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FAQs on Significant Beneficial Owner (SBO)

CS Divesh Goyal 
on 15 October 2018

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The Provisions of SBO, in a different form, been part of the Companies Act, 1956, under section 180(7)(3). The new avatar comes under Section 90 of the Companies Act, 2013, as amended in 2017.

The issue of the misuse of multi-layered corporate entities has grabbed attention of various policymakers and regulators. Regulatory authorities have adopted a step-by-step approach and tried to address this issue by enacting various legislations, notable among them being:

Legislature Background:

i. To Which Companies these SBO provisions shall apply?

Provisions of SBO applicable on all the Companies. (Here company means reporting Company)

  • Listed Public
  • Unlisted Public and
  • Private

ii. To Which Companies these SBO provisions shall not apply?

The provisions shall not apply to the holding of shares of companies/body Corporates, in case of pooled investment vehicles/investment funds such as Mutual Funds,

i. Alterative Investment Funds (AIFs),
ii. Real Estate Investment Trusts(REITs) and
iii. Infrastructure Investment Trusts (lnvlTs) regulated under SEBI Act.

iii. The word "together with any other person to" includes interest of Relatives in shares also?

Computing threshold of 10%, the combined holding of the person along with the holding of such other persons having common interest shall also be considered.

iv. Whether a Company/ Trust/ Body Corporate can be Significant Beneficial Owner?

As per Section 90, only a Natural Person can be Significant Beneficial Owner. For the purpose of significant beneficial owner, in case of 'person other than individuals or natural person', shall be determined as under:


S. No.

Where Member is

Along with

Percentage

A.

INDIVIDUAL

- Who acting alone or
- Together, or
- Through one or more persons or trust, including a trust and persons resident outside India

Hold at least 10% of share capital of the Company

B.

COMPANY

Significant beneficial owner is the natural person, who,

- Whether acting alone or
- Together with other natural persons, or
- Through one or more other persons or trust

Hold atleast 10% of share capital of the Company or
Who exercise significant influence or control in the company through other means.

C.

PARTNERSHIP FIRM

Significant beneficial owner is the natural person, who,

- Whether acting alone or
- Together with other natural persons, or
- Through one or more other persons or trust

Hold at least 10% of capital or
Has entitled of not less than 10% of profits of the partnership firm.

D.

TRUST

The beneficial owner shall includes

- identification of the author of the trust, and
- the trustee, and
- the beneficiaries with not less than 10% interest in the trust and
- any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.


v. If an individual holding interest in shares less than 10% whether SBO rules shall apply on such person

First Condition for applicability of SBO Rules and section 90 i.e. Natural person should have at least 10% of interest in 'Shares'.

Example:

Capital Structure of Company ABC limited is as following:

  • Equity Share Capital of Rs. 1,000
  • CCD's of Rs. 1,500
  • CCPS' of Rs. 500

TOTAL Rs. 3,000

Mr. A beneficially holds Rs. 260 equity shares in the Company. Whether Mr. A beneficially required to give disclosure under SBO?

Solution: For the purpose of SBO Rules share capital includes (CCD's and CCP's). Therefore total share capital of the Company is Rs. 3,000/-.

Mr. A beneficially holds Share capital of Rs. 260/-. His percentage of holding is 260/3000= 8.667%. As holding of Mr. A beneficially is less than 10% therefore no need to give disclosures u/s 90 of SBO Provisions.

vi. Meaning of Shares under Section 90 read with relevant rules.

As per Explanation II of Rule 2 (e) of SBO Rules, For the purpose of calculation of 10% of beneficial interest in shares, Shares Includes…Instrument in form of

  • Global Depository Receipts,
  • Compulsorily Convertible Preference Shares or
  • Compulsory convertible debentures.

vii. Whether SBO rules applicable on person resident outside INDIA (Non-Resident.

The definition of SBO includes non-residents as well. Therefore, the non-residents shall also be covered by the said provisions.

viii. Checks for applicability of SBO Provisions and rules?

