Beneficial Owner & SBO | Section 89 & 90 | Companies Act 2013

Yes, it’s like looking for a needle in a pile of other needles and if you are the beneficial owner then you’ll be getting all the perks related to that position.

“Not everyone wants to be identified as the beneficial owner, many criminals will deliberately use the opacity of corporate vehicles to hide their identity, hence financial action task force (FATF), an international body established in 1989 by more than 35 countries to sets standards for combating money laundering, terror financing by issuing guidelines for implementing risk-based approach towards handling customers.”

> Meaning of Ownership

‘Ownership’ is a bundle of rights attached to the property.

> Types of Ownership

Ownership is categorized into 4 different kinds:

“But generally, legal and beneficial owner are same”

> Direct V/S Indirect Ownership

EXAMPLE:

1. Mr. A directly holds 30 % in ABC Ltd

So he is the actual owner.

2. Mr. Z holds 100 % in XYZ Ltd. and XYZ Ltd. holds 70 % in ABC Ltd.

Mr. Z is indirect holder of shares of ABC Ltd. with 70% holding.

3. Mr. A hold 1 % in XYZ Ltd. and XYZ Ltd. holds 100 % in PQR Ltd. and in return PQR Ltd. also holds 99 % in XYZ ltd.

Here, subsidiary company can’t hold shares in its holding company. However, there is some exemptions u/s 19 of the Companies Act where a subsidiary can hold shares in its Holding Company.

> Concept of Registered Owner

Means a person whose name is entered in the register of members of company as the holder of shares, but who doesn’t hold beneficial interest in such shares.

“He is not the actual owner of shares, only his name is entered in ROM nor entitled to dividend or bonus shares”

“He is having voting rights, right to vote on poll, entitled to sign proxy form and counted for quorum”.

EXAMPLE:

Mr. A holds shares in ABC Ltd. and name of Mr. B is entered in ROM as registered member.

Mr. B is registered owner and Mr. A is actual owner

> Concept of Beneficial Owner

“A natural person who by virtue of express contract or arrangement oral or written ultimately owns or on whose behalf transaction is being conducted, i.e. a person who exercise ultimate control” over a legal person”.

Control: – Control means right to appoint majority of directors or right to control the management

“Who enjoys the benefits of being shareholder in a company through another person and with any % shareholding he can be beneficial owner”.

“A natural person, who acting alone or together with one or more judicial person and having controlled ownership interest or exercise control through other means”.

Controlled Ownership Interest means: – Entitled to receive income of estate without title, custody, or control over the property or the ownership/ entitlement of more than 25 % of shares or profits of the company.

Control means: – Right to appoint majority of the directors or control the management or poilicy decisions including shareholding and management rights

“One who is not having an apparent legal title, but enjoys the ownership of property”.

Beneficial Owner is defined under section 89 (10) of the companies act, 2013 which means the interest on shares directly or indirectly through contract or arrangement, alone or together with one or more persons to exercise or cause to be exercised any rights attached with such shares or receive or participate in dividend on such shares.

EXAMPLE:

1. Mr. X buys 100 shares in ABC limited via brokerage house, though shares are recorded under the broker’s name but Mr. X is beneficial owner.

2. In a case of WOS Company, holding company is holding 100 % shareholding in WOS in the name of a nominee, to maintain the minimum number of members in the company i.e. 2 for private and 7 for public.

(In this case, the company is beneficial owner and nominees are registered owner)

> Why the concept of Beneficial Owner emerged?

“The companies are independent corporate personality often misused for corporate illicit activities;

like money laundering, benami transactions, the Formation of shell companies, tax evasion, corruptions, having complex ownership by holding shares with different names & other illegal activities and;

Due to which company hide the real owners behind the transaction, and the properties held in benami transactions are liable for confiscation by the government”.

So to avoid the misuse of corporate vehicle, the Financial Action Task Force (FATF) designs and promote various policies to combat the financial crime.

Subsequently, to bring transparency, an onerous provision has been rolled out by MCA in regards to the concept of registered owner, beneficial owner & significant beneficial owner under section 89 and 90 of companies act, 2013 and this becomes an obligation on the company to collect the information from the respective persons and reporting the same to the registrar”.

“Under the beneficiary ownership rules, the company must maintain written records to identify and verify beneficial owners.”

> Detailed analysis of Section 89 of Companies Act, 2013

Section 89 of the Companies Act, 2013 read with rule 9 of Companies (Management and Administration) Rules, 2014 provides for the declaration to be filed by “Registered Owner” as well as “Beneficial Owner” and requires company to record such information in the registers, also this section doesn’t focus on quantum of shares.

If any change in the beneficial interest, registered owner to file declaration in Form MGT-4 within 30 days from such change.

