Lower threshold for 'beneficial owners'; new rules take effect from June 30

An entity or an individual holding at least 10 per cent in a company will now be considered a significant beneficial owner

To identify the effective owner of a corporate entity, the ministry of corporate affairs has notified rules on ‘beneficial owners’. 

This provision had, in a different form, been part of the Companies Act, 1956, under section 180(7)(3). The new avatar comes under Section 90 of the Companies Act, 2013, as amended in 2017. The rules take effect from this Saturday.

Earlier, an entity or an individual holding at least 25 per cent stake in a company, either alone or with related parties, was considered a significant beneficial owner. This threshold has been reduced to 10 per cent. 

Those not qualifying this test would still be considered such an owner if they have managerial positions in the company concerned. Such entities or individuals have to fill form BEN-1 to disclose their shareholding. 

This provision is not applicable to a single-owner company.

“The reduced threshold for determining significant beneficial ownership will surely increase the compliance burden on companies but at the same time will help curb tax evasion, money laundering and terrorist activities,” says Rakesh Nangia, managing partner, Nangia Advisors. 

Section 216 of the Companies Act has also been notified by the ministry of corporate affairs. This allows the government to appoint inspectors for determining persons who have or had beneficial interest in shares of a company or who are or have been beneficial owners of a company. Under the earlier rule, there was no tracking mechanism.
A special registrar will now deal with the beneficial owner clauses. This rule is aimed at curbing tax evasion and money laundering.
 

With this, for not disclosing details of beneficial owners, the government can penalise an entity. Misinformation in this regard will be considered a fraud.