Beneficial Interest

Legal definitions describe beneficial interest as a right or expectation in property, such as shares in a trust or estate, distinguished from holding legal title to that property. The beneficial owner, recognized in equity, enjoys use and benefits even when legal title belongs to someone else, particularly in trust arrangements.

Such interests may arise directly or indirectly through contracts, arrangements, or other mechanisms. Furthermore, these rights may be exercised individually or collectively with other persons through coordinated action.

A fundamental principle in company law holds that companies recognize only registered shareholders and cannot look beyond the membership register.

Significant Beneficial Owner

According to Section 90(1), a Significant Beneficial Owner (SBO) refers to an individual meeting specific criteria related to their stake or influence in a company. Such individuals must make prescribed disclosures to the company within specified timeframes, detailing the nature of their interest and relevant particulars.

The Companies (Significant Beneficial Owners) Rules, 2018 provide detailed regulations implementing Section 90. These rules establish comprehensive criteria for determining SBO status.

Two fundamental categories determine whether an individual qualifies as an SBO:

Category One: The individual holds beneficial interests in company shares amounting to not less than ten percent of the voting rights in shares;

Category Two: The individual possesses the right to exercise, or actually exercises, significant influence or control as statutorily defined over the company.

Importantly, the term “individual” appears deliberately in Section 90(1), contrasted with the broader term “person” used elsewhere in the same provision. While every individual is a person, the reverse is not true. “Person” encompasses both natural persons (human beings) and artificial persons (corporations, bodies corporate), whereas “individual” strictly means a natural person or human being.

Therefore, an SBO must fundamentally be an individual, though that individual may act in concert with other persons, including corporations, forming a group pursuing common objectives.

Responsibility for Identification

Section 90 places primary responsibility for identifying SBO status on the individual themselves. However, recognizing practical challenges, sub-section (4A) simultaneously obligates companies to take necessary steps to identify individuals who are SBOs and require their compliance with statutory provisions.

The statute provides a mechanism through sub-sections (5), (6), and (7) enabling companies to actively identify SBOs. Procedural requirements regarding register maintenance and return filing are specified in sub-sections (2), (3), and (4).

The Two Criteria Explained

First Criterion: Beneficial Interest Threshold

Under the first criterion, an individual qualifies as an SBO when holding (independently or collectively through various arrangements) beneficial interest of not less than ten percent in company shares. The crucial element here is the holding of beneficial interest by the individual.

The SBO Rules elaborate three specific situations under this criterion:

1. Share Holdings: The individual holds, either indirectly or both directly and indirectly, ten percent or more of company shares.
2. Voting Rights: The individual holds, either indirectly or both directly and indirectly, ten percent or more of voting rights in company shares.
3. Distribution Rights: The individual possesses the right to receive or participate in ten percent or more of total distributable dividends or other distributions in a financial year through indirect holdings alone or combined with direct holdings.

Indirect Holdings Requirement

A critical rule establishes that if an individual holds rights or entitlements only through direct holdings with no indirect component, they cannot be considered an SBO under the first criterion. This means purely direct shareholding, where shares are registered solely in the individual’s own name, does not trigger SBO obligations under this category.

However, when an individual possesses both direct and indirect holdings, both components must be aggregated to determine whether the ten percent threshold is crossed. The emphasis on “indirectly” indicates that beneficial interest scenarios must involve an individual enjoying benefits while legal ownership rests elsewhere.

Direct Holdings

An individual is considered to hold rights directly when either:

• Shares representing such rights are registered in the individual’s name, or
• The individual holds beneficial interest under Section 89(2) and has made the required declaration to the company.

The first condition recognizes that when a registered shareholder is both legal and beneficial owner, no need exists to detect a separate SBO, as this information already appears in company and government records.

The second condition acknowledges that when registered and beneficial ownership are separated but both parties have made Section 89 declarations, no further SBO detection is needed since this information is already on record.

