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MCA Tightens Scrutiny on Beneficial Ownership Norms for Foreign-Owned Companies

Last updated: 29 May 2024

The Ministry of Corporate Affairs (MCA) has intensified its examination of beneficial ownership standards for companies controlled by foreign investors, leading to significant compliance implications, according to legal experts.

The Registrar of Companies (RoC) has recently issued notices to multiple foreign-owned companies, including LinkedIn, for alleged violations of beneficial ownership disclosure norms, sources familiar with the matter disclosed. These notices were predominantly issued by RoCs in Haryana, Karnataka, and Mumbai, focusing on companies that had reported no significant beneficial owners (SBOs) in their annual filings. Several of these entities are fully owned by foreign private equity funds.

MCA Tightens Scrutiny on Beneficial Ownership Norms for Foreign-Owned Companies

Last week, RoC Delhi levied a penalty of Rs 27 lakh on LinkedIn and its key executives, including CEO Satya Nadella, for SBO norms violations. Prior to this, RoC imposed an Rs 18 lakh penalty on Gurgaon-based Leixir Resources and its foreign directors for similar non-compliance.

An email seeking comments from the ministry did not elicit a response.

"A consistent theme in the recent SBO non-compliance notices is a detailed examination of the reporting channels for investor directors and the fund structures on the cap table," noted a legal expert. "The RoC's scrutiny appears aimed at tracing the ultimate decision-makers within the fund structure related to the Indian portfolio entity. Although these notices might not deter investor sentiment long-term, they necessitate a reassessment of filings and compliance strategies."

India has been tightening its regulatory framework around beneficial ownership. The Securities and Exchange Board of India (SEBI) has also enhanced regulations concerning beneficial ownership in foreign portfolio investors (FPI) over the past year.

"Reporting companies must notify all corporate shareholders exceeding certain thresholds. Therefore, foreign funds and managers must understand their obligations under Indian law and respond to these notices with comprehensive details," explained another expert. "This will also help them structure their shareholding and decision-making processes within the reporting companies more effectively."

The RoC's actions aim to minimize regulatory discrepancies between foreign investments in listed versus unlisted companies. While foreign investments in listed companies require compliance with SEBI rules and upfront SBO disclosures, investments in unlisted companies through the foreign direct investment (FDI) route have not faced similar scrutiny.

"Many foreign-controlled companies declare no SBO despite being nearly wholly owned by a single entity, arguing that if the end-beneficiary is a corporate or pooled fund, there is no SBO. However, the rules specify that if the end-entity is a corporate or fund, the person controlling that entity, such as its CEO, should be the SBO," a source elaborated.

Legal experts warn that the ministry's recent actions could have extensive compliance ramifications.

"The aggressive approach taken by RoC in cases like LinkedIn has broader implications for large MNCs in India and could counteract the business-friendly environment the government aims to foster," commented another legal expert. "Filings, no matter how seemingly innocuous, should be handled with the highest diligence."

To meet these heightened transparency standards, foreign private equity funds may need to adjust their agreements.

"This situation could reshape fund-manager interactions, emphasizing the need for clearer agreements delineating roles, disclaiming control or influence, or recording reasons under the law to ensure individuals are not deemed SBOs," a tax expert suggested.

As India continues to enforce stricter compliance measures, companies and investors must stay vigilant and proactive in their reporting practices to avoid regulatory penalties and maintain smooth operations in the Indian market.

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