Shareholding v/s Beneficial Ownership - MMJC

‘Shareholders are de jure owners, and directors are de facto owners in a company’. This is an old saying explaining the position of shareholders and directors in a company. But off late, with more and more complex corporate structures being introduced in the capital markets for owning shares in a company, regulatory focus has been moving towards identification of ‘beneficial owner’ of a company. In this article, we shall discuss the difference between shareholding, i.e., owning shares in a company as compared to owning beneficial rights in a company and methods of identification of beneficial owner under the Companies Act, 2013.

1. Concept of Beneficial Ownership:

The concept and mechanism for identification of ‘beneficial owner’ has been prevalent in the banking sector under Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”) and it was implemented as a part of KYC check by banks. However, the method of identification owner is quite different under the Companies Act.

The Companies Act, 2013 (“the Act”) deals with two types of beneficial ownership:

(i)    Beneficial owner – who may or may not be an individual, which is regulated under section 89 of the Act.

(ii)   Significant beneficial owner – who must mandatorily be an individual, which is regulated under section 90 of the Act.

The concept of ‘beneficial interest’ is defined in Section 89(10) of the Act, which is applicable for both kinds of beneficial ownership as mentioned above.  It is defined as follows:-

“For the purposes of this section and section 90, 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”

From this definition, the following can be said to be the characteristic features of beneficial interest:

• It is a right or entitlement of a person (individual or non-individual) in a share.
• It may be direct or indirect.
• It may be through any contract or arrangement or through any other mode.
• It may be of that person alone or of that person together with any other person.
• It may mean the right or entitlement to (1) exercise or (2) cause to be exercised, any or all of the rights attached to such share
• It may mean the right or entitlement to receive or participate in any dividend or other distribution in respect of such share

2. Rights of a shareholder / member:

The term ‘shareholder’ is not defined in the Act. However, the term ‘member’ is defined in section 2(55) of the Act which essentially means that a shareholder / member is the one whose name is entered in the register of members. By virtue of being entered in the register of members, a shareholder can have various rights like:-

• Right to receive notices of general meetings of the Company
• Right to vote at a general meeting / postal ballot
• Right to receive dividend, when declared by the Company
• Right to receive entitlement to subscribe in case of rights issue of securities by the Company
• Right to receive bonus shares declared by the Company
• Right to participate while distribution of assets of the Company at the time of liquidation

And so on

3. Can a shareholder be beneficial owner also:

The analysis of the definition of ‘beneficial interest’ in section 89(10) of the Act shows that it is an inclusive definition. It is the right or entitlement of a person (individual or otherwise) to exercise or cause to be exercised any or all of the rights attached to a share. Further it can be direct or indirect right. This clarifies that a shareholder whose name is entered in the register of members (irrespective of whether the shareholder / member is an individual or an entity) is assumed to have beneficial interest in the shares held by the shareholder/ member.

4. Situations when shareholder and beneficial owner can be different:

It may be noted that as a law of land, it is prohibited for any person to hold any property including shares in the name of any other person, i.e., it is not permissible for a person to be a shareholder when the beneficial owner of those shares is some other person. This restriction is imposed by The Prohibition of Benami Property Transactions Act, 1988 (“Benami Act”). However, the Benami Act permits[1] certain persons to be property owner (or shareholder) even if the beneficial owner is a different person, subject to certain conditions. Such persons are as follows:-

• Shareholder being Karta of a HUF and the beneficial owner being the HUF
• Shareholder being a person standing in a fiduciary capacity such as a trustee, executor, partner, director of a company, a depository or a depository participant under the Depositories Act, 1996 and the beneficial owner being the Trust / Estate of someone deceased / partnership firm / Company / demat account holder in the respective cases.
• Shareholder being an individual and the beneficial owner being his / her spouse or his / her child.
• Shareholder being an individual and the beneficial owner being his / her brother or sister or lineal ascendant or descendant, as joint owners.

Similarly, Section 187C of the Companies Act, 2013 (“the Act”) creates obligation on companies registered under this Act or any previous Companies Act that all investments made or held by a company in any property, security or other asset shall be made and held by it in its own name. However, proviso to section 187C(1) creates a carve-out that the company may hold any shares in its subsidiary company in the name of any nominee or nominees of the company, if it is necessary to do so, to ensure that the number of members of the subsidiary company is not reduced below the statutory limit.

