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:
- To qualify as SBO under clauses (i) to (iii), the individual(s) shall enjoy the rights indirectly. Direct exercise of rights is not mandatory.
- 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.
- The criteria in clauses (i) to (iii) are objective and have to be applied to each case.
- 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 | ||