If any change in the beneficial interest, beneficial owner to file declaration in Form MGT-5 within 30 days from such change.

“If no declaration was given by beneficial owner or registered owner to company, then as per section 89 (8) of the act no rights is available to beneficial owner or his representatives to any of his shares, but the company can’t refuse to pay dividend to members i.e.registered owners”.

> Contravention of Section 89 of Companies Act, 2013

S.NO Particulars Penalty
1. Failure to provide declaration by RO or BO Rs. 50,000 and if default continues Rs. 1,000 per day
2. Failure to provide declaration by company to registrar Rs. 5000 and if default continues Rs. 1,000 per day

> Crux of Section 89 of Companies Act, 2013

E-Form Purpose of Form Time Period By Whom To Whom
FORM MGT-4 Declaration of ownership within 30 days Registered owner Company
FORM MGT-4 Change of Beneficial Interest within 30 days Registered owner Company
FORM MGT-5 Declaration of ownership within 30 days Beneficial owner Company
FORM MGT-5 Change of Beneficial Interest within 30 days Beneficial owner Company
FORM MGT-6 Return of declaration provided by RO and BO by company to registrar After the receipt of declaration from RO and BO Company Registrar

> Case Studies in Respect to Section 89

Q.1 In case the beneficial holder and registered holder are two different people, then who is entitled to receive dividend/bonus shares?

The right to receive dividend/bonus shares lies with the ultimate beneficial owner, but company can also not restrict the rights for registered shareholder.

Q.2 Mr. A is registered holder of shares of PQR Ltd, whose beneficial owner is M/S XYZ Ltd. partnership firm.

The right to give declaration by both Mr. A as well as M/S XYZ Ltd. in MGT-4 and MGT-5 and subsequently by PQR Ltd. in MGT-6

Q.3 Mr. A is registered owner of 500 shares of PQR Ltd, whose beneficial owner is M/S XYZ Ltd. partnership firm, again Mr. B is registered owner of 1000 shares of PQR Ltd, whose beneficial owner is M/S XYZ Ltd. partnership firm. Mr. A transfers 500 shares to Mr. B

Since the beneficial owner remain the same, so no declaration is required to be made, SH-4 is sufficient to show the change.

> Concept of Significant Beneficial Owner

Identification of SBO is based on direct or indirect holding of any right or entitlement in the reporting entity. Every Individual (resident or non-resident) is determined as a significant beneficial owner:

Who acting alone or together or through one or more individual or trust or possess one or more “right or entitlement” in reporting company by way of holding indirectly or together with direct holding not less than 10% of shares/voting rights/distributable divided or right to exercise control or significant influence.

“Direct Right or Entitlement: – an Individual holding shares in the reporting company in his name or acquire beneficial interest in shares of reporting company and has made declaration u/s 89 is considered as holding right or entitlement directly.

“Indirect Right or Entitlement: – an individual holding shares in the reporting company through body corporate, HUF, partnership entity, trust or pooled investment vehicle, then that individual must holds majority stake in the body corporate or holding majority stake in the holding reporting company.

As per amended Rule 2A of SBO rules, SBO is an individual who holds:

1. Shares or Profit (equity, CCPS, CCD and GDRs’; in case of non-convertible PS, and failed to pay dividend for 2 years are counted in shares)

2. Voting Rights

3. Dividend and Control

DIRECT HOLDING

For the purpose of direct holding, the person must hold shares in his own name i.e. name must be mentioned in the register of members (in such case he is not SBO) or holds or acquire beneficial interest in shares of reporting company and declaration made in reporting company.

INDIRECT HOLDING

For the purpose of indirect holding, the member may hold the shares on behalf of body corporate, HUF, partnership firm, trust, or through pooled investment fund.

“If an individual doesn’t hold any indirect right or entitlement, then he is not considered as significant beneficial owner, so to be significant beneficial owner, he must have indirect holding”.

Where member of reporting company is a body corporate or an individual is holding shares indirectly on behalf of body corporate, then to be an SBO, he must be natural person and hold majority stake (more than ½ of shares or voting rights or right to participate in dividend) in the body corporate or the ultimate holding of body corporate.

Where member of reporting company is HUF, then SBO must be karta of HUF

Where the member of reporting company is partnership firm, then SBO is either partner or who holds majority stake in the body corporate which is partner of partnership entity or in its ultimate holding company.

Where member of reporting company is trust (acting through trustee), then SBO must be trustee if it’s charitable trust, beneficiary in case of specific trust or the author of trust in case of revocable trust.

Where member of reporting company is pooled investment vehicle or any entity controlled by pooled investment vehicle, and that individual is general partner or investment manager or CEO of that pooled investment vehicle where investment manager is body corporate or partnership entity.