue of control over

the holding vehicle, or ultimate holding entity of such holding vehicle, being 10% or more of

the “participating interest” (shares, voting rights, or distributable dividends) needs to declare

himself as the SBO.

(b) Indirect and direct holdings: An individual holding direct stake in the reporting entity

(irrespective of whether significant or insignificant), and holding indirect stake as well (as

discussed above), will need to aggregate the direct and indirect holding, and if the aggregate

is 10% or more of the participating interest, the individual is an SBO.

(c) Singular holdings or holding “together with” one or more persons: In order to compute

the holdings of an individual, the participating interest of the individual has to be aggregated

with that of other individuals, who he may be acting in “togetherness”. The meaning of

togetherness is circumstantial; there are no numerical or objective standards for

determination. However, generally, the objective of being together for the purpose of control

over a reporting entity will be so visible in reality that it is not necessary to bring any such

rules. The togetherness required is for the participating interest in the reporting entity, and

not general economic resources or wealth of the two individuals. Notably, even in case of

holdings aggregated on account of togetherness, the rules as discussed above will apply –

that is, pure direct holdings will be disregarded.

(d) Indirect control and indirect significant influence: Control and significant influence are

defined largely in line with the accounting standards: control is the right to direct policy

making, and significant influence is the right to participate in policy making. Both rights

usually come from shareholding, but there may be cases of control or influence by virtue of

agreements, such as JV agreement, shareholders‟ agreement, or provisions in the

constitutional documents. Here again, direct control or direct significant influence does not

matter. However, if the individual has indirect control [control over a vehicle (or vehicles)

which control(s) the reporting entity] or indirect significant influence [control over a vehicle

(or vehicles) which has (have) significant influence over the reporting entity], this is also a

case of being an SBO.

Individuals identified in case of indirect holding

Individual in case of company or any other body corporate;

o Holding majority stake in the member company or

o Holding majority stake in the ultimate holding company of that member company.

Partner in case of partnership firm or LLP;

o In case of body corporate as Partner, individual holding majority stake in such body

corporate or holding majority stake in ultimate holding company of such body

corporate.

Karta in case of HUF;

Trustee in case of a discretionary trust or charitable trust;

Beneficiary in case of a specific trust;

Author or settlor in case of a revocable trust;

General Partner, Investment Manager or CEO in case of pooled investment vehicle or entity

controlled by pooled investment vehicle.

Who are not required to disclose?

Individuals having only direct holdings

o Shares held in the name of the individual; or

o Shares in relation to which declaration as beneficial owner has been furnished under

Section 89 (2).

Individuals holding, indirectly together with direct holding, below the specified threshold of

10% of shares, voting rights or right to receive in distributable dividend.

Excluded shareholdings

Shares held by IEPF authority;

Shares held by holding reporting company;

Shares held by Central Government, State Government or any local Authority or by

companies controlled by Central Government and/or State Government (s);

Shares held by SEBI registered investment vehicles viz. mutual funds, AIFs, REITs, INViT

etc;

Shares held by investment vehicles regulated by RBI or IRDA or PFRDA.

Onus of the SBO

The individual shall be required to consider all kinds of fragmented holding in the reporting

company through body corporate controlled by it, partnership firms, trusts, HUF, pooled

investment vehicles or entities controlled by pooled investment vehicle and the direct holding

in the Company, if any. If it aggregates to 10% or more of the shares/ voting rights/ right to

receive distributable dividend or if it exercises indirect significant influence, the individual

shall be regarded as holding significant beneficial interest.

The individual holding significant beneficial interest by virtue of holding shares or voting

rights or right to distributable dividend or exercising significant influence shall furnish the

declaration in Form No. BEN-1 within 90 days of February 8, 2019 and thereafter in case of

any change, to the reporting company.

In case of direct + indirect holding crossing the thresholds, the reporting company will not be

able to ascertain the same by simply looking at the register of members. Therefore, the onus

lies on the individual to come forward and submit declaration.

Date of creation/ acquiring Significant Beneficial Interest

The requirement of identifying and reporting SBOs and the manner of identifying SBOs

became effective on February 8, 2019. Prior to this, there was no concept of regarding an

individual as SBO under Companies Act or Listing Regulations.

Further, the details of SBO needs to be provided based on the extent of beneficial interest in

the reporting company on the commencement of Companies (Significant Beneficial

Owners) Amendment Rules, 2019 i.e. February 8, 2019.

Accordingly, the date of creation of significant beneficial interest should be the date when

SBO rules became effective i.e. February 8, 2019.

Any change thereafter, will be required to be accordingly reported within 30 days of such

change.

o Change should mean such change that result in an individual becoming an SBO or

ceasing to be an SBO. The intent cannot be to file for every change in the beneficial

interest. Adequate clarity in this regard in needed from MCA.

In case an individual becomes SBO pursuant to acquisition of rights or entitlement after

commencement of the rules, the date of acquiring significant beneficial interest shall be

provided in the declaration.

Obligations of the Reporting Company

Flowchart provided as Annexure I.

