Companies (SBO) Rules, 2018 - PowerPoint Presentation

1. Companies (SBO) Rules, 2018Pune Chapter of WIRC of ICSIKothrud Study CircleMarch 30, 20191

2. Section 89Ostensible Owner and Beneficial OwnerWhen the name of a person is entered in the register of members as the holder of shares but who does not hold the ‘beneficial interest’The person whose name is entered in the Register of members is the Ostensible ownerThe person who holds beneficial interest is the Beneficial owner2

3. Sections 89 and 90Significant Beneficial Owner (SBO) v. Beneficial OwnerSBO is also a Beneficial Owner. Both the Sections aim at identification of “owners” behind the ‘façade’The object and mechanism of Section 89 and 90 are entirely different3

4. FATF guidanceTRANSPARENCY AND BENEFICIAL OWNERSHIP “Despite the essential and legitimate role that corporate vehicles play in the global economy, under certain conditions, they have been misused for illicit purposes, including money laundering (ML), bribery and corruption, insider dealings, tax fraud, terrorist financing (TF), and other illegal activities. This is because, for criminals trying to circumvent anti-money laundering (AML) and counter-terrorist financing (CFT) measures, corporate vehicles are an attractive way to disguise and convert the proceeds of crime before introducing them into the financial system.”4

5. FATF guidanceFor example, if a company is legally owned by a second company (according to its corporate registration information), the beneficial owners are actually the natural persons who are behind that second company or ultimate holding company in the chain of ownership and who are controlling it.5

6. FATF guidanceThe FATF definition of beneficial owner also applies in the context of legal arrangements, meaning the natural person(s), at the end of the chain, who ultimately owns or controls the legal arrangement, including those persons who exercise ultimate effective control over the legal arrangement, and/or the natural person(s) on whose behalf a transaction is being conducted.6

7. FATF guidanceStep 1 (a) The identity of the natural persons (if any, as ownership interests can be so diversified that there are no natural persons, whether acting alone or together, who exercise control of the legal person through ownership) who ultimately have a controlling ownership interest in a legal person, and(b) to the extent that there is doubt as to whether the persons with the controlling ownership interest are the beneficial owners, or where no natural person exerts control through ownership interests, the identity of the natural persons (if any) exercising control of the legal person through other means.7

8. FATF guidanceStep 2 Where no natural person is identified under (a) or (b) above, financial institutions should identify and take reasonable measures to verify the identity of the relevant natural person who holds the position of senior managing official.8

9. FATF guidanceThe natural person(s) who directly or indirectly holds a minimum percentage of ownership interest in the legal person (the threshold approach). For example, Recommendation 24 allows the determination of the controlling shareholders of a company based on a threshold (for example, any persons owning more than a certain percentage of the company, such as 25%).The ownership interest approach suggests that it is likely that there could be more than one beneficial owner (for example, with a threshold of more than 25%, there could be a maximum of three beneficial owners).9

10. FATF guidanceShareholders who exercise control alone or together with other shareholders, including through any contract, understanding, relationship, intermediary or tiered entity (a majority interest approach)This indirect control could be identified through various means, as shareholder's agreement, exercise of dominant influence or power to appoint senior management. Shareholders may thus collaborate to increase the level of control by a person through formal or informal agreements, or through the use of nominee shareholders.10

11. Significant Beneficial OwnerOnly an individual is an SBOThe individual acts alone ORThe individual acts together with one or more ‘persons or trusts’ ORThe individual acts through one or more ‘persons or trusts’ The Individual possesses one or more of the ‘prescribed rights or entitlements’ – INDIRECTLY or together with DIRECT holdings “Indirect Possession of prescribed rights or entitlements by an individual alone OR together with OR through other persons in the REPORTING COMPANY” is the basis for determination of SBO11

12. CONCEPTSINDIRECT HOLDING DIRECT HOLDINGPOSSESSION OF RIGHTS AND ENTITLEMENTS IN REPORTING COMPANY12

13. TOUCHSTONE OF APPLICABILITYINDIRECT HOLDING EXPLANATION - IHolding of ‘shares’ ‘voting rights’ ‘right to receive or participate in dividend or distribution’ INDIRECTLY (As per Explanation III) is the touchstone for determination of SBO Rules do not apply if the holding/right is DIRECT ALONEDIRECT holding becomes relevant ONLY IF the individual ALSO has these rights INDIRECTLY13

14. DIRECT v INDIRECT RIGHTSEXPLANATION IIDIRECTIndividual holds shares in his own nameIndividual holds or acquires beneficial interest in the shares u/s 89(2) & makes a declaration to that effectINDIRECT Individual does not hold shares in his own name but through another individual, body corporate, HUF, LLP, Registered Firm, Trust etcIndividual holds or acquires beneficial interest in the shares u/s 89(2) BUT DOES NOT MAKE a declaration to that effect14

15. EXAMPLES OF DIRECT HOLDINGExplanation IIMr. A holds 51% shares in his own nameMr. A holds 9% shares ‘directly’ AND 42% shares in the name of Mr. X and complies with Section 89 (NOTE: Mr. A holds 50% shares ‘directly’ AND 1% shares in the name of Mr. X as ostensible owner BUT DOES NOT COMPLY with Section 89 would hold 1% shares INDIRECTLY)15

16. Mr. A (individualMr. AMr. X(Shareholder and Director)Mr. Y(Shareholder and Director)50%50%PQR Ltd(RC)Mr. A has provided funds to Mr. X and Mr. Y for purchase of shares of PQR Ltd. – the Reporting CoMr. A has not filed disclosures under section 89

17. Rights & EntitlementsParameters ShareholdingVoting rights in sharesThresholdIndirect holding - not less than 10% of shares; or Indirect + direct holding - not less than 10% of shares. (‘GDRs, CCPS, CCD are Shares’)Indirect holding - not less than 10% of voting rights; or Indirect + direct holding - not less than 10% of voting rights.17

