Significant Beneficial Owners: A Comprehensive Guide.

Significant Beneficial Owners , Introduction:

This guide provides a comprehensive overview of identifying significant beneficial owners (SBOs) for companies falling under the definition of “reporting companies” as outlined in Section 90 of the Companies Act, 2013. By understanding who qualifies as an SBO and how to identify them, reporting companies can ensure compliance with regulations and contribute to greater transparency in their operations.

Triggering an Investigation:

Any reporting company where rights or entitlements defined in Section 90 of the Companies Act, 2013, and its relevant rules are held by entities other than individuals must investigate to identify its SBOs. This includes situations where entities like trusts, partnerships, or body corporate hold shares or voting rights.

Who Qualifies as  Significant Beneficial Owners?

An individual qualifies as an SBO if they meet any of the following criteria, either through Indirect holdings only or in combination with direct holdings:

1. Owns 10% or more of the company’s shares
2. Holds voting rights equivalent to 10% or more of the shares
3. Enjoys the right to receive or participate in at least 10% of the total distributable dividend or any other distribution in a financial year
4. Exercises significant influence or control over the financial and operating policy decisions of the reporting company, but not control or joint control of those policies.

Determining Direct Holdings:

According to the Companies (Significant Beneficial Ownership) Rules, 2019, an individual’s direct holding in a reporting company can be established through two conditions:

1. Ownership in the individual’s name: This requires the individual’s name to be explicitly listed as the owner of shares in the company’s records that represent such rights or entitlements.
2. Declaration of beneficial interest: Even if not directly listed, an individual holding a beneficial interest in shares can be considered a direct holder if they have made a declaration to the company under sub-section (2) of section 89, acknowledging their beneficial ownership.

Identifying SBOs in the Case of Indirect Holdings:

The Companies (Significant Beneficial Ownership) Rules, 2019 provides specific guidelines to apply for identifying SBOs based on the type of entity holding the shares:

Case 1: Body Corporate (other than LLP)

• Majority stake in the body corporate: Holding a majority stake directly implies significant control and influence over the reporting company.
• Majority stake in the ultimate holding company: Tracing ownership through layers of holding companies is crucial to identify the true SBO.

What is a Majority Stake?

The Rules define a majority stake as any of the following:

1. Holding more than one-half of the equity share capital in the body corporate. This means owning more than 50% of the total number of shares issued by the company.
2. Holding more than one-half of the voting rights in the body corporate. This grants the holder significant influence over key decisions made by the company.
3. Having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate. This implies a substantial share in the company’s profits and other distributions.

Case 2: HUF

• The Karta (head of the family) is considered the SBO.

Case 3: Partnership Entity

 It means a firm registered under the Indian Partnership Act, 1932 or

A limited liability partnership registered under the Limited Liability Partnership Act, 2008 

• Partner: The partner is considered the SBO.
• Majority stake in a body corporate which is a partner of the partnership entity.
• Majority stake in the ultimate holding company of a body corporate which is a partner of the partnership entity.

Please refer to the Majority stake as defined in CASE 1

Case 4: Trust

• Discretionary or Charitable Trust: The trustee is considered the SBO due to their legal authority over trust assets and decision-making for beneficiaries.
• Specific Trust: The beneficiary with a definite right to receive benefits is considered the SBO.
• Revocable Trust: The author or settlor, retaining control over assets and the ability to revoke or modify the trust, is considered the SBO.

Case 5: Pooled Investment Vehicle (specific conditions)

• General Partner
• Investment manager
• Chief Executive Officer where the investment manager is a body corporate or partnership entity

Case 6: Pooled Investment Vehicle (other jurisdictions)

SBO is determined based on the criteria outlined in Cases 1 to 4, as applicable.

Conclusion:

By understanding these guidelines and systematically analyzing direct and indirect holdings, reporting companies can effectively identify SBOs and ensure compliance with regulations. This ultimately promotes transparency and accountability in the corporate landscape.

Additional Resources:

• Companies Act, 2013, Section 90
• Companies (Significant Beneficial Ownership) Rules, 2019
• Ministry of Corporate Affairs website

Disclaimer:

This guide provides general information and should not be considered legal advice. It is recommended to consult with legal professionals for specific guidance and interpretation of applicable regulations.