Assistance for Identification of Beneficial Interests – Who is Responsible? - MMJC

Introduction.

After International Financial Reporting Standards have laid importance on reporting of beneficial owners of corporate entities, the regulators across the world have become vigilant in this behalf. In India, the Ministry of Corporate Affairs (‘MCA’) is taking multiple steps to ensure proper disclosure of beneficial interest in the company by the shareholders.

In its constant endeavor to improve reporting on beneficial ownership, MCA through its notification dated 27^th October 2023, mandated the companies to designate a person who shall be responsible for giving information to registrar regarding beneficial interest in the company whenever asked by ROC. These provisions relating to designation of person were inserted in rule 9 of management and administration rules 2014. In this article, we shall try to deliberate upon the intricacies of rule 9 sub-rules (4) to (8) of Companies (Management and Administration) Rules, 2014 (‘Management rules’) prescribing the requirement of designating a person for giving information to ROC.

Legal provisions.

As per rule 9(4) of Management rules, each company is required to designate one person who shall be responsible for extending co-operation to ROC with respect to beneficial interest in the company. Rule 9(5) of Management rules provides list of persons who can be designated for this purpose and rule 9(6) clarifies that what shall be the consequences of not designating any person for this purpose. Sub-rules 7 & 8 of rule 9 specify the method of intimating ROC about the details of person designated for this purpose.

Priority for designation.

As stated above, rule 9(5) of Management rules provides list of persons who can be designated for co-operating with ROC with respect to beneficial interest. The sub-rule 5 states that, company may designate Company Secretary (‘CS’) (wherever required to be appointed) or Key Managerial Person (‘KMP’) other than CS or if there is no CS or KMP, then every director. In case of directors, it is clearly mentioned that if there is no CS or any other KMP in the company, then every director can be designated person, but no such condition is present between CS and KMP, that is, there is no provision in rule which states that KMP can be designated only if there is no CS. This situation gives rise to 2 questions.

• Is it that KMP can be designated only if there is no CS, or its board’s call who to designate? And
• If company has CS, KMP and directors, but none of them is agreeing to be designated person, then what shall be the solution to this?

Priority amongst CS and KMP.

As mentioned earlier, unlike clause 3, clause 2 of rule 9(5) of Management rules does not state that, KMP can be designated only if there is no CS. The conjoint reading of clauses 1 and 2 give a meaning that company can designate either CS or KMP other than CS. Further clause 3 states that, if there is no CS or KMP then, directors can be designated. That means, who shall be the designated person for the purpose of assisting registrar of companies in identifying beneficial ownerships has to be decided by the board of directors of the company.

Whether every director would be held responsible for compliance under rule 9 sub-rule (5)?

But if CS or KMP are not ready to take up the responsibility as stated above then can the board of directors designated one amongst them for the purpose of compliance with sub-rule (5) of rule 9?

Simple reading of the language of clause 3 of rule 9(5) of Management rules gives the impression that if no person from clauses 1 and 2 are available, then every director can be designated. This language gives rise to one question that, whether company can designate any one of the directors or it must designate all directors or board of directors as a whole?

The answer to this question can be found in opening statement of rule 9(5) of Management rules. Conjoint reading of opening lines of rule 9(5) with clause 3 says that company may designate every director if there is no CS or KMP. The use of word ‘may’ in the language of rule 9(5) of Management rules gives option to company to either designate one single director or all of them. In other words, it is the board’s call whether to designate one director or all/every director.

Consent of individual for responsibility under sub-clause (5) clause 9.

Designating a person for a specific task means making him responsible for that task. Therefore, no person can be designated unless he is willing to be so designated. If none of the CS or KMP or any of the members of the board of directors give consent to be designated under this provision, then provisions of sub-rule 6 of rule 9 of Management rules come into play. This sub-rule states that, till the time no person is designated, the company secretary will be deemed to have been designated, if there is no CS then managing director or manager will deemed to be designated and if there is no CS as well as MD or manager, then every director of the board will have deemed to be designated. Therefore, if none of the above-mentioned entities are willing to take up the responsibility under rule 9 sub-rule (5) then the entire board of directors by default will become responsible by virtue of deeming provision under sub-rule 6.

Intimation to ROC.

The next step after designating the person is to intimate the ROC. Reading of rule 9 sub-rule 6 of Management rules makes it clear that, the detail of designated person must be intimated to ROC through annual return. So, this intimation would be given in the month of October or November every year. However, the information provided through this form is as of 31^st March, that is, as at year end. Therefore, although intimation must be given to ROC after conduct of AGM, it is advisable for the companies to designate a person through board resolution before 31^st March or year end.

Intimation of change in designated person.

Since the details regarding designated person must be given in annual returns and annual returns are filed only ones in a year, there arises a difficulty with respect of intimating to ROC about the change in details of designated person. Rule 9(8) of Management rules says that, change in details of designated person should be intimated to ROC in form GNL-2. That means, if the designated person is changed or there is any change in particulars of the designated person in between filing of annual returns, then such changes can be intimated to ROC in this form GNL-2.

Name or designation of person?

While intimating the details of designated person to ROC, there arises a question that, whether the company should intimate the designation/position of the person being designated or should it give the name of the person?

For example, if the company has designated its CS, then whether it should say that it has designated its CS, or it should say that it has designated its CS Mr. X? this question becomes significant in case where the person on the designated post like CS resigns and new person is appointed on that post.

The answer to this question is difficult as on date because the form in which intimation is to be given, that is form MGT-7 has not yet been modified to include space for providing details of designated person under this position. Ones the form is amended, the answer to this question shall be clear. However, if we look at the purpose of introducing this provision, it aims at designating one specific person whom ROC shall contact in case of any enquiry inspection etc. looking at this purpose, it appears relevant to give name and other contact details of designated person to the ROC.

Conclusion.

Complete reading of the provisions of rule 9 sub rule (4) to (8) of Management rules gives answers to most of the questions. The intention of bringing this provision in the Act is to designate one person who can be one single point of contact in case of enquiry or inspection etc. also since one specific person is designated for maintaining and providing records, the liability on the other directors and KMPs is comparatively reduced. This provision is advantageous for both, company, and the regulator (ROC).

This article is published in Taxmann. The link to the same is as follows: –

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000023862/assistance-for-identification-of-beneficial-interests-%E2%80%93-who-is-responsible-experts-opinion

This article is written by Ms Rutuja Umadikar – Research Associate – RND Team – rutujaumadikar@mmjc.in