1. There should be an Natural Person.
2. Individual having beneficial interest not less than 10% of share capital.
3. Name of such individual not entered into register of Members.
4. Share capital includes (GDR+CCP's+CCD's)

What is meaning of Senior Managing Official?

The same has not been defined in the final rules or anywhere else under Companies Act.

Therefore, as per the General practices:

• SMO shall be someone who exercises strategic decision making powers in respect of the legal person (for example, a company director).

• In situations where there is more than one official of a legal person with strategic decision making powers and none is senior to the others, all should be treated as senior managing officials.

• Accordingly, the CEO/ MD/ Manager/WTD of the company to be identified as SBO.

HYPOTHETICAL SITUATIONS

A. If an Individual ('a') holding shares in any Company (Exp. Mr. A Holding 50% shareholding of ABC Pvt. Ltd. and his name entered into register of member) Whether provisions of SBO shall be applicable on Mr. A or Not?

As per meaning "Significant Beneficial Owner: means beneficial owner holding ultimate beneficial interest not less than 10% and whose name not entered in the register of members of a Company."

Therefore, One can opine that SBO provision applicable on person who is holding beneficial interest and whose name not entered into register of members. In above mentioned example individual holding shares directly in the company in his name therefore provision of SBO not applicable on such individual.

B. If an Individual ('a') holding shares in any Company, (Exp. Mr. A Holding 5% shareholding of ABC Pvt. Ltd. and his name not entered into register of member).

On behalf of Mr. a name of Mr. B entered into register of Members. Whether provisions of SBO shall be applicable on Mr. A or Not? As per SBO Significant Beneficial Owner: means beneficial owner holding ultimate beneficial interest not less than 10% and whose name not entered in the register of members of a Company.

In the above mentioned question, shareholding is less than 10% therefore question of SBO doesn't arise. No need to made compliances as per SBO.

C. If in the question B; Mr. A Holding 18% shareholding of ABC Pvt. Ltd. and his name not entered into register of member). On behalf of Mr. a name of Mr. B entered into register of Members. Whether provisions of SBO shall be applicable on Mr. A or Not?

Mr. A is beneficial owner and Mr. B is registered owner. Mr. B holding shares on behalf of Mr. A which is more than 10%.

As per SBO provisions, Mr. A fall under conditions of Section 90. Therefore, have to comply with the provisions of Section 90.

D. What is Director Shareholding and Indirect Share holding?

• Mr. X hold 25% shares of XYZ limited in his Name.
• Mr. Y hold 99% shares of ABC Limited and ABC Limited Hold 70% shares in XYZ Limited in its name.

In the above mentioned case Mr. X hold Directly 25% shares in XYZ and

Mr. Y holds indirectly 70% shares of XYZ Limited.

E. Mr. X hold beneficial interest in A Ltd, B Ltd, C LTD and D LTD. Should Mr. X disclose in BEN 1 to all the Companies?

Yes, Mr. X has to disclose to all the Companies.

F. Mr. X holds 80% of P Ltd, which holds 80% of Q Ltd. Can Mr. X claim that I have complied with my obligation having disclosed to P Ltd, and P Ltd should have disclosed my indirect holding to Q? Can Mr. X say that he has no idea about P's holding of Q?

No. The SBO should provide the declaration of its beneficial interest in all the companies. It is pertinent to note that the one who has control or significant influence cannot plead unawareness. Therefore, right upto the vertical spectrum, Mr. X will have to keep disclosing

G. Mr. A holds 30% of P Ltd. Now, P Ltd holds 60% of Q Ltd, and Q Ltd holds 30% of R Ltd. Mr. A holds some 5% directly into R Ltd. So, should Mr. A disclose to P Ltd, Q Ltd and R Ltd?

Yes. The definition of beneficial interest covers both direct as well as indirect holding. Therefore, the Mr. A should provide the declaration to all the companies except P Ltd.

