Who Really Owns the Company? Beneficial-Interest and SBO Declarations Under Sections 89–90

Nominee shareholders, foreign holding layers, founder trusts: the register of members often names someone who is not the true owner. Sections 89 and 90 of the Companies Act, 2013 bring both halves of that split into the open. The registered holder declares whose interest it really is. The beneficial owner declares what he holds. Individuals who are significant beneficial owners (SBOs) declare to the company, which registers them, files returns with the Registrar, goes looking for the undeclared, and can ask the Tribunal to restrict their shares (s.90(7)). For founders using offshore or layered structures, this is the disclosure spine of the whole setup.

Section 89: both sides of every split declare

"Where the name of a person is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares, such person shall make a declaration within such time and in such form as may be prescribed to the company specifying the name and other particulars of the person who holds the beneficial interest in such shares" (s.89(1), Companies Act 2013). The registered face names the true owner.

The mirror image: "Every person who holds or acquires a beneficial interest in share of a company shall make a declaration to the company specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed" (s.89(2)). The true owner names the registered face and the nature of his interest.

"Where any change occurs in the beneficial interest in such shares, the person referred to in sub-section (1) and the beneficial owner specified in sub-section (2) shall, within a period of thirty days from the date of such change, make a declaration to the company in such form and containing such particulars as may be prescribed" (s.89(3)). Both sides re-declare within thirty days of any change. The Central Government may make rules on the manner of holding and disclosing beneficial interest (s.89(4)) and may exempt classes of persons from the requirements of the section, other than the definition in sub-section (10), in the public interest (s.89(11)).

What counts as beneficial interest

"Beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to (i) exercise or cause to be exercised any or all of the rights attached to such share; or (ii) receive or participate in any dividend or other distribution in respect of such share" (s.89(10)). Voting control or dividend entitlement, direct or indirect, alone or together: side letters, voting pacts and dividend-routing agreements can all bring a person within the definition. The same definition applies for section 90.

The company's relay under section 89

"Where any declaration under this section is made to a company, the company shall make a note of such declaration in the register concerned and shall file, within thirty days from the date of receipt of declaration by it, a return in the prescribed form with the Registrar in respect of such declaration with such fees or additional fees as may be prescribed" (s.89(6)). The thirty days run from receipt of the declaration, not from the underlying transaction.

Penalties run on both sides:

• A person who fails to make a declaration under s.89(1), (2) or (3) is liable to a penalty of ₹50,000 and, for continuing failure, a further ₹200 for each day after the first, subject to a maximum of ₹5 lakh (s.89(5)).
• A company that fails to file the s.89(6) return in time, and every officer in default, is liable to ₹1,000 for each day of failure, subject to a maximum of ₹5 lakh for the company and ₹2 lakh for an officer in default (s.89(7)).

Two further consequences matter. "No right in relation to any share in respect of which a declaration is required to be made under this section but not made by the beneficial owner, shall be enforceable by him or by any person claiming through him" (s.89(8)). The undeclared owner cannot enforce rights in those shares, and neither can anyone claiming through him. And on dividends: "Nothing in this section shall be deemed to prejudice the obligation of a company to pay dividend to its members under this Act and the said obligation shall, on such payment, stand discharged" (s.89(9)). The company pays the registered member and is discharged.

Section 90: significant beneficial owners declare

Section 90(1) applies to "every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of section 2, over the company." Such an individual is the "significant beneficial owner" and must declare to the company, specifying the nature of his interest and other particulars, in the manner and within the period prescribed. The Central Government may prescribe classes of persons who need not declare (proviso to s.90(1)).

Three points follow from the text:

• Only individuals declare. Companies and trusts in the chain do not; the human at the top does, whether acting alone, together, or through persons or trusts, including persons resident outside India. That wording is what catches foreign-founder holding structures.
• The Act's twenty-five per cent figure is not the working number. The Act says "or such other percentage as may be prescribed", and the Rules prescribe a lower one: see the next section.
• Significant influence or control is a separate limb. An individual can be an SBO without hitting any percentage.

The prescribed test: ten per cent through indirect holdings, plus control

The Companies (Significant Beneficial Owners) Rules, 2018, as amended in 2019, define an SBO in relation to a reporting company as an individual referred to in section 90(1) who, acting alone or together, or through one or more persons or trust, possesses one or more of these rights or entitlements (rule 2(1)(h)):

• holds indirectly, or together with any direct holdings, not less than ten per cent of the shares;
• holds indirectly, or together with any direct holdings, not less than ten per cent of the voting rights in the shares;
• has the right to receive or participate in not less than ten per cent of the total distributable dividend or any other distribution in a financial year, through indirect holdings alone or together with direct holdings; or
• has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone.

