Concept Of Significant Beneficial Owners

The concept of significant beneficial owner (SBO) has been introduced by the company’s amendment act 2017. The legislative intent is to identify the ultimate natural person exercising control over the company or in some cases the entire corporate structure. This becomes particularly vital in case of corporate frauds wherein it becomes difficult for the regulators to fix responsibility owing to the multiple layers of bodies corporate.

  • Meaning of SBO

As per section 90 read with rule 2(h) of the companies (significant beneficial owners Rules) 2018 as amended in 2019, “the Rules”, SBO in relation to the reporting company (company undertaking the compliance) is defined as follows:

An individual who, acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, can exercise one or more rights in respect of the reporting company:

(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.

Note:

  1. To qualify as SBO under clauses (i) to (iii), the individual(s) shall enjoy the rights indirectly. Direct exercise of rights is not mandatory.
  2. The total of indirect and direct holdings shall be 10% or more. There is no internal limit. For instance, once it is established that an individual (say Mr. X) holds more than 10% of shares (indirectly and directly) in ABC Pvt. Ltd., he would qualify as a SBO in ABC Pvt. Ltd. The proportion of indirect and direct holdings is not material. He may hold 0.1% of shares indirectly and 9.9% of shares directly.
  3. The criteria in clauses (i) to (iii) are objective and have to be applied to each case.
  4. The criterion of clause (iv) is subjective and has to be applied based on the specific facts and circumstances of each case.
  • Key concepts

For the purpose of the aforesaid definition, the terms contained therein carry the following meanings:

I. Direct holdings:

An individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely.-

  • The individual’s name is entered in the register of members in respect of the shares in consideration.
  • The individual holds or acquires a beneficial interest in the shares of the reporting company under section 89, and has made a declaration in this regard to the reporting company in Form MGT-5.

II. Indirect holdings:

An individual shall be considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company. Indirect holding means holding rights or entitlements through a member which is not a natural person of the reporting company.

Member of reporting company Individual is
Body corporate (Indian or foreign), other than LLP Holds majority stake in that body corporate or in holding company of the body corporate
Hindu undivided family Karta
Limited liability partnership or partnership firm registered under Indian Partnership Act 1932 Partner or holds majority stake in the body corporate partner or ultimate holding company of the body corporate partner
Discretionary trust or charitable trust Trustee
Specific trust Beneficiary
Revocable trust Author/ settlor
*Pooled investment vehicle or entity controlled by pooled investment vehicle General partner/ investment manager/ CEO(where investment manager is a body corporate)

*majority stake in a body corporate means:

(i) Holding more than one-half of the equity share capital in the body corporate; or

(ii) Holding more than one-half of the voting rights in the body corporate; or

(iii) Having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate;

Note: The question of majority stake shall only arise in case the member of reporting company or its ultimate Holding Company is a body corporate.

Pooled investment vehicle or entity controlled by pooled investment vehicle shall be based in a jurisdiction which is a member of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member State is a member of the International Organization of Securities Commissions. If the pooled investment vehicle or entity controlled by pooled investment vehicle does not meet the aforesaid criteria, the criteria specified in the preceding clauses shall apply mutatis mutandis.

III. Acting together:

Two or more individuals shall be deemed to be acting together if they 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 the reporting company, pursuant to an agreement or understanding, formal or informal.

IV. Shares:

While ascertaining the shareholding of the reporting company for identifying a SBO, apart from its equity share capital, Compulsorily Convertible Preference Shares, Compulsorily Convertible Debentures and Global Depository Receipts shall also be taken into account. It must be noted that the BDRs, CCPs and CCDs must first be converted into equity shares before aggregating.

Moreover, while computing majority stake, only equity share capital shall be considered.

V. Significant influence:

Significant influence means 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’.

VI. Control:

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.

VII. Voting rights:

Voting rights means the right of a member of a company to vote in any meeting of the company or by means of postal ballot.

  • Compliance by SBO

Every individual(s) who qualify for SBO shall furnish BEN-1 to the company as within the time limit specified under:

SBO became on Time limit for reporting
On or before 8th February 2019 Within 90 days (8th May 2019)
Between 8th February 2019 and 9th May 2019 (90 days from date of notification) Within 30 days from 9th May 2019 (8th June 2019)
After 9th May 2019 Within 30 days
  •  Compliance by Reporting Company:

On receipt of BEN-1 from the individual, the reporting company shall file BEN-2 along with fees with ROC within 30 days.

As per MCA circular dated 6th September 2018, the e-form BEN-2 has to be filed by the reporting company within 30 days of its deployment on the MCA web portal. No additional fees will be levied if the form is filed within the aforementioned time limit.

  • Duties of Reporting Company:

As per Section 90(5) read with Rule 2A of the Rules, every reporting company shall take necessary steps to identify its SBO. Section 90 thus, imposes a dual obligation: on the company as well as the individual to report the existence of a SBO. This is different from Section 89 which only casts duty on the individuals concerned, the company being a mere postman which forward the information received from the individual to the ROC.

