Significant beneficial owners in companies to face strict action for wrong disclosures

Significant beneficial owners in Indian corporates might face strict action for inadequate or wrong disclosures about their ownership and companies too can seek action against entities in case they fail to provide satisfactory responses, according to rules.

With the corporate affairs ministry amending the rules for significant beneficial owners under the Companies Act, 2013, corporates are required to take necessary steps to identify such owners and obtain a declaration from them.

Apart from providing more clearer definitions for determining whether an individual or an entity has significant beneficial ownership, corporates would be required to provide the details in a more elaborate manner to the ministry.

Significant beneficial owners, who fail to make a declaration regarding their ownership, could face fine, imprisonment or both under the Companies Act. In instances, where such entities have willfully provided incorrect information, then such acts would be considered as fraud under the Act.

Similarly, companies that fail to maintain registers of significant beneficial owners would also face action, as per the rules.

Leading consultancy Deloitte said the spirit of the amendment rules is to bring in more clarity and is in alignment with the government's drive to inculcate transparency and accountability in the corporate set up.

"The disclosures relating to Significant Beneficial Owners are expected to lead to transparency of shareholding structures and help the government identify benami transactions and prevent money laundering activities," it said in a note.

In cases where a significant beneficial owner does not provide a response or if the response is inadequate, then the company concerned can approach the National Company Law Tribunal (NCLT) for suitable directions, including freezing of their rights related to their shares.

The amendments to the rules also come at a time when the government is clamping down on corporate entities suspected to be used as conduits for illicit fund flows. The ministry, which is implementing the companies law, has already deregistered lakhs of companies that have not been carrying out business activities for a long time.

Regarding the amended rules, an official said on Saturday that the whole principle of proportional calculation has been done away with. "It is very clear on how significant beneficial owners would be identified in various circumstances... The rules seek to lift the corporate veil," the official had said.

In its note, Deloitte said that every significant beneficial owner is required to make time-bound disclosures of their holding in the reporting company and any changes.

"The objective is to identify the ultimate beneficial individual or group of individuals who have control or ownership of the reporting company disregarding the intermediate shareholding by non-individual persons," it added.