Understanding Indirect Holdings

Whether an individual holds shares or rights indirectly is determined by applying specific criteria based on the nature of the registered member. These criteria rest on legal presumptions about individuals falling within these categories having indirect shareholding, voting rights, or distribution entitlements.

When the Member is a Body Corporate:

If a corporate entity is the registered member and the individual either:

• Holds majority shares in that corporate member, or
• Holds majority shares in the ultimate holding company of that corporate member,

then the individual is considered to hold rights indirectly.

When the Member is a Hindu Undivided Family:

If an HUF is the registered member holding shares through its Karta, and the individual is that Karta, the individual is considered to hold rights indirectly.

When the Member is a Partnership:

If a partnership entity is the registered member and the individual either:

• Is a partner in that partnership, or
• Holds majority stake in a corporate body that is a partner, or
• Holds majority stake in the ultimate holding company of a corporate body that is a partner,

then the individual holds rights indirectly.

When the Member is a Trust:

If a trust holds shares through a trustee, and the individual is:

• The trustee in a discretionary or charitable trust, or
• The beneficiary in a specific trust, or
• The author or settlor in a revocable trust,

then the individual holds rights indirectly.

When the Member is a Pooled Investment Vehicle:

Special provisions apply to pooled investment vehicles based in jurisdictions with specific regulatory frameworks. If the member is such a vehicle and the individual is the general partner, investment manager, or Chief Executive Officer (where the investment manager is a corporate or partnership entity), then the individual holds rights indirectly.

For pooled investment vehicles in jurisdictions not meeting specified requirements, the other criteria for body corporates, partnerships, or trusts apply as appropriate.

Second Criterion: Significant Influence or Control

Under the second criterion, an individual who possesses the right to exercise, or actually exercises, significant influence or control in any manner other than through direct holdings alone qualifies as an SBO.

The phrase “other than through direct holdings alone” is crucial. It means that if an individual exercises significant influence or control apart from or in addition to direct shareholding, such rights must be considered for SBO determination.

For instance, if an individual subscribes to company debentures or provides loans and consequently acquires special rights through agreements or articles of association, such individual would be considered as having the right to exercise significant influence or control.

Significant Influence

The SBO Rules define “significant influence” as the power to participate, directly or indirectly, in financial and operating policy decisions of the company, without constituting control or joint control of those policies.

The word “power” is pivotal. To fall within this definition, there must exist power to participate in financial and operating policy decisions, regardless of actual exercise. Therefore, if an individual (alone or with others) has the power to participate directly or indirectly in such decisions, they are considered to have significant influence and consequently are an SBO.

In companies, policy decisions are made by the Board of Directors and implemented by executive directors and officers. The Board is empowered to exercise all powers that the company is authorized to exercise. Financial and operating policy decisions fall within the Board’s domain.

Therefore, an individual who is not a Board member but possesses power to participate in these decisions would be deemed to have significant influence. Evidence would typically exist in shareholders’ agreements, articles of association, or other documents conferring such power.

Defining Control

The term “control” follows the definition in Section 2(27) of the Act, which provides an inclusive definition. It encompasses:

1. The right to appoint a majority of directors
2. The power to control management or policy decisions

Such control may be exercised:

• By one person individually or multiple persons acting in concert
• Directly or indirectly
• Through shareholding, management rights, shareholders’ agreements, voting agreements, or any other manner

The definition being inclusive means it applies to anything constituting control in ordinary understanding within the Act’s context.

Several situations create presumption of control:

• Right to appoint majority of directors
• Controlling management or policy decisions
• Exercise by single person or multiple persons acting together
• Direct or indirect exercise
• Through various mechanisms including shareholding, management rights, or agreements

In corporate practice, control typically means majority control through shareholding or voting power, which ultimately determines the power to control a company. Normally, control means exercising power through voting rights, with controlling interest indicating power to carry resolutions at general meetings.

