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FAQs on SBO Rules

Corporate Law Services Division


corplaw@vinodkothari.com
16th June, 2018

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Disclaimer:
This write up is intended to initiate academic debate on a pertinent question. It is not intended
to be a professional advice and should not be relied upon for real life facts.
FAQs on SBO Rules
Article

MCA vide its Notification dated June 13, 2018 has enforced the provisions of amended
Section 90 of the Companies Act, 2013 and also issued the Companies (Beneficial
Interest and Significant Beneficial Interest) Rules, 20181 (‘Final Rules’) in relation to
Significant Beneficial Ownership (‘SBO’). This is one of the most onerous provision
rolled out by MCA. The purpose of this Section is to ask companies ‘Parde ke peeche
kaun hai? Saamne aao!’. In this regard, the following FAQs discusses various questions
relating to the provisions dealing with theamended Section 90 and the Final Rules.

1. To which companies these provisions shall apply?

The provisions are applicable to all companies – i.e., pubic as well as private
companies.

2. What is the meaning of beneficial interest?

The meaning of the term has been provided in Section 21 (iii) of the Amendment Act,
which amends the provision of Section 89(10) of the Act, provides the following-

“beneficial interest in a share includes, directly or indirectly, through any contract,


arrangement or otherwise, the right or entitlement of a person alone or together
with any other person to—
(i) exercise or cause to be exercised any or all of the rights attached to such share;
or
(ii) receive or participate in any dividend or other distribution in respect of such
share."

However, it is pertinent to note that the said amendment has not yet been enforced
by MCA. Therefore, to give a clear picture of amended Section 90, the enforcement of
the amended Section 89 (10) shall be awaited.

3. What is the meaning of Significant Beneficial Ownership (‘SBO’)?

As per the amended Section 90 of the Companies Act, 2013 (‘Act’), SBO is referred as
every individual who
 acting alone or together, or
 through one or more persons or trust, including a trust and persons resident
outside India,
holds beneficial interests, of not less than twenty-five per cent. or such other
percentage as may be prescribed, in shares of a company or the right to exercise, or
the actual exercising of significant influence or control as defined in clause (27) of

1 http://www.mca.gov.in/Ministry/pdf/CompaniesSignificantBeneficial1306_14062018.pdf
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section 2 of the Act (i.e., control of at least twenty per cent of total voting power, or of
business decisions under an agreement).

4. The above definition empowers the government to prescribe other


threshold limit for the determination of the SBO.

Is there any other threshold limit apart from the percentage mentioned
above?

The Ministry has provided a lower threshold limit for the determination of the SBO
through the Final Rules on SBO, issued by MCA on June 14, 2018, according to which-

"significant beneficial owner means an individual referred to in sub-section (1) of


section 90 (holding ultimate beneficial interest of not less than ten per cent.)
read with sub-section (10) of section 89, but whose name is not entered in the
register of members of a company as the holder of such shares, and the term
'significant beneficial ownership' shall be construed accordingly;”

Therefore, now the threshold limit for determination of SBO has been reduced to 10
%.

5. Who shall be the SBO –

(a) where the member is an individual?

Where the member is an individual, his/her name must not be there in the register
of members of the company and he/she should hold the ultimate beneficial interest
of not less than ten percent.

(b) where the member is a company?

In this case, the SBO is the natural person, who, whether acting alone or together
with other natural persons, or through one or more other persons or trusts, holds
not less than 10% share capital of the company or who exercises significant
influence or control in the company through other means and do not have its name
in the register of members of the company.

(c) where the member is a partnership firm?

In this case, the SBO is the natural person, who, whether acting alone or together
with other natural persons, or through one or more other persons or trusts, holds
not less than 10% of capital or has entitlement of not less than ten percent of
profits of the partnership and do not have its name in the register of members of
the company.
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(d) where no natural person is identified under (c) and (d) mentioned above?

In this case, the SBO is the relevant natural person who holds the position of senior
managing official and do not have its name in the register of members of the
company.

(e) where the member is a trust through its trustee?

In this case, the identification of beneficial owner(s) shall include identification of


the author of the trust, the trustee, 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 and do not have its name in the
register of members of the company.

6. Is there any exemption provided to the companies under the Final Rules?

As per the Final Rules, 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, Alterative Investment Funds (AIFs), Real Estate Investment
Trusts(REITs) and Infrastructure Investment Trusts (lnvlTs) regulated under SEBI
Act.

