1. Pune Chapter of WIRC of ICSI Kothrud Study Circle March 30, 2019
Companies (SBO) Rules, 2018
Pune Chapter of WIRC of ICSI
Kothrud Study Circle
March 30, 2019

2. Section 89 Ostensible Owner and Beneficial Owner
When 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 owner
The person who holds beneficial interest is the Beneficial owner

3. Sections 89 and 90
Significant Beneficial Owner (SBO) v. Beneficial Owner
SBO 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 different

4. FATF guidance TRANSPARENCY 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.”

5. FATF guidance
For 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.

6. FATF guidance
The 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.

7. FATF guidance
Step 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.

8. FATF guidance
Step 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.

9. FATF guidance
The 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).

10. FATF guidance
Shareholders 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.

11. Significant Beneficial Owner
Only an individual is an SBO
The individual acts alone OR
The individual acts together with one or more ‘persons or trusts’ OR
The 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 SBO

12. CONCEPTS INDIRECT HOLDING DIRECT HOLDING
POSSESSION OF RIGHTS AND ENTITLEMENTS IN REPORTING COMPANY

13. TOUCHSTONE OF APPLICABILITY INDIRECT HOLDING
EXPLANATION - I
Holding 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 ALONE
DIRECT holding becomes relevant ONLY IF the individual ALSO has these rights INDIRECTLY

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

15. EXAMPLES OF DIRECT HOLDING Explanation II
Mr. A holds 51% shares in his own name
Mr. 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)

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

17. Rights & Entitlements Parameters Threshold Shareholding
Voting rights in shares
Indirect 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.

18. Rights & Entitlements Parameters Threshold
Right to receive or participate in distributable dividend or other distribution in a financial year
Not 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.

19. Rights & Entitlements Parameters Threshold
Exercise of significant influence
Power 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).

20. Rights & Entitlements Parameters Threshold Exercise control
Right 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 manner

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–1
In addition, mandatory to give notice in BEN-4 to members OTHER THAN INDIVIDUALS who holds at least 10% of its –
shares
Voting rights
Right to receive or participate in the dividend or any other distribution payable in a financial year

22. Criteria to determine the INDIRECT holding of Individuals in RC
If 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)

23. Mr. A
Mr. A (individual
35%
Y Pte Ltd
Whether Mr. A is a SBO?
25%
Z Ltd
(RC)

24. Mr. A
Mr. A (individual
51%
Y Pte Ltd
12%
Whether Mr. A is a SBO?
Z Ltd
(RC)

25. ABC Ltd (RC) Andrew Sander John Sander Paul Sander Mr. A (individual
40%
20%
40%
PQR Pte Ltd
All three act with a common intent while exercising voting rights
Is there any SBO in RC?
100%
ABC Ltd
(RC)

26. Significant Influence
An 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 alone
If 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 company
Management personnel swapping or sharing
Material transactions with the Reporting company
Policy-making participation in the Reporting company
Technical information exchanges

27. Criteria to determine the INDIRECT holding of Individuals
If the member of the reporting company is a Hindu Undivided Family: if such individual is a Karta
If 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;

28. Criteria to determine the INDIRECT holding of Individuals
If 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 SBO
If the trust is specific – such individual is a beneficiary
If the trust is revocable – such individual is the author

29. Criteria to determine the INDIRECT holding of Individuals
If 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 it
Chief Executive Officer (if the investment manager is a body corporate or partnership entity) of such vehicle or entity controlled by it.

30. 82% 18% ABC Ltd (RC) AB V1 Fund MNO Pte Ltd AB V2 Fund PQR Pte Ltd
40%
AB V2 Fund
42%
82%
18%
PQR Pte Ltd
Is there any SBO in RC?
100%
ABC Ltd
(RC)

31. Obligations of Reporting Company
A 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 SBO
Has a knowledge of identity of a SBO or knowledge of another person likely to have such knowledge
Who has been a SBO at any time during the 3 years immediately preceding the date on which notice is issued

32. Failure to provide information has serious consequences
If 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)

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–1
In addition, mandatory to give notice in BEN-4 to members OTHER THAN INDIVIDUALS who holds at least 10% of its –
shares
Voting rights
Right to receive or participate in the dividend or any other distribution payable in a financial year

34. Obligation on the Individual who is an SBO
Within 90 days of 8 February 2019, an individual who is a SBO on that date to submit Form BEN – 1 to the Reporting company
If an individual becomes SBO after 8 February 2019 or SBO changes after that date, file Form BEN-1 within 30 days of acquisition or change
If 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 2019

35. Exemptions Shares held by – Investor Education and Protection Fund
A 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 2
Entities whose shares are held by the Central or State Government or any local authority
Entities controlled by the Central or State Government
SEBI registered investment vehicles such as mutual funds, alternate investment funds, real estate investment trusts, infrastructure investment trusts
Investment vehicles regulated by Reserve Bank of India, Insurance Regulatory and Development Authority or Pension Fund Regulatory and Development Authority.

36. Thank you!