Explanation I to that clause adds that if an individual does not hold any right or entitlement indirectly under the first three limbs, he is not to be considered an SBO. So the Rules' test is built around indirect holding: a founder who holds shares only in his own name is on the register of members and is not, by that fact, an SBO. A founder who holds through a holding company, trust, nominee or foreign entity, and whose total reaches ten per cent, is in the frame. Instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures are treated as "shares" for this purpose (Explanation VI to rule 2(1)(h)). "Significant influence" means 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 (rule 2(1)(i)).

Declaration and return timelines

• The SBO files a declaration in Form BEN-1 with the reporting company. An individual who subsequently becomes an SBO, or whose significant beneficial ownership changes, files it within thirty days of acquiring the ownership or of the change (rule 3(2), as substituted in 2019).
• On receipt, the reporting company files a return in Form BEN-2 with the Registrar within thirty days of receiving the declaration, with the prescribed fees (rule 4, as substituted in 2019). The form BEN-2 was further substituted in July 2019.
• The company maintains a register of SBOs in Form BEN-3 (rule 5(1), 2018 Rules).
• The reporting company must take steps to find out whether any individual is an SBO and, if so, identify him and cause him to declare in BEN-1. Where a member that is not an individual holds not less than ten per cent of its shares, voting rights or distribution rights, the company must give that member a notice in Form BEN-4 seeking information under s.90(5) (rule 2A, inserted in 2019).

Certain holdings are outside the Rules: shares held by the authority under s.125(5), by the company's holding reporting company (whose details are reported in BEN-2), by the Central or State Government or a local authority, by entities controlled by them, and by specified SEBI-, RBI-, IRDAI- and PFRDA-regulated investment vehicles (rule 8, as substituted in 2019).

When a foreign parent holds the shares

A common structure: the only name in the register of members is a foreign holding company in the US, Singapore or the UAE. That does not end the inquiry. The parent is a member, not an SBO, because only an individual can be an SBO (rule 2(1)(h)). The question is which individuals stand behind it.

The Rules answer it for a member that is a body corporate, "whether incorporated or registered in India or abroad", other than a limited liability partnership. An individual holds a right indirectly through that member if he holds a majority stake in the member, or a majority stake in the member's ultimate holding company, wherever incorporated (Explanation III(i) to rule 2(1)(h)). A "majority stake" means more than one-half of the equity share capital, more than one-half of the voting rights, or the right to more than one-half of the distributable dividend or other distribution (rule 2(1)(d)).

A worked case. The parent holds all the shares of your Indian company. A founder holds 60 per cent of the parent. That is a majority stake in the member, so the founder holds the parent's shares in your company indirectly and clears the ten per cent test. The founder is an SBO. If the founder holds only 40 per cent of the parent, there is no majority stake, and the body-corporate look-through does not catch him on shareholding alone. The significant influence or control limb may still apply on the facts.

Two further points:

• Acting together. Individuals who act with a common intent or purpose of exercising rights, or control or significant influence, under an agreement or understanding, formal or informal, are deemed to be "acting together" (Explanation V to rule 2(1)(h)). A co-founders' shareholders' agreement at the parent level may, on the facts, make them "acting together".
• Partnerships, trusts and pooled investment vehicles on the parent's cap table have their own look-through tests (Explanations III(iii), (iv), (v) and IV to rule 2(1)(h)). Take these to a CA early.

The duties sit with the Indian company. It sends the parent a BEN-4 notice, because the parent is a member that is not an individual and holds ten per cent or more (rule 2A(2)). The individuals behind the parent sign BEN-1, and the Indian company files BEN-2. The parent itself files neither.

The rule 8(b) exclusion covers shares held by "its holding reporting company". A "reporting company" is a company as defined in section 2(20) of the Act (rule 2(1)(f)), which a foreign parent is not. Read that way, rule 8(b) is written for an Indian holding company. Do not assume it excuses a foreign parent from the look-through; have a CA confirm it on your facts.

The company's duties and enforcement ladder under section 90

The company must maintain a register of the interest declared by individuals, with name, date of birth, address, details of ownership and other prescribed details (s.90(2)). It is open to inspection by any member on payment of the prescribed fee (s.90(3)). The company must file a return of significant beneficial owners and changes with the Registrar (s.90(4)), and "shall take necessary steps to identify an individual who is a significant beneficial owner in relation to the company and require him to comply with the provisions of this section" (s.90(4A)). The company cannot simply wait for declarations.

If a declaration is missing, "a company shall give notice, in the prescribed manner, to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe (a) to be a significant beneficial owner of the company; (b) to be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or (c) to have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued, and who is not registered as a significant beneficial owner with the company" (s.90(5)). The reply is due "within a period not exceeding thirty days of the date of the notice" (s.90(6)).