7. Understanding the provisions with the help of few illustrations:

 Illustration 1:

An illustration of simple indirect shareholding is as follows:

In this illustration, Mr. X is the direct owner of A Ltd and owns 30% shareholding. Mr.
Z is an indirect owner of A ltd and owns 70% shareholding.
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 Illustration 2:

An illustration of both direct and indirect shareholding is as follows:

25 % 75 % 100
Mr. A P Ltd Q Ltd Mr. Z
%

In this case, Mr. A is holds directly 25% in P Ltd and Mr. Z holds 75% indirectly
in P ltd.

 Illustration 3:

In this illustration, we have a seemingly an


unimportant 1% owner. But, in reality, this
individual is the ultimate beneficial owner, with
all the profits being delivered to the UBO in
merely 1% shares.

However, the same is not possible in India, as


subsidiaries cannot hold shares in holding
company (Section 19 of the Act)

But of course, it is possible for a company not


being a holding company.
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 Illustration 4:

An illustration of simple indirect shareholding is as follows:

In this illustration, there are multiple levels of indirect ownership.

The three beneficiaries are clearly highlighted – P2, P3 and P4. P2 has a 32% interest
in the Target Co. (50% x 65% = 32%), P3 has 14%, and P4 has 50%. Note that P3 has
both a direct and indirect interest in P Ltd.

 Illustration 5:

Mr. A holds beneficial interest in P Ltd, which vertically owns Q Ltd, R Ltd, S Ltd
and T Ltd. Should A disclose to each of them?

Mr. A P Ltd Q Ltd R Ltd S Ltd T Ltd

Yes.

 Illustration 6:

Mr. A holds 60% of P Ltd, which holds 60% of Q Ltd. Can Mr. A 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. A say that he has no idea about P’s
holding of Q?
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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. A will have to
keep disclosing.

 Illustration 7:

Mr. A holds 60% of P Ltd. Now, P Ltd holds 60% of Q Ltd, and Q Ltd holds 60%
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.

 Illustration 8:

Holds more than 10%

1% 9.5%
Mr. A Z Ltd. Y Ltd.

In this case, Mr. A shall be the SBO of Z ltd.

 Illustration 9:

100%
AIF Z Ltd.

In this case, the entire share capital is held by an AIF, therefore, there is no SBO (as
per the exemption provided in Rule 8).

8. Is the Rules made for those AIFs (or pooled investments) which are
organized as companies?
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Mr. A 10% AIF 15% Z Ltd

No. Rule 8 provides clear exemption to pooled investments.


Therefore, the pooled investments operate as a blinker, there is no need to
look beyond them.

9. In Para (i) to Explanation I of SBO Rules, what all will be considered to


compute 10% of share capital?

As per Explanation II of Rule 2 (e) of SBO Rules, instruments in the form of GDRs,
CCDs, CCPs shall be treated as shares for the purpose of this clause. Accordingly,
‘share capital’ shall also be construed.

Eg: Capital Structure of X Ltd comprises of Equity Rs 100; CCPS Rs. 150 and CCDs Rs
50.
Mr. A beneficially holds Rs. 25 of Equity in X Ltd and his name reflects in the register
of members.

X Ltd holds 50% of Equity in Z Ltd.


Now we ascertain if Mr. A can be regarded as SBO for Z Ltd:

X Ltd. Holds 50%


Equity Rs. 100; Equity
Mr. A CCPS Rs. 150 & Z Ltd.
Holds Rs. CCDs Rs. 50
25 of
Equity

So, Mr. A’s % of share capital held in X Ltd (corporate member of Z Ltd) = 25/
(100+150+50) i.e. 25/300 = 8.33%

Therefore, Mr. A will not be regarded as SBO of Z Ltd.

10. Can there be a situation where a natural person is not an SBO for one
company but is an SBO for another Company?

Case 1

Mr. A X Ltd Y Ltd


10% 15%
(registered
owner)
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a. Whether Mr. A is an SBO for X Ltd? No, as he is the registered owner.

b. Whether Mr. A is the SBO for Y Ltd? Yes. as per Para (i) of Explanation I of
Rule 2 (e) of SBO Rules, Mr. A is the natural person who holds 10% in X Ltd.
Therefore, Mr. A will be regarded as SBO in Y Ltd.

c. Who has the onus to declare to Y Ltd? In the aforesaid case, it will be the
onus of X Ltd to obtain declaration from Mr. A to be submitted to Y Ltd.

