On February 8, 2019, the Ministry of Corporate Affairs issued the Companies (Significant Beneficial Owners) Amendment Rules, 2019 (‘Amendment Rules’), amending the provisions of Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’). Every individual who is considered to be a ‘significant beneficial owner’ (‘SBO’) for a reporting company, is required to file a declaration with the reporting company in Form BEN-1 on or before May 8, 2019. Some of the key requirements under the amended SBO Rules are briefly summarised below.

A.       Who is an SBO in a Reporting Company?

1.       As per the amended SBO Rules, an SBO for a reporting company is an individual who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:

i.         holds indirectly, or together with any direct holdings, not less than 10% of the shares*;

*For the purposes of this test, the instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures are to be treated as ‘shares’.

ii.        holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;

iii.     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; or

iv.        has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone.

2.       Therefore, the amended SBO Rules now prescribe two categories of independent thresholds to be evaluated for assessing an SBO in a reporting company i.e. objective threshold and subjective threshold. Accordingly, it is possible that a reporting company may have more than one SBO.

3.          Objective Threshold – 10% Indirect Holding Test:

i.       Any individual holding indirectly 10% or more either of shares, voting rights in the shares or right to receive or participate in total distributable dividend or any other distribution (‘distribution rights’) along with direct holdings will be considered to be an SBO. For purposes of the objective test, it is important to determine whether the individual indirectly holds any shares, voting rights or distribution rights in a reporting company which, together with the direct holdings, amounts to 10% or more of the shares, voting rights and distribution rights of the reporting company. The amended SBO Rules have clarified that no individual will be an SBO merely on account of her/his direct stake in the reporting company.

ii.       The amended SBO Rules prescribe different parameters for assessing ‘indirect holding’ of an individual in a reporting company depending on her/his status or relationship with the member of the reporting company:

*Rule 2(d) of the amended SBO Rules defines ‘majority stake’ to mean: (i) holding more than one-half of the equity share capital in the body corporate; or (ii) holding more than one-half of the voting share capital in the body corporate; or (iii) having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate.

i.     It is important to note that the anti-money laundering and counter-terrorist financing system of Mauritius have been assessed by the Eastern and Southern Africa Anti-Money Laundering Group. The findings of this assessment have also been reviewed and endorsed by the FATF. However, Mauritius is not a member State of the FATF. This needs to be kept in mind while evaluating the SBO for funds based in Mauritius.

ii.      There needs to be more clarity on the following aspects:

(a)     While calculating the indirect stake for the purpose of determining the SBO, should only the direct shareholding of the individual in the body corporate (which is a shareholder of the reporting company) be considered, or should it also include their effective shareholding, factoring cross holdings through other holding companies.

(b)    The threshold for a partnership or LLP is much more stringent than thresholds for any other categories of members. In a partnership, every partner (irrespective of their partnership interest), will be regarded as an SBO, which is a significantly higher threshold.

1.       Subjective Test

i.       The second test is the subjective test wherein any individual having a right to exercise or exercising significant influence or control other than through direct holdings alone is considered to be an SBO.

ii.      The amended SBO Rules define ‘significant influence’ to mean the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not in control or joint control of those policies. This definition is quite broad and covers the right to participate in financial and operating policy decisions of the reporting company, without necessarily having any control over them. Therefore, whether any individual possesses or is entitled to exercise significant influence will be a factual test and would need to be determined on a case to case basis.

It should be noted that the definition of ‘significant influence’ under the amended SBO Rules is different from the definition prescribed under the Companies Act, 2013 (‘Act’), which is aligned with the definition set forth in the Accounting Standards and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Act prescribes an objective threshold for determining whether ‘significant influence’ exists. The term ‘significant influence’ has been defined under the Act to mean control of at least 20% of the total voting power, or control of or participation in business decisions under an agreement.

iii.     Further, for purposes of the amended SBO Rules, ‘control’ is as per the definition prescribed under the Act, which includes the right to appoint majority of the directors or to control the management or policy decisions, exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

iv.       Given the manner in which the term SBO is defined, one may argue that a shareholders agreement between shareholders of the reporting company would not per se make them an SBO since such a shareholders agreement is only on account of their direct shareholding in the reporting company.

B.       Duties of the Reporting Company

It is the duty of the reporting company to take ‘necessary steps’ to find out if there is any SBO of the reporting company, and to cause such SBO to make a declaration in Form BEN-1. What would be treated as ‘necessary steps’ has not been clarified, thereby putting a greater degree of onus on reporting companies.

Additionally, every reporting company is required to give notice in Form BEN-4 to such members (other than individual), who hold not less than 10% of its shares, voting rights, or distribution rights, to seek information relating to the SBO. Whilst the amended SBO Rules provide for filing of BEN-1 by the SBOs within 90 days from the date of commencement of the Amendment Rules, in the event the reporting company sends a notice under Form BEN-4, as per Section 90 of the Companies Act, the SBO is required to provide the details within 90 days from the date of the receipt of the Form BEN-4 from the reporting company.

C.      Penalties for Non-Compliance

As per the provisions of the Act, an SBO who fails to make the prescribed declaration, shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs 1,00,000 (approx. US$1,450) but which may extend to Rs 10,00,000 (approx. US$14,500) or with both, and where the failure is a continuing one, with a further fine which may extend to Rs 1,000 (approx. US$145) for every day during which the failure continues. Separate penalties are also imposed on the reporting companies which fail to comply with the provisions of the Act. Willfully providing any false or incorrect information or suppressing material information in the declaration made under these amended SBO Rules will be regarded as a ‘fraud’ under Section 447 of the Act.

D.       Non Applicability

The amended SBO Rules are not applicable to the extent the shares of the reporting companies are held by the following entities:

i.       an authority for administration of Investor Education and Protection Fund;

ii.      its holding reporting company (only if details of such holding company are reported in Form BEN-2);

iii.    the Central Government, State Government or any local authority;

iv.    a reporting company, body corporate or an entity which is controlled by the State Government/s or Central Government or partly by the Central Government and partly by one or more State Governments);

v.       investment vehicles registered and regulated with the Securities and Exchange Board of India, such as mutual funds, alternative investment finds, real estate investment trusts, infrastructure investment trusts; and

vi.      investment vehicles regulated by the Reserve Bank of India, Insurance Regulatory and Development Authority or Pension Fund Regulatory and Development Authority.