This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.

Date: 13 February 2019
Significant Beneficial Ownership Norms - Revamped
In complex and multi-layered corporate structure involving multiple entities, real individual owners often remain behind the scene and are generally not traceable. The Government of India has been aggressively taking steps to amend its laws to unfold these corporate cobweb so as to identify such real individual owners on look through basis. The Government has now again amended the law to bring clarity for enforcing compliance and bringing transparency in the corporate world.

Vide its notification dated 8 February 2019, the Ministry of Corporate Affairs has amended the Companies (Significant Beneficial Owners) Rules, 2018 ("New Rules") issued under Section 90 of the Companies Act, 2013 ("Act") and has laid down mandatory disclosure compliance requirements. The amendment has come into force from the date of notification.  

Key highlights:

Significant Beneficial Owner

New Rules have completely overhauled the definition of 'Significant beneficial Owner/SBO' to mean an individual, who acting alone or together, or through one or more persons or trust:

(i) holds indirectly, or together with any direct holdings, not less than 10% of the shares/voting rights in the shares in an Indian company; or
(ii) has right to receive or participate in not less than 10% of distributable dividend through indirect holdings alone or together with any direct holdings; or
(iii) has right to exercise or actually exercises significant influence or control in any manner other than direct holdings alone

The term 'Significant Influence' means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not in control or joint control of those policies. 

The term 'Control' is defined to 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. Such right may be exercised directly or indirectly. Such rights may be derived by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Direct Holdings

An individual is considered to be holding the aforesaid right or entitlement directly (i) if the shares in an Indian company are held in his or her name or (ii) if he or she holds or acquires a beneficial interest in the shares of an Indian company and has made a declaration under Section 89 of the Act.

The term 'Beneficial Interest' in a share include the right or entitlement of a person (without being a registered owner of such a share) to (i) exercise or cause to be exercised any or all the rights attached to the share; or (ii) receive or participate in any dividend or other distribution in respect of such a share. Further, the definition provides that such rights may arise out of any contract, arrangement or otherwise and may be exercised by such a person directly or indirectly, either alone or together with any other person.

Indirect Holdings

An individual is considered to be holding the aforesaid right or entitlement indirectly in an Indian company i.e. through body corporate, Hindu Undivided Family, Partnership Entity, Trust, Pooled Investment vehicle in the following situations:

(i) Where shareholder is a Body Corporate - if the individual holds majority stake (more than 50% of shares/voting rights/dividend rights) in that Body Corporate or its ultimate holding company.

(ii) Where shareholder is a Hindu Undivided Family - if the individual is the karta.

(iii) Where shareholder is a partnership entity (under the Partnership Act or Limited Liability Partnership Act) - if the individual is a partner or holds majority stake in Body Corporate Partner or its ultimate holding company.

(iv) Where shareholder is a Trust through trustee - if the individual is a trustee in case of discretionary trust or charitable trust / a beneficiary in case of specific trust / an author or settlor in case of revocable trust.

(v) Where shareholder is a Pooled Investment Vehicle or an entity controlled by it based in the country which is a member of Financial Action Task Force on money laundering and that country's securities market regulator is a member of the International Organization of Securities Commissions - if the individual is a general partner or investment manager, or Chief Executive Officer (where investment manager of such pooled vehicle is a body corporate or partnership entity). In other case, the provisions in (i), (ii), (iii) or (iv) above will apply. 

While the New Rules have clearly made out the distinction between direct and indirectly holdings, the use of the aforesaid phrases like 'indirectly, or together with direct holdings' and 'in any manner other than direct holdings' in the definition of SBO makes it clear that so long as an Individual has aforesaid right or entitlement through direct holdings alone, these compliance requirements doesn't apply. However, if an Individual has the aforesaid right or entitlement indirectly, or together with direct holdings, these compliance requirements will apply. 

The concept of indirect holdings i.e. looking through the corporate structure while disregarding the concept of corporate veil to find the Individual on the top is not envisaged under Section 90 of the Act, therefore, it appears that the New Rules have gone beyond the Act to that extent. 

Compliance Requirements

SBO is required file a declaration with the Indian company in the prescribed manner within 90 days from the commencement of the New Rules i.e. 8 February 2019. The Indian company, in turn, is required to record the disclosures made by SBO and maintain a register thereof and is also required to file such details with the Registrar of Companies, which will form part of the public records. The Indian company has also been obligated to identify and require SBO to file the prescribed declaration. If the required disclosures are not made in the satisfactory manner, the Indian company may even apply to the National Company Law Tribunal for seeking to restrict transfer of interest and suspend any or all rights attached to the shares. 
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Chambers of Rajan & Indraneel is a premier full service law firm headquartered at New Delhi, India. The Firm represents amalgamation of vast experiences and practices of two eminent lawyers. Indranil Ghosh is highly reputed as a disputes lawyer. He was a senior partner and head of litigation practice in one of the oldest Indian law firm Fox Mandal for several decades before setting up his own practice. Rajan D Gupta is a rank holder Chartered Accountant turned Corporate Lawyer. He is also a licensed Insolvency Resolution Professional. He has been associated with internationally renowned big law firms in past and has held senior level positions in firms like PwC, Fox Mandal, Khaitan & Co. and SRGR Law, etc. before starting the Firm.

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This newsletter contains general information available in public domain at the time of its preparation. It is intended as a general news update and is not intended to be comprehensive nor to provide specific business, financial, investment, legal, tax or other professional advice or opinion or services. This newsletter is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional adviser and refer to the source pronouncement/documents on which this business alert is based. It is also expressly clarified that this newsletter is neither a solicitation nor an invitation of any sort whatsoever or a source of advertising from our firm or any of its partners or lawyers or other professionals to create any adviser-client relationship. Whilst every effort has been made to ensure the accuracy of the information contained in this news alert, this cannot be guaranteed, and neither our firm nor any related person/entity shall have any liability to any person or entity that relies on the information contained in this publication. Any such reliance is solely at the user's risk.
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