AMENDMENT TO THE COMPANIES (SIGNIFICANT BENEFICIAL OWNERS) RULES, 2018

[Mr. M. GOVINDARAJAN]

Introduction

The Ministry of Corporate Affairs made the Rules called as ‘The Companies (Significant Beneficial Owners) Rules, 2018 vide Notification No. 561(E), dated 13.06.2018.

The Ministry of Corporate Affairs has now brought an amendment to the said Rules vide ‘The Companies (Significant Beneficial Owners) Amendment Rules, 2019 on 08.02.2019. The amended Rules shall come into effect after the publication of the said rules in the official gazette.  Major changes have been taken place in this amendment.

• New definitions have been substituted and inserted.
• New Rule 2A has been inserted.
• Rules 3 and 4 are substituted for new provisions.
• Rules 7 and 8 are substituted for new provisions.
• All forms BEN – 1, BEN – 2, BEN – 3 and BEN – 4 for new rules.

Definitions

The original Rules contain only 5 definitions.  The amendment brought out new definitions as detailed below-

• Rule 2(b) defines the term ‘control’ as. Section 2(27) of the Companies Act, 2013 defines the term ‘control’ as .
• Rule 2(c) defines the term ‘form’ as the form specified in Annexure to these rules (BEN – 1, BEN – 2, BEN – 3 and BEN – 4).
• Rule 2(d) defines the expression ‘majority stake’ as-

• holding more than one-half of the equity share capital in the body corporate; or
• holding more than one-half of the voting rights in the body corporate; or
• having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate.

• Rule 2(e) defines the expression ‘partnership entity’ as .
• Rule 2(f) defines the expression ‘reporting company’ as t.
• Rule 2(g) defines the term ‘section’ as
• Rule 2(h) defines the expression ‘ Significant beneficial owner’ in relation to a reporting company as an individual referred to in sub-section (1) of section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:-

• holds indirectly, or together with any direct holdings, not less than ten per cent. of the shares;
• holds indirectly, or together with any direct holdings, not less than ten per cent. of the voting rights in the shares;
• has right to receive or participate in not less than ten per cent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
• has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone:

• Explanation I to this Rule provides that
• Explanation II to this Rule provides that

• the shares in the reporting company representing such right or entitlement are held in the name of the individual;
• the individual holds or acquires a beneficial interest in the share of the reporting company under  section 89(2), and has made a declaration in this regard to the reporting company.

• Explanation III to this Rule provides that

• where the member of the reporting company is a body corporate (whether incorporated or registered in India or abroad), other than a limited liability partnership, and the individual,-

• holds majority stake in that member; or
• holds majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of that member;

• where the member of the reporting company is a Hindu Undivided Family (HUF) (through karta), and the individual is the karta of the HUF;
• where the member of the reporting company is a partnership entity (through itself or a partner), and the individual,

• is a partner; or
• holds majority stake in the body corporate which is a partner of the partnership entity; or
• holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.

• where the member of the reporting company is a trust (through trustee), and the individual,-

• is a trustee in case of a discretionary trust or a charitable trust;
• is a beneficiary in case of a specific trust;
• is the author or settlor in case of a revocable trust.

• where the member of the reporting company is,

• a pooled investment vehicle; or
• an entity controlled by the pooled investment vehicle,

based in member State 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, and the individual in relation to the pooled investment vehicle,

• is a general partner; or
• is an investment manager; or
• is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.

• Explanation IV to this Rule provides that

• a pooled investment vehicle; or
• an entity controlled by the pooled investment vehicle,

based in a jurisdiction which does not fulfill the requirements referred to in clause (v) of Explanation III, the provisions of clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation Ill, as the case may be, shall apply.

• Explanation V to this Rule provides that if any individual, or individuals 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 a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be 'acting together'.
• Explanation VI to this Rule provides that the instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as 'shares'.

• Rule 2(i) defines the expression ‘significance influence’ as

Duty of the reporting company

New Rule 2A has been inserted by this amendment which makes an obligation on the reporting company.  Rule 2A provides that-

• every reporting company shall take necessary steps to find out if there is any individual who is a significant beneficial owner, in relation to that reporting company, and if so, identify him and cause such individual to make a declaration in Form No. BEN-1;
• every reporting company shall in all cases where its member (other than an individual), holds not less than ten per cent. of its;-

• shares, or
• voting rights, or
• right to receive or participate in the dividend or any other distribution payable in a financial year,

give notice to such member, seeking information in accordance with sub-section (5) of section 90, in Form No. BEN-4.

Declaration of significant beneficial ownership under section 90

The amendment substituted Rule 3 which deals with the declaration of significant beneficial ownership under section 90.  The newly substituted Rule 3 provides that-

• On the date of commencement of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, every individual who is a significant beneficial owner in a reporting company, shall file a declaration in Form No. BEN-1 to the reporting company within 90 days from such commencement.
• Every individual, who subsequently becomes a significant beneficial owner or where his significant beneficial ownership undergoes any change, shall file a declaration in Form No. BEN-1 to the reporting company, within 30 days of acquiring such significant beneficial ownership or any change therein.

The explanation to this Rule provides that where an individual becomes a significant beneficial owner, or where his significant beneficial ownership undergoes any change, within 90 days of the commencement of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, it shall be deemed that such individual became the significant beneficial owner or any change therein happened on the date of expiry of 90 days from the date of commencement of said rules, and the period of thirty days for filing will be reckoned accordingly.

Return

The amendment substituted a new Rule for Rule 4.  The newly substituted Rule 4 provides that upon receipt of declaration under rule 3, the reporting company shall file a return in Form No. BEN-2 with the Registrar in respect of such declaration, within a period of 30 days from the date of receipt of such declaration by it, along with the fees as prescribed.

Application to the Tribunal

The amendment substituted a new Rule for Rule 7.  The newly substituted Rule 7 provides that the reporting company shall apply to the Tribunal-

• where any person fails to give the information required by the notice in Form No. BEN-4, within the time specified therein; or
• where the information given is not satisfactory,

in accordance with section 90(7), for order directing that the shares in question be subject to restrictions, including –

• restrictions on the transfer of interest attached to the shares in question;
• suspension of the right to receive dividend or any other distribution in relation to the shares in question;
• suspension of voting rights in relation to the shares in question;
• any other restriction on all or any of the rights attached with the shares in question.

Non applicability

The newly substituted Rule 8 provides that these rules shall not be made applicable to the extent the share of the reporting company is held by-

• the authority constituted under  section 125(5)  of the Act (Authority for IEPF);
• its holding reporting company; the details of such holding reporting company shall be reported in Form No. BEN-2;
• the Central Government, State Government or any local Authority;
• a reporting company, or a body corporate, or 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;
• Securities and Exchange Board of India registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InVITs) regulated by the Securities and Exchange Board of India;
• Investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

Forms

The newly substituted forms by the amendment are as follows-

• Form No. BEN – 1 - Declaration by the beneficial owner who holds or acquires significant beneficial ownership in shares.
• Form No. BEN- 2 – Return to the Registrar in respect of declaration under section 90.
• Form No. BEN – 3 – Register of beneficial owners holding significant beneficial ownership.
• Form No. BEN – 4.

Conclusion

The amendment to the Rules requires the companies to identify the beneficial owners and obtain a declaration from them.  The disclosures relating to significant beneficial owners are expected to lead to transparency of shareholding structures, and help the Government identify benami transactions and prevent money laundering activities.