The company has obligations in respect of both individual members as well as members who are not natural persons.

a) Individual members

The Company shall take necessary steps to ascertain if any individual qualifies as its SBO. The company shall issue notice to such individuals in form BEN-4 and require him to file declaration in form BEN-1 to the company within 30 days from the date of notice.

b) Members not being Natural Persons

The company shall:

1. Identify all members holding not less than 10% of-

a) Shares, or
b) Voting rights, or
c) Right to receive or participate in the dividend or any other distribution payable in a financial year.

2. Require the member to identify the individuals who would qualify as SBO in the reporting company by issuing notice to the said individuals in BEN-4.

  • Application to NCLT

Every company shall apply to the NCLT where:

A. Any individual fails to give information specified in BEN-4 within 30 days of the notice.

B. Information provided is not satisfactory.

C. The aforesaid application shall be made by the company within 15 days from the expiry of the period of 30 days from the date of BEN-4.

Illustration: If the company had issued BEN-4 to an individual on 1st March 2019. If no reply was received by 30th march 2019, the company shall apply to NCLT by 14 April 2019.

The application shall be made for an order imposing restrictions on the shares, which shall include:

a) Restrictions on the transfer of interest attached to the shares;
b) Suspension of the right to receive dividend or any other distribution;
c) Suspension of voting rights;
d) Any other restriction on all or any of the rights attached with the shares.

  • Order by NCLT

The NCLT shall after giving the parties an opportunity to be heard pass such order as it deems fit. The order shall be passed within 60 days of the application.

  • Subsequent steps:

The company or the person aggrieved by the order of the NCLT may make an application to the NCLT for relaxation or lifting of the restrictions placed by the NCLT, within a period of one year from the date of the order.

If no such application has been filed within a period of one year from the date of the order, such shares shall be transferred, without any restrictions, to the Investor Education and Protection Fund.

  • Register of SBO

Every company shall maintain a register of Significant Beneficial Owners and changes therein in BEN-3.

The register shall be open for inspection by any member on payment of prescribed fees not exceeding Rs. 50 during business hours on every working day.

  • Exemptions

The Rules shall not be applicable to the extent shares are held by the following:

a) Investor Education and Protection Fund.

b) Holding reporting company. However, the reporting company shall file BEN-2 which shall contain the Corporate Identification Number of the holding reporting company.

c) Central Government, State Government or any local Authority.

d) (i) a reporting company, or
(ii) A body corporate, or
(iii) An entity,

Controlled by the Central Government or by any State Government or
Governments, or partly by the Central Government and partly by one or more
State Governments.

e) Mutual funds, alternative investment funds, Real Estate Investment Trusts, Infrastructure Investment Trust registered with SEBI.

f) Investment Vehicles regulated by RBI, IRDA, PFRDA.

Thus, the reporting company shall be required to comply only in respect of the share capital not held by the aforesaid entities. For instance, if PQR Ltd. holds 66.66% shares in ABC Pvt. Ltd. (reporting company), ABC Pvt. Ltd. shall only have to identify SBO in respect of 34% of its share capital.

  • Penalties
Default Fine Imprisonment Continuing default
Failure to furnish BEN-1 Rs. 1 lakh to Rs. 10 lakh Extend to 1 year Rs. 1000 per day till default continues
Company fails to file BEN-2 Rs. 10 lakh to Rs. 50 lakh _ Rs. 1000 per day till default continues
Company fails to maintain register/ denies inspection Rs. 10 lakhs to Rs. 50 lakhs (company and every officer in default) _ Rs. 1000 per day till default continues
Individual wilfully furnishes false information/ supresses material fact Action under Section 447 (Fraud)
Any other default under Section 90 r/w the Rules (including failure by company to issue BEN-4) Penalty under Section 450

 

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Critical Issues in filing e-form DPT-3

Critical Issues in filing e-form DPT-3

The obligation on companies to file e-form DPT-3 “the form” is one of the many recent measures by the Ministry of Corporate Affairs to enhance corporate disclosures and identify defaulters hitherto escaping basis some loop holes in the law. Though, filing of the form has been an annual compliance since the inception of the Companies Act 2013, its scope has been considerably enhanced vide Ministry of Corporate Affairs notification dated 22nd January 2019. Due to the form’s close nexus to the company’s financials coupled with inconsistencies between the Companies Act 2013, Companies (Acceptance of Deposits) Rules 2014 and the form, form filing is yet to gather steam even in the last week before the deadline.

Hereunder, an effort has been made to highlight certain critical issues in respect of the form.

Definition of Deposit

As per Rule 2(1)(c ) of Companies (Acceptance of Deposits) Rules 2014, “Deposit” means any deposit of money with, and includes any amount borrowed by, a company, but does not include the items contained in the said Rule.