18. Rights & EntitlementsParametersRight to receive or participate in distributable dividend or other distribution in a financial yearThresholdNot less than 10% of such distributable dividend/distribution, through indirect holding; or Not less than 10% of such distributable dividend/distribution, through indirect + direct holding.18

19. Rights & EntitlementsParametersExercise of significant influenceThresholdPower to participate, directly or indirectly, in the financial and operating policy decisions of the Reporting Company (without having control or joint control of these policies).19

20. Rights & EntitlementsParametersExercise controlThresholdRight to appoint majority of the directors; or Right to control the management or policy decisions either individually or together with other persons, directly or indirectly, by virtue of: (i)  shareholding (but not through direct holding); or (ii)  management rights; or (iii)  shareholders agreement; or (iv)  voting agreements or in any other manner20

21. Obligation of companies“Take necessary steps” to find out if there is an individual who is an SBO, identify him and cause the individual to make declaration in Form BEN–1In addition, mandatory to give notice in BEN-4 to members OTHER THAN INDIVIDUALS who holds at least 10% of its – sharesVoting rightsRight to receive or participate in the dividend or any other distribution payable in a financial year21

22. Criteria to determine the INDIRECT holding of Individuals in RCIf the member of the Reporting Company is a body corporate: if such individual holds a majority stake in such body corporate or in its ultimate holding company (whether incorporated / registered in India or not) (i.e., holding more than 50% of the equity share capital or the voting rights or having the right to receive or participate in more than 50% of the distributable dividends/other distribution)22

23. Mr. A (individualMr. AY Pte LtdZ Ltd (RC)35%25%Whether Mr. A is a SBO?

24. Mr. A (individualMr. AY Pte LtdZ Ltd (RC)51%12%Whether Mr. A is a SBO?

25. Mr. A (individualPaul SanderAndrew SanderPQR Pte Ltd40%20%ABC Ltd(RC)John Sander40%100%Is there any SBO in RC?All three act with a common intent while exercising voting rights

26. Significant InfluenceAn individual is a SBO IF –The individual has a right to exercise or actually exercises significant influence or control in any manner other than through direct holdings aloneIf the Significant Influence or Control is exercised or exercisable through DIRECT holdings alone by an individual, he will not be an SBO Normally, any of the following are considered to be evidence of significant influence:Board representation on the Reporting companyManagement personnel swapping or sharingMaterial transactions with the Reporting companyPolicy-making participation in the Reporting companyTechnical information exchanges26

27. Criteria to determine the INDIRECT holding of IndividualsIf the member of the reporting company is a Hindu Undivided Family: if such individual is a KartaIf the member of the Reporting Company is a partnership entity: if such individual is a partner of such partnership entity, or holds majority stake in a body corporate (or in its ultimate holding company), which is a partner in the partnership entity;27

28. Criteria to determine the INDIRECT holding of IndividualsIf the member of the reporting company is a trust (through trustee): If the trust is discretionary or charitable – such individual who is a trustee is SBOIf the trust is specific – such individual is a beneficiaryIf the trust is revocable – such individual is the author28

29. Criteria to determine the INDIRECT holding of IndividualsIf the member is a pooled investment vehicle or an entity controlled by such vehicle: if such individual is –a general partner/investment manager of such vehicle or entity controlled by itChief Executive Officer (if the investment manager is a body corporate or partnership entity) of such vehicle or entity controlled by it.29

30. AB V1 FundMNO Pte LtdAB V2 FundPQR Pte Ltd82%18%ABC Ltd(RC)100%Is there any SBO in RC?42%40%

31. Obligations of Reporting CompanyA Company shall give notice in Form BEN-4 to:Any person (whether a member or not) whom the company knows or has reasonable cause to believe:Is an SBOHas a knowledge of identity of a SBO or knowledge of another person likely to have such knowledgeWho has been a SBO at any time during the 3 years immediately preceding the date on which notice is issued31

32. Failure to provide information has serious consequencesIf the person fails to give information to the Company within the time specified in the notice or where the information given is not satisfactory, the Company has to apply to NCLT within 15 days of the expiry of the period specified in the Notice for an Order specified in Section 90(7)32

33. Obligations of Reporting company“Take necessary steps” to find out if there is an individual who is an SBO, identify him and cause the individual to make declaration in Form BEN–1In addition, mandatory to give notice in BEN-4 to members OTHER THAN INDIVIDUALS who holds at least 10% of its – sharesVoting rightsRight to receive or participate in the dividend or any other distribution payable in a financial year33

34. Obligation on the Individual who is an SBOWithin 90 days of 8 February 2019, an individual who is a SBO on that date to submit Form BEN – 1 to the Reporting companyIf an individual becomes SBO after 8 February 2019 or SBO changes after that date, file Form BEN-1 within 30 days of acquisition or changeIf an individual becomes SBO after 8 February 2019 or SBO changes after that date BUT ON OR BEFORE 8 May 2019 the date of becoming SBO OR CHANGE IN SBO SHALL BE DEEMED TO BE 8 May 201934

35. ExemptionsShares held by –Investor Education and Protection FundA holding reporting company (which itself is required to obtain Form BEN-1 from its SBOs and file BEN-2) provided that the details of holding reporting company are reported in BEN 2Entities whose shares are held by the Central or State Government or any local authorityEntities controlled by the Central or State GovernmentSEBI registered investment vehicles such as mutual funds, alternate investment funds, real estate investment trusts, infrastructure investment trustsInvestment vehicles regulated by Reserve Bank of India, Insurance Regulatory and Development Authority or Pension Fund Regulatory and Development Authority.35

36. Thank you!36