India Introduces Beneficial Ownership Disclosure Rules
In a bid to enhance transparency and accountability in corporate governance, the Ministry of Corporate Affairs in India has introduced the Companies (Significant Beneficial Owners) Amendment Rules, 2019. The new rules, which came into effect on February 8, 2019, aim to identify and disclose significant beneficial owners (SBOs) of Indian companies.
What is a Significant Beneficial Owner?
Under the new rules, an SBO is defined as an individual who, acting alone or together with others, possesses one or more of the following rights or entitlements in an Indian company:
- Holds indirectly, or together with any direct holdings, not less than 10% of the share capital of the company
- Holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares of the company
- Has right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings
- Has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone
Significant influence is defined as the power to participate, directly or indirectly, in the financial and operating policy decisions of a company but is not control or joint control of those policies.
Disclosure Regime
The new rules require every individual who was an SBO as on February 8, 2019, to file a declaration in Form BEN-1 to the company within 90 days (i.e., before May 9, 2019). Similarly, every individual who subsequently becomes an SBO or experiences any change in significant beneficial ownership must file a declaration in Form BEN-1 to the company within 30 days of acquiring such significant beneficial ownership or any change therein.
Obligations of the Company
The duty is on the company to identify an SBO and issue a notice in Form BEN-4 to its member (other than individuals) holding not less than 10% of its shares, voting rights, rights to receive or participate in dividends or any other distribution payable in a financial year. Upon receipt of the declaration by the SBO, the company shall file a return in Form BEN-2 with the Registrar of Companies within 30 days of the date of receipt of such declaration.
Exclusions
The new rules do not apply to the extent the shares of a company are held by:
- An authority constituted by the Central Government for administration of the Investor Education and Protection Fund
- Holding reporting company where the details of such company are provided in the prescribed Form
- Central Government, State Government or any local authority
- A reporting company, body corporate or an entity controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments
- Securities and Exchange Board of India registered investment vehicles
- Investment vehicles regulated by the Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority
Penalties
An SBO who fails to make a declaration may be punishable with a term of imprisonment of up to 1 year, a fine in the range of INR 0.1 million to INR 1 million or both. In case of continuing failure, a further fine of up to INR 1,000 per day of default may be imposed.
Similarly, where a company fails to maintain registers and/or file returns with the Registrar of Companies, or denies inspection of the SBO register, the company and every officer in default may be subject to a fine of between INR 1 million and INR 5 million. In case of continuing failure, a further fine of up to INR 1,000 per day of default may be imposed.
A person who wilfully furnishes false or incorrect information, or suppresses any material information of which the declarant was aware of in the declaration made, is liable to be punished for fraud under section 447 of Companies Act, 2013.