Regulatory mandate 

All companies are obligated to file the following returns in pursuance of amended Rules 16 and 16 A of Companies (Acceptance of Deposits) Rules 2014 in e-form DPT-3:Type of return Amounts covered Period coverage Due date Periodicity of filing
One time Return Exempted deposits * Received between 1st April 2014 and 31st March 2019 and outstanding as on 31st March 2019 29th June 2019 Only once
Regular Annual Return Deposits and/ or Exempted deposits * Outstanding as on 31st March of every year commencing from 31st March 2019 ^ On or before 30th June of every year Annually

*Exempted deposits means all amounts exempted from the definition of deposits under Rule 2(1) (c) of Companies (Acceptance of Deposits) Rules 2014.

^ The regular annual return shall encompass all deposits and/or exempted deposits outstanding as on 31st March 2019, irrespective of the date of receipt.

Note:

  1. As regards exempted deposits, one has to only fill the total amount outstanding in the one- time return, while the regular annual return shall encompass a detailed bifurcation into the relevant categories.
  2. The return pertaining to deposits has not undergone any change.
  3. The following companies are exempted from filing the aforementioned returns:
  • Banking companies and Non-Banking Financial Companies registered with RBI.
  • Housing Finance Companies registered with National Housing Bank.
  • Government Companies.

Critical Aspects

Exempted Deposits

The list of monies exempted from the purview of deposits is very exhaustive. Hence, in the interest of brevity, only some critical entries have been covered.

  1. Amount received from foreign sources (Rule 2(1) (c) (ii)): To classify as an exempted deposit, the provisions of the Foreign Exchange Management Act 1999 should be complied with.
  2. Amount received from other company (Rule 2(1)(c )(vi): Only amounts received from other companies are exempt. Thus, amounts received from other bodies corporate such as LLP, not covered in other entries shall classify as deposits.
  3. Amount received as share application money or advance for allotment of securities (Rule 2(1) (c) (vii): To classify as exempted deposit, the amount shall not be outstanding for more than 75 days from the date of receipt (60 + 15 days for refund). (it is to be noted that if share application money is received from another company and is outstanding for more than 75 days then such amount would be deemed deposit)
  4. Amount received from director or relative of director of Private Company (Rule 2(1) (c) (viii): The director or relative shall give a declaration at time of disbursing the amount, that the amount lent to the company is not from any monies borrowed by him. The company shall disclose in its Board’s report details of amounts accepted under this item. The amount shall continue to be an exempted deposit even if the person ceases to be a director of the company.
  5. Amount received from employee (Rule 2(1) (c) (x): The amount shall not exceed the annual salary of the employee and shall be in the nature of non-interest bearing security deposit pursuant to a contract of employment.
  6. Amount received as advance (Rule 2(1)(c )(xii)(a): The advance shall be appropriated against the specific goods/ services within 365 days of receipt of advance.
  7. Amount received from promoters of the company (Rule 2(1)(c )(xiii): The amount shall be brought in by promoters based on specific stipulation of bank/ financial institution. The amount shall be an exempted deposit only till the loan of bank/ financial institution remains outstanding. The amount shall only be brought in by the promoters or their relatives or both.

Auditors certificate:

  1. Auditors certificate is mandatory only for return of deposits i.e. while selecting option (ii) and (iv) in the form.
  2. It is recommended to procure Auditors certificate in case of exempted deposits as some ROCs are asking for the same based on their scrutiny of the form.
  3. The certificate shall be procured only from the Statutory Auditor of the company.

Networth:

  1. The figures shall be based on the latest audited Balance Sheet preceding the date of the return i.e., 31st March 2018.
  2. The net worth to be filled in the form contains an entry pertaining to intangible assets (Entry 8(b) (v)). This may result in the networth being different from the amount filed in the preceding annual filing forms. In such case, it is recommended for the company to attach a clarification.

Object clause: While prefilling the object clause of the company in entry no. 6 of the form, if the object clause is prefilled differently from the actual object clause of the company, there is no need to raise a ticket as it might have occurred due to difference in the NIC numbers. (as per Webinar by ICSI dated 17th June 2019)

Nil return: If no amounts are outstanding as on 31st March 2019, there is no need to file the forms.

  • Insurance companies only registered with IRDA and not with RBI are not exempted from filing the forms.

Interest outstanding: If interest amount is outstanding in respect of any item in the form, the same has to be clubbed with the principal.

In case of companies incorporated after 1st January 2019, they shall file the form based on un-audited figures.

Amounts received from shareholders from Private Company: The loans received by a private company from its shareholders less than 100% of its paid up capital, reserves and surplus and securities premium account shall classify as deposit and hence, the same has to be disclosed in the regular annual return under the return of deposits option. (MCA notifications dated 5th June 2015 & 13th June 2017)

Amount received from shareholders by Private Company prior to 1st April 2014: Loans received by private company from its shareholders under Section 58A of Companies Act 1956 shall not qualify as deposits under Companies Act 2013. However, annual disclosure has to be made in the notes to the financial statements till amount is outstanding. (General Circular 5/2015)

Statutory fees: The fees is based on the share capital of the company.

Failure to file within due date:

The company shall be liable to prescribed additional fees. Also, the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first day during which the contravention continues. (Rule 21 of Companies (Acceptance of Deposits) Rules 2014)