Jul 6, 2021

Significant Beneficial Ownership

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INTRODUCTION

After the recommendation of  Financial Action Task Force (FATF, an inter-governmental body) and suggestions of the Company Law Committee, the Central Government introduced the concept of Significant Beneficial Ownership by way of substituting Section 90 of the Companies Act, 2013 (‘Act’) by the Companies (Amendment) Act, 2017. As per Section 90, a declaration is to be given to the company by every individual who, acting alone or together or through one or more person including a trust and persons resident outside India, holds beneficial interest of not less than 25% or other prescribed percentage in shares of a company or the right to exercise or the actual exercising of significant influence or control under section 2(27) of the Act. A person giving declaration as aforesaid shall be the Significant Beneficial Owner (‘SBO’).

Alongside introduction of SBO, the Central Government also notified Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’) on 13th June, 2018, which deal with identification and reporting in connection with SBO. The original SBO Rules, not only created lot of confusion but were  mired with issues and  multiple interpretations.  Therefore, considering stakeholders representation on 08th February, 2019, the Central Government completely overhauled the SBO Rules and expanded the definition of SBO to mean an individual who, either alone or together with other individuals or trust, exercises rights or entitlements in the Reporting Company by way of holding 10% shares or 10% voting rights or right to receive 10% or more dividend, both indirect and direct holdings or rights taken together or such individual exercises significant influence or control, indirectly or along with direct holding in the Reporting Company.

DUTY OF THE REPORTING COMPANY:

While the SBO Rules cast obligation on the person, who is the SBO to make requisite declaration under Section 90 but sub-section (4A) and (5) read with Rule 2A of SBO Rules, also cast the following responsibilities on a company, in respect to whom a declaration of SBO is required to be made:

  1. To take necessary steps to identify an individual who is a significant beneficial owner in relation to the company and require him to comply with the provisions of this section.
  2. To give notice, in Form BEN-4-

    (1) to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe—

      (a) to be a significant beneficial owner of the company;

      (b) to be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or

      (c) to have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued,

      and who is not registered as a significant beneficial owner with the company as required under this section.

    (2) to every member (other than individual), holding not less than 10% of its shares,

    to provide the information sought in Form BEN-4.

The responsibility on a company to send Form BEN-4 to any individual, who it believes to be a significant beneficial owner should  be backed by strong reasons and evidence. Some of the such cases may be:

  • Directions by a shareholder to pay dividend to some other person
  • Voting instructions by some other individual
  • Appointment of same person as proxy in all general meetings

Every person to whom notice is given in Form BEN-4 shall have to either inform the company that there is no significant beneficial owner or he/she is not the significant beneficial owner or provide the details of significant beneficial owner. The said action is important on account of the consequences arising out of non-reporting as dealt with by sub-section (7) of section 90.

While the intent behind casting aforesaid responsibility on a company is to ensure that significant beneficial owner is identified but this responsibility because of the consequences associated with it, is of significant importance, as in Indian scenario where most of the companies are closely held, existence of significant beneficial owner in respect of corporate members will always be the case and intentional non-disclosure, will force the company to move application to NCLT.    

CONSEQUENCES OF NON-REPORTING UNDER SUB-SECTION (5) READ WITH SBO RULES

As per sub-section (7) of section 90 read with Rule 7 of the SBO Rules, where any person fails to give the information required by BEN-4, within the time specified therein or where the information given is not satisfactory, then the reporting company shall apply to the Tribunal (NCLT) within a period of 15 days of the expiry of the period specified in BEN-4 for order directing that the shares in question be subject to restrictions, including:

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

It is important to that in circumstances as mentioned above i.e. no information is received or where the information given is not satisfactory, a company is under a mandatory obligation to file an application with the NCLT. With respect to a situation where the information received is not satisfactory as per a company, then the company shall have strong reasons and justifiable evidence to make a case for information not being satisfactory.

One must keep in mind that NCLT on application moved by a company is not under a binding obligation to pass any restrictive order and the concerned person or member shall have the opportunity to explain why he or she is not a significant beneficial owner and retract the contentions made by the company.

Any person aggrieved by the order of the NCLT may make an application to the NCLT for relaxation or lifting of the restrictions, within a period of one year from the date of such order as per sub-section (9) of Section 90. However, if no such application has been filed within a period of one year from the date of the order, then the company shall be under an obligation to transfer such shares without any restrictions, to the IEPF authority, in the prescribed manner.

TRANSFER OF SHARES TO IEPF AUTHORITY

The Companies (Amendment) Ordinance, 2018 introduced the requirement of transferring shares in respect to which an order is passed by NCLT under sub-section (8) to IEPF authority and after almost two and half years, MCA has amended the IEPF (Accounting, Audit, Transfer and Refund) Rules, 2016 w.e.f. 09th June, 2021 to insert new Rule 6A, which provides the manner of transfer of shares as per sub-section (9) of Section 90 to the IEPF authority.

