[Pammy Jaiswal is a Partner and Darshan Rao is an Executive, both at Vinod Kothari and Company]
The framework for significant beneficial owner (“SBO”) identification can be traced back to the recommendations of the Financial Action Task Force (“FATF”). Section 90 of the Companies Act, 2013 (“Act”) read with the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”) translates the recommendations into provisions for enforcing the concept, with two broad manners of identification:
- the first being the objective test where the shareholding is picked up through the layers to see the type of entity and the extent of shareholding to identify the SBO for the reporting entity; and
- the second is the subjective test where the aspects of control and significant influence are evaluated from all possible corners to reach the SBO.
While the objective test is the most commonly applied method for identifying an SBO, in practice regulators have often relied on a degree of subjectivity. Regulatory findings have shown that an individual may be regarded as an SBO not only where there is an indirect holding of at least 10 percent together with any direct holding, but also where the person, whether individually or acting together with others, is considered to exercise control or significant influence over the reporting company.
In the LinkedIn matter (which the authors have previously analysed here), which received attention because of the approach adopted to determine who ultimately exercised influence, the regulator applied a broader view than the numerical threshold alone. Building on the principles seen in that case, we have analysed a series of additional regulatory rulings in which the Registrar of Companies (“RoC”) has used differing approaches to reach an SBO determination. These rulings show how the regulator has used subjective reasoning to:
- situations where control over the board of the listed overseas parent has been treated as an indicator of SBO status;
- cases where the position of CEO has been considered in relation to, and not only within, a pooled investment vehicle;
- findings where financial dependence and control have been inferred through the use of a common domain name; and
- instances where erstwhile promoters were required to make disclosures even though the new promoters were exempt during that period.
In this post, the authors have examined these themes in the paragraphs that follow to illustrate the manner in which the RoC interpreted and applied the legal provisions on SBO identification, and how this resulted in a proactive effort to identify SBOs by relying on subjective elements within the existing framework.
Subjectivity Facets for SBO Identification
As discussed above, the two broad yet imperative subjective tests for SBO identification in the context of reporting company are:
- the right to exercise significant influence or control [note here that actual exercise is not a prerequisite]; or
- the actual exercise of significant influence or control.
Further, it is pertinent to note that ‘control’ has been defined under section 2(27) of the Act to “include 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”.
Again, the term ‘significant influence’ has been defined under rule 2(1)(i) of the SBO Rules as the “power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies”.
Examining Cross Holdings, Chairmanship, and Other Publicly Available Data
In the matter of Samsung Display Noida Private Limited, the Indian reporting entity was a wholly-owned subsidiary of an overseas listed entity which was a large conglomerate and hence there were several cross holdings in the entities in the top level. There was no declaration of SBO in the given case on the argument that the holding entity is a listed company and hence, there is no individual holding control or significant influence over the said parent. Enquiry was made about the details of the promoters, directors, key managerial personnel and shareholders of certain promoter entities as well as chairperson of board meetings and ultimate beneficial owner (“UBO”) for the reporting company.
Further, upon investigation into the public records of the holding entity, it was found that one particular individual from the promoter category along with his family holds approximately 21.46% in the ultimate parent entity and that his son holds significant stake in two other promoter group entities which in turn holds in the ultimate parent entity of the reporting company.
The RoC concluded that the son along with his family members, directly and indirectly, exercises significant influence in the ultimate parent. Further, the same person also holds the position of a chairperson in the said entity when the said company already has a full-fledged chairperson indicating a situation of proxy control through legally remote mechanism. Accordingly, he should have been declared as SBO for the reporting company in India.
Individual Manager / CEO Related to Pooled Investment Vehicle and Not Necessarily of the Investment Vehicle
In cases where the SBO is identified through the members holding in the reporting company and the ultimate shareholder as such is a pooled investment vehicle (PIV), in that case even if there is no individual as a general partner or the investment manager or the CEO of such PIV, then any individual in relation to the PIV and not necessarily of such PIV can be regarded as an SBO. In the matter of Leixir Resources Private Limited, the CEO of the investment manager was considered as an SBO since he was the one responsible for the decision making of such investment manager and hence, relevant for investment decisions of the vehicle.
While arriving at the conclusion of this ruling, the RoC clearly indicated that the legislative scheme of Section 90 ensures that at the end of every ownership chain, a natural person(s) must be identifiable as the SBO. Companies cannot rely on the complexity of foreign fund structures or the absence of direct nominees to evade compliance; the obligation to investigate and file BEN forms lies squarely on the Indian company. The RoC implicitly aligned Indian law withFATF Recommendations 24 and 25, emphasizing that beneficial-ownership disclosure extends through investment vehicles, LLPs, and trusts.
Financial / Business Dependency, Usage of Common Domain Name, KMPs of Foreign Parent Employed in Indian Reporting Company
In the matter of Metec Electronics Private Limited, where 100% of the shares were only held by a few individuals, the RoC concluded that even in such entities, identification of SBO is still possible on account of assessment of several factors. These include the reporting test as well as financial control test. In such cases, one may consider evaluating the business dependency in terms of supply to or from the reporting entity, other factors like entities with a common domain name, similarity in trademark, procurement policies.
In this case, it was investigated and consequently observed that the shareholder of the reporting company held a controlling stake in the overseas supplier entities on which the reporting company had the highest dependency. Further, the RoC also found out that both the reporting company and these supplier entities had applied for a similar trademark. Further, these entities were reported to be under the common control of an individual who happens to be the director as well the majority shareholder of the reporting company. It is also imperative to note that one of the director-cum senior employees and another senior employee are the ones who have been shown as the supervisor and UBO for the overseas supplier entities.
In this ruling, the RoC also referred to the FATF Guidance on control in cases with no shareholding. It includes the following means:
- Control through positions held within a legal person: Natural persons who exercise substantial control over a legal person and are responsible for strategic decisions that fundamentally affect the business practices or general direction of the legal person may be considered a beneficial owner under some circumstances. Depending on the legal person and the country’s laws, directors may or may not take an active role in exercising control over the affairs of the entity; and
- Control through informal means: Furthermore, control over a legal person may be exercised through informal means, such as through close personal connections to relatives or associates. Further, when an individual is using, enjoying or benefiting from the assets owned by the legal person, it could be grounds for further investigation if such individual is in the condition to exercise control over the legal person.
Current Exemption Gets Overruled By Past Obligation To Declare
In the matter of Shree Digvijay Cement Limited, the RoC held clearly in this case that the current holding structure even though exempt from the disclosure requirements pursuant to Rule 8 of the SBO Rules, the same will still be subject to penal actions where the declaration was not made as and when applicable in the period prior to qualifying for such exemption.
Conclusion
On perusal of each of these rulings, it becomes clear that no matter how complicated or how simple the corporate structure is, the regulators will leave no stone unturned while carrying on their investigation for finding the real SBOs. Regulators have the determination to uncover SBOs who exercise control behind every legal entity.
A few measures that can be adopted include establishing robust frameworks to continuously track changes in shareholding and control arrangements, maintaining detailed documentation of every ownership and control analysis conducted and filing all SBO disclosures promptly with the RoC. However, the concern that remains is that the exercise to trace the origins of relationship may prove to be an onus on entities apart from the penal consequences it carries in case of non-compliance.
– Pammy Jaiswal & Darshan Rao