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: 17 September 2018
Disclosure of Significant Beneficial Ownership (SBO) in Indian Companies - To Do or Not To Do
The newly inserted Section 90 of the Companies Act, 2013 ("2013 Act") requires every person to disclose his/her ‘beneficial interest’ if he/she is categorized as a ‘significant beneficial owner’ (“SBO”) in an Indian company. The Government of India has also issued new Companies (Significant Beneficial Owners) Rules, 2018 ("SBO Rules") to implement the provisions of Section 90. The SBO Rules define the expression 'Significant Beneficial Owner' to mean every individual, who acting alone or together with one or more persons or trust, including a trust and persons resident outside India, holds beneficial interest, of at least 10 per cent, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in Section 2(27) of the 2013 Act, but whose name is not entered in register of members of a company as the holder of such shares.

The term 'Beneficial Interest' in a share has been defined to 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.

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.

Section 90 does not define the term 'Significant Influence'. However, this expression has been defined under the Act in context of the term 'Associate Company'. Accordingly, ‘Significant Influence’ means control of at least 25% of the voting power, or control of or participation in business decisions under an agreement.

It appears that SBO Rules are ultra-vires Section 90 as they have not only traveled beyond the statutory contours laid out by Section 90, but they also seek to considerably expand the scope and applicability of Section 90 without statutory authorization. In fact, the definition of Significant Beneficial Owner provided in SBO Rules itself appears to be in complete violation of the definition of same term given in Section 90(1). It thus appears that SBO Rules have undesirably expanded the coverage of definition of ‘Significant Beneficial Ownership’ that may lead to several unintended consequences and may cause considerable inconvenience to the global parent entities of the multinational corporate doing business in India.

SBO Rules have been made applicable even to cases where the shareholders/members of the Indian company are persons other than individuals and natural persons. Significantly, SBO Rules use the expression 'ultimate beneficial ownership', whereas Section 90 provides for disclosure of significant ‘beneficial interest’ in the shares of an Indian company.

SBO Rules further provide that where a member of the Indian company in question is a ‘company’, the significant beneficial owner would be the natural person who holds not less than 10% shares of the company or exercises significant influence or control over the company. It may be noted here that the SBO Rules use term 'company' while explaining how ‘significant beneficial ownership’ shall be determined in case of persons other than individuals or natural persons. The term 'company' is defined under Companies Act 2013 as a company incorporated under the Act or under any previous law. Thus, the term ‘company’ does not include a company incorporated outside India. On the other hand, the expression 'body corporate' has been defined by the Act to include a company incorporated outside India. Interestingly, SBO Rules do not use the expression ‘body corporate’ but they only mention the term ‘company’. Thus, a pertinent question arises as to whether or not  a body corporate (i.e. a company incorporated outside India) holding shares in an Indian company would also be hit by the SBO disclosure requirements.

SBO Rules provides similar provisions for cases in which member of the Indian company in question is either a ‘partnership firm’ or a ‘trust’. Thus, in case the member of Indian company in question is a ‘partnership firm’ or a ‘trust’, then SBO Rules will apply requiring a disclosure by an individual holding ‘significant beneficial interest’ in such Indian company.

The Indian company in question is required to record the disclosures made by the ‘significant beneficial owners’ 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 Company can even apply to the National Company Law Tribunal if the required disclosures are not made and it may restrict transfer of interest and suspend all rights attached to the shares.

Indeed, poorly drafted Section 90 and SBO Rules do call for more clarity on correct applicability of the provisions. The Government must also ensure not to, in general, disregard or negate the well regarded concepts of ‘corporate veil’ and ‘separate legal entity’ in respect of corporate structures as ‘corporate veil’ is permitted to be pierced or lifted only in certain specific extreme circumstances. As of now, the Ministry of Corporate Affairs has extended the deadline to file the required disclosures as a respite to the corporates facing difficulties due to confusion and lack of clarity. It is expected that the Government of India will soon bring out suitable clarification or amendment. 
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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.

We have a team of experienced Lawyers, Chartered Accountants, Company Secretaries and Insolvency Resolution Professionals with access to network of high quality experienced lawyers in all major commercial cities of India.

The Firm offers a wide range of expert legal services in the areas of corporate and commercial laws and specializes in representing major foreign and domestic corporations with diverse business interests in India. The Firm is professionally equipped to handle large sized and complex corporate transactions like Mergers & Acquisitions, Corporate Restructuring, Joint Ventures, Inbound & Outbound Investments, Private Equity and Venture Capital Investment Transactions, Real Estate Transactions, Infrastructure Projects, Project Finance, Power Projects, Non-Conventional Energy Projects, Highways & Road Projects and Corporate Taxation as well as GST, etc. The Firm also offers proven capabilities in litigation and dispute resolution practice areas, especially in handling international and domestic arbitrations as well as litigation in Supreme Court, various High Courts of India and various judicial and quasi-judicial tribunals/forums including at National Client Law Tribunal, Appellate Tribunals, Tax Tribunals, Competition Commission, Electricity Tribunal, Telecom Disputes Tribunal, Designated Authorities and other adjudicatory bodies.

We have set up a Japan Business Desk (JBD) in order to serve our Japanese clients in a better way. The endeavour of the JBD is to act as a bridge between our professionals and clients from Japan so as to ensure that there are no barriers as to linguistic and cultural differences. This will indeed facilitate Japanese corporates doing business in India. 
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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