Computing the shares on a diluted basis as on the commencement of SBO Rules i.e. as on

February 8, 2019 after taking into consideration the dilution by virtue of conversion of CCPS

and CCDs. GDRs are already represented by equivalent number of underlying shares held by

the foreign depository bank.

Ascertain from the register of members such members (other than individual) holding 10% of

the shares or voting rights or right to receive or participate in the dividend or any other

distribution.

Send notice to such member, except for excluded shareholding, in Form BEN-4 seeking

information about SBO.

On receipt of declaration from SBO in Form No. BEN-1 make entry in the register

maintained in Form No. BEN-3 and file details with the Registrar in eForm BEN-2 within 30

days from the date of receipt of such declaration.

Filing of BEN-2 by Subsidiary Companies

In cases where SBO has been identified for holding company and the holding company

reports the same to the Registrar in Form No. BEN-2, the subsidiary of such holding

reporting company need not ascertain SBO in relation to the shares held by the holding

reporting entity.

The subsidiary shall simply file eForm BEN-2 reporting the details of such holding reporting

company.

Field no. 3 of the draft form provided in SBO Rules is for declaration of holding reporting

company wherein CIN of the holding reporting company is required to be provided.

Annexure I

Whether the individual, along with other PAC, holds majority stake in any BODY CORPORATE?

Yes

Whether such body corporate or any of its subsidiaries hold 10% or more of Shares/ VR/ right to receive distributable dividend in any RC?

Yes

Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

Yes

No case of indirect holding, no SBO declaration required to be submitted.

No

No

No

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

Whether such body corporate or any of its subsidiaries is a partner in any partnership firm (incl LLP)?

No

Whether holding of such body corporate or any of its subsidiaries taken together with the direct holding of the individual in the Shares/ VR/ right to receive distributable dividend aggregates to 10% or more?

No

No case of significant beneficial interest, no SBO declaration required to be submitted.

Yes

Yes

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

Whether the individual is a partner in any PARTNERSHIP FIRM OR LLP?

Yes

Whether such firm holds 10% or more of Shares/ VR/ right to receive distributable dividend in any RC?

Yes

Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

Yes

No case of indirect holding, no SBO declaration required to be submitted.

No

No

No

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

No

Whether holding of such body corporate or any of its subsidiaries taken or firm together with the direct holding of the individual in the Shares/ VR/ right to receive distributable dividend aggregates to 10% or more?

Yes

Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

Yes

No case of indirect holding, no SBO declaration required to be submitted.

No Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

Whether the individual is a Karta of any HUF?

Yes

Whether such HUF holds 10% or more of Shares/ VR/ right to receive distributable dividend in any RC?

Yes

Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

Yes

No case of indirect holding, no SBO declaration required to be submitted.

No

No

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

No

Whether holding of such HUF taken together with body corporate or any of its subsidiaries taken or firm together with the direct holding of the individual in the Shares/ VR/ right to receive distributable dividend aggregates to 10% or more?

Yes

Whether the individual is a trustee in any DISCRETIONARY or CHARITABLE TRUST?

Yes

Whether such trust holds 10% or more of Shares/ VR/ right to receive distributable dividend in any RC?

Yes

Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

Yes

No case of indirect holding, no SBO declaration required to be submitted.

No

No

No

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

No

Whether holding of such TRUST, BODY CORPORATE, FIRM, HUF taken together with the direct holding of the individual in the Shares/ VR/ right to receive distributable dividend aggregates to 10% or more?

Yes

Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

Yes

No case of indirect holding, no SBO declaration required to be submitted.

No

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

Whether the individual is a beneficiary in any SPECIFIC TRUST OR AUTHOR OR SETTLOR OF A REVOCABLE TRUST?

Yes

Whether such trust holds 10% or more of Shares/ VR/ right to receive distributable dividend in any RC?

Yes

Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

Yes

No case of indirect holding, no SBO declaration required to be submitted.

No No

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along

with any direct holding.

No Whether holding of such TRUST, BODY CORPORATE, FIRM, HUF taken together with the direct holding of the individual in the Shares/ VR/ right to receive distributable dividend aggregates to 10% or more?

Whether the individual is a general partner or investment manager of any POOLED INVESTMENT VEHICLE or is the CEO of the investment manager of any POOLED INVESTMENT VEHICLE??

Yes Whether holding of such pooled investment vehicle or any entity controlled by such pooled investment vehicle in the Shares/ VR/ right to receive distributable dividend aggregates to 10% or more?

Yes Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

Yes

No case of indirect holding, no SBO declaration required to be submitted.

No No

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

Whether holding of such POOLED INVESTMENT VEHICLE, TRUST, BODY CORPORATE, FIRM, HUF taken together with the direct holding of the individual in the Shares/ VR/ right to receive distributable dividend aggregates to 10% or more?

Yes Whether the individual has given any declaration under Section 89 (2) in relation to the beneficial interest held in the RC?

No

Declaration in Form No. BEN-1 to be furnished to the RC within 90 day of 08/02/2019 for such holding along with any direct holding.

No

Yes Yes

No case of indirect holding, no SBO declaration required to be submitted.

Whether the individual is able to exercise significant influence pursuant to any agreement executed by any entity controlled by such individual?

No