As per the Rule 6A, the shares shall be credited to DEMAT Account of the IEPF Authority within a period of 30 days of such shares due to be transferred to the IEPF Authority with the following important conditions:

  1. Transfer of shares by the companies to the IEPF Authority shall be deemed to be transmission of shares and the procedure to be followed for transmission of shares shall be followed by the companies while transferring the shares to the IEPF Authority;
  2. Such shares shall be transferred to the IEPF Authority without any restrictions and no application shall be filed for claiming back such shares from the IEPF Authority;
  3. The voting rights on shares transferred to the IEPF Fund shall remain frozen. However, for the purpose of the SEBI (SAST) Regulations, 2011, the shares which have been transferred to the IEPF Authority shall not be excluded while calculating the total voting rights.

While under Section 124, shares on which dividend remains unpaid or unclaimed for seven years, are also required to be transferred to IEPF Authority but the significant difference with respect to shares transferred to IEPF Authority under sub-section (9), is that such shares once transferred can’t be claimed back, as opposed to shares transferred under Section 124, which can be claimed back from IEPF authority. It is because of the restriction on claiming back the shares transferred to IEPF Authority under sub-section (9) that both the disclosure of significant beneficial ownership and obligation cast on a company, are of great importance.

PROCEDURE TO TRANSFER SHARES TO IEPF AUTHORITY

Where the shares are dealt with in a depository: Where the shares are held in physical form:

STEP-I: Company shall inform the depository by way of corporate action, where the shareholders have their accounts for transfer in favour of the IEPF Authority,

STEP-II: On receipt of such intimation, the depository shall effect the transfer of shares in favour of DEMAT account of the IEPF Authority.

STEP-III: While effecting such transfer, the company shall send a statement to the IEPF Authority in Form IEPF-4 within 30 days of the corporate action containing details of such transfer and attach the following documents:

  • A copy of order of the NCLT under section 90(8) of the Act; and
  • A declaration that no application under section 90(9) of the Act has been made or is pending before the NCLT.

STEP-I: Company Secretary or the person authorised by the Board shall make an application, on behalf of the concerned shareholder, to the company, for issue of a new share certificate;

STEP-II: On receipt of the application, a new share certificate (in Form SH-1) for each such shareholder shall be issued and it shall be stated on the face of the certificate that “Issued in lieu of share certificate No….. for the purpose of transfer to IEPF under subsection (9) of section 90 of the Act” and the same be recorded in the register maintained for the purpose;

STEP-III: After issue of a new share certificate, the company shall inform the depository by way of corporate action to convert the share certificates into DEMAT form and transfer in favour of the IEPF Authority.

STEP-IV: While effecting such transfer, the company shall send a statement to the IEPF Authority in Form IEPF-4 within 30 days of the corporate action containing details of such transfer and attach the following documents:

  • A copy of order of the NCLT under section 90(8) of the Act; and
  • A declaration that no application under section 90(9) of the Act has been made or is pending before the NCLT.

OTHER CORPORATE ACTION OR CONDITIONS ON SUCH TRANSFERRED SHARES:

In case of bonus shares, split etc.: All benefits accruing on shares transferred to IEPF Authority like bonus shares, split, consolidation, fraction shares and the like except right issue shall also be credited to such DEMAT account by the company which shall send a statement to the IEPF Authority in Form IEPF-4 within thirty days of the corporate action containing details of such transfer.

In case of Delisting: If the company is getting delisted, the IEPF Authority shall surrender shares on behalf of the shareholders in accordance with the SEBI Delisting Regulations and the proceeds realised shall be credited to the IEPF Fund and a separate ledger account shall be maintained for such proceeds.

In case of Winding-up: In case the company whose shares or securities are held by the IEPF Authority is being wound up, the IEPF Authority may surrender the securities to receive the amount entitled on behalf of the security holder and credit the amount to the IEPF Fund and a separate ledger account shall be maintained for such proceeds.

In case of further dividend: Any further dividend received on such shares shall be credited to the IEPF Fund and a separate ledger account shall be maintained for such proceeds.

CONCLUSION

Even after three years of its introduction, the objective of introducing the concept of significant beneficial ownership has still not been achieved, as companies are yet to make necessary disclosure in the said respect. While non-clarity of law and hesitation to disclose SBO either intentionally or on account of fear of regulatory action is amongst the key reasons for non-compliance but both members and companies have failed to understand the real consequences of non-compliance i.e. possibility of losing out on the shares to IEPF.  Central Government by way of introducing necessary procedural guidelines for transferring of shares to IEPF Authority, has made its intentions clear and onus is now on both the SBO and the company to ensure compliance or otherwise be prepared to face the brunt.

AUTHORED BY

Mr. Ankit Singhi

Head of Corporate Affairs & Compliances

ACS, LLB

ankit@indiacp.com

+91 9910888952

Mr. Shivam Singhal

Associate

ACS

shivam.singhal@indiacp.com

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