H. XYZ Limited is a company where no natural person is identified even though in the shareholding pattern its shareholders are company and firms both. But in spite of all efforts no natural person is identified who can be categories as a significant beneficial owner in XYZ Ltd.

Keeping in view, the provisions of Section 90 read with relevant rules who would be treated as significant beneficial owner

As per Rule 2(e) (iii) of Companies (Significant Beneficial Owners) Rules, 2018, the natural person who holds the position of Senior managing official such as Directors, Managing Directors, or any person what so ever designation he holds, but who controls the affairs of the company shall be consider as significant beneficial owner

I. Situation

Mr. X Hold 10% share holding of PQR Limited
PQR Limited hold 90% share holding of XYZ Limited
XYZ Limited Hold 15% share holding of ABC Limited

a. Whether Mr. X need to Give SBO disclosure to PQR Limited
No, because he is holding shares in PQR limited directly not as beneficial.

b. Whether Mr. X need to Give SBO disclosure to XYZ Limited
No, because his holding in XYZ limited is less than 10%. (90 * 10% = 9%)

c. Whether Mr. X need to Give SBO disclosure to ABC Limited
No, because his holding in ABC limited is less than 10%. (15 * 90% * 10% = 1.35%)

J. Situation

Mr. X Hold 5% share holding of PQR Limited
Mr. X Hold 15% share holding of XYZ Limited
XYZ holds 95% share holding of PQR Limited

a. Whether Mr. X need to Give SBO disclosure to XYZ Limited
No, because he is holding shares in PQR limited directly not as beneficial.

b. Whether Mr. X need to Give SBO disclosure to PQR Limited
Yes, Because X Natural Person acting as as Registered Owner As Well As SBO for XYZ Limited.

Mr. A Directly hold shares 5%
Through XYZ limited Holds (95 * 15%) 14.25%
Ultimate holding of A in XYZ is (5+14.25 = 19.25%) directly or indirectly

K. COMPANY:

Holding Company (H) Subsidiary Company (S)
Shareholder of H: Mr. A Mr. B Mr. C

Situation I:

Company 'H' holding 50% shareholding of Company 'S'. Mr. A, B and C hold 10%, 20% and 30% shares of Company 'H'. Whether A, B, C have to file BEN-1 to Company's'?

Solution: Interest of A, B, C in 'S' shall be as follow:


S. No.

Shareholders

Holding in 'H'

Holding of 'H” in 'S'

Ultimate inters of Shareholders in 'S'

BEN-1

1.

A

10%

50%

(50*10%) = 5%

N

2.

B

20%

50%

(50*20%) = 10%

Y

3.

C

30%

50%

(50*30%) = 15%

Y


Situation II:

Company 'H' holding 30% shareholding of Company 'S'. Mr. A, B and C hold 50%, 30% and 5% shares of Company 'H'. Whether A, B, C have to file BEN-1 to Company's'?

Solution: Interest of A, B, C in 'S' shall be as follow:


S. No.

Shareholders

Holding in 'H'

Holding of 'H” in 'S'

Ultimate inters of Shareholders in 'S'

BEN-1

1.

A

50%

30%

(30*50%) = 15%

Y

2.

B

30%

30%

(30*30%) = 9%

N

3.

C

5%

30%

(30*5%) = 1.5%

N


Situation III:

Company 'H' holding 10% shareholding of Company 'S'. Mr. A and B hold 99%, and 1% shares of Company 'H'. Whether A and B have to file BEN-1 to Company's'?

Solution: Interest of A, B, C in 'S' shall be as follow:


S. No.

Shareholders

Holding in 'H'

Holding of 'H' in 'S'

Ultimate inters of Shareholders in 'S'

BEN-1

1.

A

10%

99%

(10*99%) = 9.9%

N

2.

B

10%

1%

(30*1%) = .1%

N


NOTE: As we discussed about the Company as Beneficial Interest same is situation with Partnership firms or Trust.


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