However, de facto control by groups holding small capital proportions is not uncommon. Majority shareholding is neither essential nor always decisive in determining actual control. Real or de facto control can exist through various means. In companies with large, dispersed shareholding, comparatively small shareholdings held by few hands may enable actual control.

Declaration Requirements for SBOs

Every SBO must make a declaration to the company specifying the nature of their interest and other particulars in prescribed manner and timeframe.

The rules provide:

Initial Declaration: On commencement of the 2019 Amendment Rules, every existing SBO must file a declaration in Form BEN-1 within ninety days.

Subsequent Declarations: Every individual subsequently becoming an SBO, or whose SBO status changes, must file Form BEN-1 within thirty days of acquiring such ownership or any change.

An explanation clarifies that for individuals becoming SBOs or experiencing changes within the initial ninety-day period, the event is deemed to occur on the ninetieth day, with the thirty-day filing period calculated accordingly.

In case of an LLP:

As per Section 90 (1) of the Companies Act, 2013 read with Rule 5(2) of Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023:

Every individual, who subsequently becomes a significant beneficial owner, or where his significant beneficial ownership undergoes any change shall file a declaration in Form No. LLP BEN-1 to the reporting limited liability partnership, within thirty days of acquiring such significant beneficial ownership or any change therein.

Company’s Obligations

Identification Duty

Every company must take necessary steps to identify individuals who are SBOs and require their compliance with statutory provisions.

Without limiting this general duty, companies must specifically give notice to members (other than individuals) holding not less than ten percent of shares, voting rights, or distribution rights, seeking information in prescribed format.

Notice Provisions

Companies shall give notice in BEN- 4 to any person (whether or not a member) whom the company knows or reasonably believes:

• To be an SBO
• To have knowledge of an SBO’s identity or know someone likely to have such knowledge
• To have been an SBO during the preceding three years who is not registered as required

The person to whom the notice has been issued has to provide information to be given within 30 days of Notice.

In case of an LLP:

As per Section 90 (5) of the Companies Act, 2013 read with Rule 4, 8 and 9 of Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023:

Every  LLP shall where its partner holds not less than 10% contribution or not less than 10% voting rights or right to receive or participate in the distributable profits or any other distribution payable in a financial year  give Notice in BEN – 4 seeking information in accordance with subsection (5) of Section 90

Return and Register Requirements

Upon receiving declarations, companies must:

File Returns: File Form BEN-2 with the Registrar within thirty days of receiving declarations, along with prescribed fees.

In case of an LLP:

As per Section 90 (4) of the Companies Act, 2013 read with Rule 6 of Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023:

Upon receipt of declaration in Form LLP BEN – 1, the reporting LLP shall file a return in Form No. LLP BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of such declaration by it.

Maintain Register:

Maintain a register of SBOs in Form BEN-3 containing names, dates of birth, addresses, ownership details, and other prescribed particulars.

As per Section 90 (2) of the Companies Act, 2013 read with Rule 7(1) of Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023: The limited liability partnership shall maintain a register of significant beneficial owners in Form No. LLP BEN-3.

Provide Inspection: Keep the register open for inspection by members during business hours for reasonable periods (not less than two hours) on working days, on payment of fees not exceeding fifty rupees per inspection.

Special Provisions for Subsidiary Companies

Applicability of Section 90 must be assessed for each subsidiary company separately based on the two criteria for determining SBOs.

However, the rules provide that if a holding company has reported SBO details to the Registrar in Form BEN-2, no fresh declaration is required from the SBO to the subsidiary. The subsidiary need only report details of the holding company in Form BEN-2.

This exemption applies only to shares held by the holding company in its subsidiary. For remaining shares held by other persons, the subsidiary must independently determine whether SBOs exist, and such SBOs must make declarations in Form BEN-1 to the subsidiary, which must then report in Form BEN-2.

Exemptions:

The rules provide exemptions where shares are held by:

• Authority constituted under Section 125(5) of the Act
• The holding reporting company (subject to reporting requirements)
• Central Government, State Government, or local authorities