Significant beneficial ownership rules: The ambiguity continues

Based on the concept of mere 'participation', potentially, all individuals holding key positions, namely, executive directors, CEOs, CFOs and COOs may be considered SBOs

The recent amendments introduced by the Ministry of Corporate Affairs (MCA) in the disclosure and reporting requirements with respect to significant beneficial owners (SBO) of Indian companies represent a fair attempt at resolving many questions that arose the first time over and their intent cannot be doubted. However, two things have happened despite the amendments. First, the MCA may have ended up narrowing the net of individuals who are now required to make disclosures; second, there is continuing ambiguity around some issues, with a few more added. In this backdrop, it is entirely possible that we may not have seen the last on SBO amendments yet. Here is why:

In very simple terms, an individual who indirectly owns effectively 10 per cent or more of the shares, voting rights or dividend rights in an Indian company, qualifies to be an SBO. The SBO Rules (Rules) clarify who qualifies to be an SBO under different scenarios where shareholding is held through different types of entities (eg a body corporate, a partnership, a trust and an investment fund). However, there is an overriding exception in the Rules, that if an individual’s stake in the holding company or ultimate holding company of an Indian company does not exceed 50 per cent, that person does not qualify as an SBO.  Hence, in situations where a person may hold 50 per cent or fewer shares in a holding or ultimate holding company, but effectively holds more than 10 per cent of the shares of the Indian company, he/she would still not qualify as an SBO per the amended Rules.

Also, previously, where the member of the Indian company was a company or partnership firm, the senior managing official (SMO) of the company was deemed the SBO, in case no individual was identified as SBO. Multiple compliances were consequently triggered. This deeming concept has now been eliminated, based on which it may be argued that once no SBO is identified, there is no further reporting or compliance required. Pertinently, however, the newly introduced definition of ‘significant influence’, an independent qualifying criterion for treatment as an SBO in the amended rules, challenges this argument. As per this definition, ‘significant influence’ means the power to ‘participate’ in the operating and financial policy decisions of a company. Based on this concept of mere ‘participation’,  potentially, all individuals holding key positions, eg executive directors, CEOs, CFOs and COOs, may be considered SBOs and subject to the reporting requirements. If this is the interpretation adopted, then the new definition will effectively substitute the previous concept of SMO. The moot point though is whether such an interpretation supports the real intent behind the SBO provisions, which were introduced to help identify individuals whose positions of influence or control (either due to their indirect holdings or the roles they played), are otherwise ‘opaque’ to a company, its shareholders or other stakeholders. Notably, several countries like the UK and Singapore have issued guidance with respect to ‘excepted roles’ that would not ordinarily be treated as exercising significant influence or control over a company, eg people advising the company in a professional capacity or employees acting in the course of their employment.

All said, for now, SBOs and Indian companies must comply with the disclosure requirements as they stand. As a first step, Indian companies will need to send out notices to members with at least 10 per cent stake (in shares, voting rights and dividend rights) and any other individuals whom they believe could be SBOs or persons who may have knowledge of the SBOs in the manner prescribed under the Rules. Companies that had initiated this process in 2018 (before the Rules were kept in abeyance) will have to undertake the exercise once again. Separately, given the open issues, the MCA would do well to either amend the Rules or issue detailed guidance/FAQs so that the provisions are clear to those to whom they are intended to apply. The MCA could also look at rationalising exemptions and synergising with similar disclosures required under other statutes to avoid duplication. Further, to give comfort to SBOs making disclosures, it would help if the information shared by them is kept private and not publicly accessible on the MCA domain.

The author is tax partner, EY India. Views expressed are personal