Samsung Display Noida Case and the Expanding Scope of SBO Identification

[Mahi Singh]

In the matter of IN RE : SAMSUNG DISPLAY NOIDA PRIVATE LIMITED - 2024 (7) TMI 448 - REGISTRAR OF COMPANIES & ADJUDICATING OFFICER UTTAR PRADESH, KANPUR.

Shareholding determines the say in decisions of the company from the appointment of directors to restructuring decisions; Section 90 of the Companies Act, 2013 aimed at knowing the significant shareholders who may tend to exercise significant control over the company mandates declaration of such detail aimed at transparency and further, supplemented with detailed procedure with Companies (Significant Beneficial Owners) Rules, 2018, and BEN forms. 

Section 454 of the Companies Act, 2013 empowers the Registrar, as delegated by the Central government, to penalise the company for non-compliance.
Recently, the office of the Registrar of Companies, Uttar Pradesh, was presented with the challenge where Samsung Display Noida Private Ltd. had violated the SBO norms by not disclosing their SBOs to the registrar's office under the Companies Act, 2013. The company was penalised for Rs. 8,14,200.

Accusation:-
The reporting company is a wholly owned subsidiary company of Samsung Display Co. After examination by the MCA, it was found that declarations lacked filling e-form BEN-2(Return to the Registrar in respect of declaration under Section 90). The reporting company ought to have filled out the e-form BEN-2 under Section 90 of the Companies Act. Therefore, a notice under Section 206(1) of the Act 2013 dated 15.04.2024. was issued.

The reporting company’s reply:-
The reporting company stated the shareholding that was held by the companies wherein it was made clear that the reporting company is wholly owned by the Samsung Display Co. Ltd. (SDC, Korea) and 84.8% of SDC, Korea shareholding is held by Samsung Electronics Co., Ltd, Korea (SEC, Korea) and remaining 15.2% of SDC, Korea is with Samsung SDI Co. Ltd., (SDI, Korea). 

They also stated that SDC Korea and SDE Korea are listed companies on the Korean Stock Exchange; accordingly, the holding companies are from outside India and no individual, whether directly or indirectly, acting alone or together, holds the majority shares in the SEC Korea (the Ultimate company) and SDC Korea (the holding company), so, no individual falls under the category of SBO under Section 90. 

After the examination of the documents and the submissions made by the reporting company, it was observed that the reason given by the reporting company is solely based on the self-evaluation that no individual holds more than 10% of the reporting company. However, the reporting company have failed to take into consideration the indirect holding by virtue of indirect holding, exercise of control or significant control.

After the above observation, the Show cause notice (SCN) was issued to the reporting company, its directors and Key Managerial Personnel (KMP) for non-compliance with Section 90 along with SBO rules made under, dated 15.04.2024.

Response of reporting company to the SCN:-
The reporting company remained stuck to the prior response and defended itself on the grounds of Rule 2(1)(h) of the Companies (Significant Beneficial Owners) Rules, 2018 of the Act and the explanations I & III stating that the reporting company is a separate legal entity. Its own Board of Directors is completely managing it. Moreover, no individual has a majority or more than 10% of the share in the reporting company.

ROC’s response:- 
The reporting company’s response was not acceptable because the person residing outside India holds a beneficial interest in the reporting company, and this goes against Section 90(1) of the Companies Act. The company also did not take the necessary steps to identify the SBO with the nature of indirect holding. Therefore, the company’s efforts in relation to Section 90, sub-section 4A and 5 of the Act were found to be insufficient. 

The reporting company has one current account at Citi Bank N.A., New Delhi. As per RBI’s mandate, the company must disclose the Beneficiary owner when opening the legal person account. Instead of sharing the UBO disclosure, the reporting company sent an email correspondence to Citi Bank N. A..  

The reporting company, in a response dated 10.05.2024, shared the consolidated financial statements of Samsung Electronics Company Ltd., where it disclosed the fact that SEC Korea is the controlling company and Samsung Display Noida Private Ltd is wholly owned by it. 

As per information from the public domain, Mr Lee Hee, along with his family, holds around 21.46% shares of SEC Korea, while with deeper investigation, it was revealed that Lee Jae-Yong, son of Mr Lee Hee, along with his family, holds significant stakes in Samsung Life Insurance Co. Ltd & Samsung C&T, which constitute around 8.64% and 5.01% shares, respectively, in SEC Korea.

Generally, in the case of a Publicly listed Company, if the individual holds more than 25% of the company shareholding either individually or collectively, then it is said to have a significant influence over the company. Whereas, in the present case, it was noticed that even though Mr Lee Jae Yong did not hold the majority shares of SEC Korea, then also appointed as the Executive Chairman by the Board of Directors on the recommendation of the Board Chairman. Therefore, it shows that there was no genuine reason for the appointment of Mr. Lee Jae Yong, as there was already a Board of Directors. Still, Mr. Lee Jae was appointed without providing any reason behind the decision. 

Therefore, it shows that the Lee family has significant control over the board as he holds cross-ownership in various subsidiaries, including Samsung Electronics, which is considered to be the jewel of the Samsung Group. That is enough to steer the entire company and influence the management decisions of SEC, Korea. 
Accordingly, after the appointment of Mr Lee, the company ought to have declared him as an SBO u/s 90 of the Companies Act, 2013. The reporting company ought to have complied with Section 90(5) of the Companies Act mandating seeking the information by way of giving notice under the BEN-4 form from all those who hold more than 10% of the shares or voting rights or rights to participate in dividend needs.

Section 90(4A) requires the company to identify SBO individuals. The reporting company needs to take more steps to identify the present individual as SBO, therefore violating Section 90(4A). 

In concluding remarks, the Registrar of Companies, Uttar Pradesh, laid out that the reporting company is in default and has violated Section 90 of the Companies Act, 2013. The default period for penalisation was concluded to be 1212 days. The reporting company, its present director and the KMP were penalised with Rs. 8,14,200. The company was also ordered to file BEN-2 under Section 454(3)(b) of the Companies Act within 90 days of this Order. 
In the matter of Samsung SDI India Private Limited (No. 03/06/SBO/UP/2024/Samsung SDI), a similar adjudication on the same date was against Samsung’s SDI India Private Limited, based on the ground that Mr. Lee Jae-Yong and his family exercised control, indirectly influencing the company’s decisions.

Impact:-
The SBO declaration is a way of ensuring accountability in a company’s actions. Although a company is an artificial entity, it ultimately operates under the control of individuals. In the age of conglomerates, a complex web of ownership exists, making it immensely crucial to identify the real human owners. This task becomes even more complicated when ultimate ownership rests with a foreign citizen, as concerns related to orderly foreign exchange management and tax evasion come into play. The MCA‘s action acting through the Registrar is evidence of a careful approach towards foreign shareholding, also evident with the preceding order of the Registrar for NCR and Haryana against LinkedIn India (No. ROC/D/Adj/Order/Section 89&90/2246- 2256) , penalising for non-compliance with the SBO declaration.