By Sudish Sharma, Samad Ali and Anantha Desikan S
The Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”) was notified on June 14, 2018. The SBO Rules endeavor to identify the natural person who holds beneficial interest in a company, by laying down multi-layered criteria for determining who a significant beneficial owner (“SBO”) is in relation to a company. “Beneficial interest” in a share has been described in Section 89(10) of the Companies Act, 2013 (“CA 2013”) to inter-alia mean the right to exercise any rights attached to such share or to participate in any distribution in respect of such shares. The Ministry of Corporate Affairs, Government of India (“MCA”) had on February 8, 2019 notified the Rules to revise the provisions of SBO Rules, namely, Companies (Significant Beneficial Owners) Amendment Rules, 2019 (“Amendment Rules”). The key changes to the SBO Rules vide the provisions of the Amendment Rules are discussed further below.
Who is an SBO?
Section 90 of the CA 2013 inter-alia stipulates that every individual who holds beneficial interests of not less than 25% in shares of a company exercises control over a company would be classified as an SBO. As per Section 90 of the CA 2013, the Central Government is empowered to prescribe the holding percentage threshold to determine who an SBO is. The Central Government has prescribed new criterion for the determination of SBOs vide the Amendment Rules. Rule 2 of the Amendment Rules inter-alia states that an SBO in relation to a company means a person who (acting alone or together or through a trust) possesses one or more of the following rights or entitlements in such company, namely: who holds indirectly or together with any direct holdings not less than 10% of the shares or voting rights, who through indirect holdings or together with any direct holdings has the right to participate in not less than 10% of any distribution in a financial year and who has the right to exercise significant influence or control other than through direct holdings alone. The Central Government has thus elaborated on the provisions of Section 90 of the CA 2013 and has laid down detailed objective criteria regarding the determination of SBOs.
The new perception of SBOs
If the test of control is applied to determine who an SBO is, significant influence and control must be ascertained based on indirect means of exercising such control and not based on direct holdings alone. Further, the thresholds of holding shares and voting rights of a company, as discussed above, only apply to the following two scenarios: where such shares or voting rights are held purely indirectly by an individual or are held in conjunction with any direct holdings. Only direct holding of shares or voting rights have thus been ruled out to positively ascertain who an SBO is. This is a significant development as it clarifies the intent of the SBO Rules, namely, to identify significant beneficial owners whose identity has not previously been disclosed to the concerned company.
Key concepts clarified
Rule 2 of the Amendment Rules provides that “significant influence” means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies. Significant influence under the Amendment Rules would thus imply significant direct or indirect participation by an individual in key decision making of a company while at the same time not having any control over such policies.
Further, Explanation V of the definition of “significant beneficial owner” provided in Rule 2 of the Amendment Rules 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 shall be deemed to be ‘acting together’. Thus, the Amendment Rules have laid down detailed criteria regarding what constitutes ‘acting together’ for the purposes of the SBO Rules.
The definition of the term ‘majority stake’ has been inserted vide Rule 2 of the Amendment Rules. ‘Majority stake’ means holding more than 50% of the equity share capital in the body corporate, or holding more than 50% of the voting rights in a body corporate, or having the right to receive or participate in more than 50% of the distributable dividend or any other distribution by the body corporate.
It is pertinent to note that Rule 2 also provides that instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as ‘shares’, for the purposes of the Amendment Rules. Thus, some of the instruments that have been cast outside of the ambit of ‘shares’ for the purposes of the Amendment Rules include partially convertible preference shares, partially convertible debentures and non-convertible debentures.
Not mandatory for every company to identify a person as ‘significant beneficial owner’:
Prior to the notification of the Amendment Rules, the existing SBO Rules provided that in case a company is unable to identify a person as SBO, then the companies were required to identify its senior management officials as the SBO. As a much-needed relief, the Amendment Rules has done away with such requirement.
The Amendment Rules have brought about necessary changes regarding the objective tests that are required to be employed for the identification of SBOs. The insertion of the above-mentioned concepts, namely, ‘significant influence’, ‘acting together’, ‘majority stake’ and ‘shares’ have shed much needed light on what clearly constitutes the same. The most significant change under the Amendment Rules is the fact that the following forms of direct association with a company: directly holding shares, directly holding voting rights and/or exercising direct control have been ruled out as tests for the identification of SBOs, which is in line with the spirit of the SBO Rules (i.e. the identification of persons exercising indirect influence over companies by virtue of their indirect shareholding, indirect voting rights or indirect control).
[The first author is an Executive Partner while others are Associates in Corporate practice, Lakshmikumaran & Sridharan, New Delhi]