If the person does not reply, or the reply is unsatisfactory, the company must "apply to the Tribunal within a period of fifteen days of the expiry of the period specified in the notice, for an order directing that the shares in question be subject to restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other matters as may be prescribed" (s.90(7)). The Rules list the restrictions, including on transfer, on the right to receive dividends and distributions, and on voting (rule 7, as substituted in 2019). The Tribunal may, after hearing the parties, make an order restricting the rights attached to the shares within sixty days of receipt of the application or such other period as may be prescribed (s.90(8)).

An application for relaxation or lifting of the restrictions may be made to the Tribunal within one year of its order. If none is made in that year, the shares are to be transferred, without restrictions, to the authority constituted under s.125(5) (s.90(9)).

Penalties under section 90

• An individual who fails to make a declaration under s.90(1): ₹50,000 and, for continuing failure, a further ₹1,000 for each day after the first, subject to a maximum of ₹2 lakh (s.90(10)).
• A company that fails to maintain the register, file the information, take the steps under s.90(4A), or allow inspection: ₹1 lakh and, for continuing failure, ₹500 a day after the first, subject to a maximum of ₹5 lakh; and every officer in default: ₹25,000 and ₹200 a day after the first, subject to a maximum of ₹1 lakh (s.90(11)).
• Wilfully furnishing false or incorrect information, or suppressing material information of which one is aware, in a declaration attracts action under section 447 (s.90(12)).

What to do now

• Map the chain. For each individual behind the company, trace shares, voting rights, dividend entitlement and influence through every holding company, trust and nominee. Test each against the ten per cent and control limbs of rule 2(1)(h).
• Collect declarations. Registered holders and beneficial owners declare under s.89; SBOs file BEN-1 with the company. For a new SBO or a change, the deadline is thirty days (rule 3(2), Rules 2018; s.89(3) for s.89 changes).
• File BEN-2. The company files within thirty days of receiving the declaration (rule 4, Rules 2018; s.89(6) for the s.89 return).
• Keep the register and notices up. Maintain the BEN-3 register, and issue BEN-4 notices where the company knows or suspects an undeclared SBO. If a notice goes unanswered for thirty days, diary the fifteen-day Tribunal application window (s.90(5)-(7)).
• Consequence of delay. Penalties under ss.89(5), 89(7), 90(10) and 90(11), as above; the undeclared owner's rights in the shares are unenforceable (s.89(8)); and shares can be restricted by the Tribunal (s.90(7)-(8)).

Have a CA review your facts before you act or file.

FAQ

Who must declare under s.89?
Both sides. The registered holder who does not hold the beneficial interest names the true owner, and every holder or acquirer of a beneficial interest names the registered holder and the nature of the interest. Both re-declare within thirty days of any change (s.89(1)-(3)).

What counts as beneficial interest?
Direct or indirect rights, alone or together with another person, through any contract, arrangement or otherwise, to exercise the rights attached to the share or to receive or participate in dividends or other distributions (s.89(10)).

Who is a significant beneficial owner?
An individual described in s.90(1) who, under the Rules, indirectly (alone or together with direct holdings) holds not less than ten per cent of shares, voting rights or distributable dividend, or who has or exercises significant influence or control other than through direct holdings alone (rule 2(1)(h), Rules 2018 as amended in 2019).

What must the company do about SBOs?
Maintain the register, file returns, identify SBOs and require them to declare, send notices to the suspected but unregistered (with a three-year lookback), and apply to the Tribunal within fifteen days of the notice period expiring where there is no satisfactory reply (s.90(2)-(7)).

Our foreign parent holds all the shares. Who files what?
The Indian company sends the parent a BEN-4 notice (rule 2A(2)). Each individual with a majority stake in the parent, or in its ultimate holding company, is treated as holding indirectly and, if the ten per cent thresholds in rule 2(1)(h) are met, is an SBO and declares in BEN-1 (Explanation III(i) to rule 2(1)(h); rule 3). The Indian company then files BEN-2 within thirty days of receiving each declaration (rule 4).

What happens to undeclared rights?
Rights in shares for which the beneficial owner has not made a required declaration are not enforceable by him or anyone claiming through him. Dividends paid to the registered member discharge the company (s.89(8)-(9)).

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See Also

• Allotting Shares After a Public Offer? Minimum Subscription, Listing Permission and Refunds Under Sections 39–40
• Debentures Under Section 71: Conversion, DRR, Trustees and Holder Remedies
• Buying back your own shares (s.68): the 25% ceiling, the board-vs-members route, and the solvency paper trail