Case 2

Mr. A X Ltd Y Ltd Z Ltd


10% 90% 15%
(registered
owner)

a. Whether Mr. A is an SBO for X Ltd? No, as he is the registered owner.

b. Whether Mr. A is the SBO for Y Ltd? Yes. As per Para (i) of Explanation I of
Rule 2 (e) of SBO Rules, Mr. A is the natural person who holds 10% in X Ltd.
Therefore, Mr. A will be regarded as SBO in Y Ltd.

c. Whether Mr. A is the SBO for Z Ltd? No. As per Para (i) of Explanation I of
Rule 2 (e) of SBO Rules Mr. A holds 9% (10% of 90%) in Y Ltd which is the
corporate shareholder of Z Ltd. Therefore, Mr. A will not be regarded as SBO
for Z Ltd.

11. Can there be a situation where a natural person is a registered owner as well
as SBO?

Mr. A X Ltd Y Ltd


5% 95 %
(registered
owner) 15%

Mr. A’s direct holding in X Ltd: 5 %.

However, as per Para (i) of Explanation I of Rule 2 (e) of SBO Rules, Mr. A is the natural
person who holds 10% or more in Y Ltd but his name is not entered in the register of
members of the company as the holder of such shares (for 15%).

In this case, Mr. A is registered owner as well as SBO.


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12. Will the shareholding of the relatives also be considered in determining the
SBOs?

The definition of SBO refers to every individual who


 acting alone or together, or
 through one or more persons or trust, including a trust and persons resident
outside India
holds beneficial interests. Therefore, for 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.

13. Are non-residents also covered by the said provisions?

The definition of SBO includes non-residents as well. Therefore, the non-residents


shall also be covered by the said provisions.

14. How does the law apply itself to those who are not within Indian
jurisdiction?

As per the amended provision of Section 90(5), The obligation is not only on the
holder, but also on the companies, as they have to seek information from the
person whom the company knows or has reasonable cause to believe to be:

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 SBO with the company as required under this section.

15. Whether Section 89 & 90 shall apply in case of the followings:

(a) Pledge: Yes, if the all the rights attached thereto are also transferred
(b) Transfer pending registration: Yes
(c) Pooling of voting rights: Yes

16. What will be the case if the beneficial interest holder’s name is borne on the
register of members?

In this case, the entire provision of Section 89 and 90 shall not be applicable.

17. What is the timeline for declaration by SBO?


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Every significant beneficial owner is required to file a declaration in Form No. BEN-
1 to the company in which he holds the significant beneficial ownership:

(a) on the date of commencement of the Final Rules within ninety days from such
commencement;
(b) Thereafter, within thirty days in case of any change in his significant beneficial
ownership.

Further, every individual, who, after the commencement of these rules, acquires
significant beneficial ownership in a company is also required to file a declaration in
Form No. BEN-1 to the company, within thirty days of acquiring such significant
beneficial ownership or in case of any change in such ownership.

18. Is there any requirement of intimating the Registrar of Companies regarding


the SBO?

The declaration of beneficial interest received by the company, is required to be filed


in Form No. BEN-2 with the Registrar in respect of such declaration, within a period
of thirty days from the date of receipt of declaration by it, by the company.

19. Will the company have to keep any record of the SBOs?

Every company is required to maintain a register of SBOs in Form No. BEN-3.

Also, this register shall be open to for inspection during business hours, at such
reasonable time of not less than two hours, on every working day as the board may
decide, by any member of the company on payment of such fee as may be specified by
the company but not exceeding fifty rupees for each inspection.

20. How will the company seek information from various persons about SBOs?

Company is required to give notice seeking information in accordance with Section


90 (5) of the Act, in Form No. BEN-4.

21. Is there any exemption provided to equity listed companies or wholly owned
subsidiaries of such companies?

The draft rules provided exemption from compliance under the said section where
the registered owner was a body corporate whose equity shares were listed on any
stock exchange or was a wholly-owned subsidiary of such body corporate. Foreign
listed companies were also proposed to be exempted.

However, the Final Rules withdrew the proposed exemption.


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22. Are the forms available in e-version?

The format of the forms has been provided in the Final Rules. However. The e-version
of the forms are still awaited.