5. Obligations of shareholder and beneficial owner when both are different:

In the above-mentioned situations, if the beneficial interest in those shares is not owned by the shareholder whose name is entered in the register of members and the beneficial owner of those shares is someone else (irrespective of whether the beneficial owner is an individual or an entity), then section 89(1) of the Act creates an obligation on such shareholder to give declaration to the Company in a form MGT-4 specifying the name and details of the person who is holding the beneficial interest in those shares, within 30 days of his name being entered in the register of members. Simultaneously, section 89(2) of the Act creates an obligation on the beneficial owner of such shares to give declaration to the Company in a form MGT-5 specifying the nature of interest of that beneficial owner and the details of the person whose name is entered in the register of members as the registered owner of those shares, within 30 days of acquiring beneficial interest in shares of the Company. Section 89(3) of the Act further creates obligation on the registered owner and the beneficial owner of shares to give declarations to the Company in Form MGT-4 and Form MGT-5 respectively, whenever there is a change in the registered owner or the beneficial owner of those shares, within 30 days of such change. In turn, section 89(6) of the Act creates an obligation on the Company to file these declarations received with the Registrar of Companies (ROC) of the Ministry of Corporate Affairs (MCA) in e-form MGT-6 within 30 days of receipt of declarations in Form MGT-4 and MGT-5.

This situation can often be seen in wholly owned subsidiary companies where the holding company holds all the shares except a nominal number of shares which are held by a nominee(s) of the holding company for the purpose of maintaining minimum number of shareholders in the wholly owned subsidiary company.

6. Concept of ‘Significant Beneficial Owner’:

In addition to the concept of ‘beneficial owner’ under section 89 of the Act which had been prevalent under the Companies Act, 1956 also, a new concept of ‘significant beneficial owner’ (“SBO”) has been introduced in section 90 of the Companies Act, 2013. Section 90(1) of the Act read with Rule 2(1)(h) of the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”) defines SBO as follows:-

“significant beneficial owner” in relation to a reporting company means an individual referred to in sub-section (1) of Section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:

(i) holds indirectly, or together with any direct holdings, not less than ten percent, of the shares;

(ii) holds indirectly, or together with any direct holdings, not less than ten percent, of the voting rights in the shares;

(iii) has 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 any direct holdings;

(iv) has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone

This definition highlights that the SBO with regard to particular shares is someone different from the ‘beneficial owner’ of those shares. The differences between SBO and beneficial owner can be summarised as follows:-

1. Beneficial owner can be individual or an entity (incorporated or non-incorporated), but SBO is necessarily an individual.
2. Beneficial owner of shares can be direct owner (i.e., registered shareholder is himself the beneficial owner) OR can be indirect owner (i.e., registered shareholder and beneficial owner are different).

But the registered owner of particular shares cannot be SBO for those particular shares, although he may be having some other shares in the Company in his direct name. This is because the concept of SBO emphasises mainly on indirect holding, and direct holding is also clubbed with indirect holding. But direct holding alone will not make a registered shareholder an SBO.

• Beneficial ownership disclosure is applicable for even 1 share in the Company. But for being SBO and triggering the disclosure requirement for SBO, that individual should hold 10% of shares / voting rights / right to participate in distributable dividend / any other distribution / control/ significant influence.
• The Forms prescribed for disclosure of beneficial owner is MGT-4, MGT-5 and MGT-6 as explained in the above paras as per section 89 of the Act. But for SBO, section 90(1) of the Act creates obligation on the SBO to give declaration to the Company in Form BEN-1 within 30 days of acquiring beneficial interest and within 30 days of any change therein. In turn, section 90(2) creates obligation on the Company to file e-form BEN-2 with ROC of MCA within 30 days of receipt of declaration in Form BEN-1.

Further the Explanation to the definition of SBO given in Rule 2(1)(h) of SBO Rules, especially Explanation III explains who the SBO shall be, in case of different types of shareholders.

Conclusion:

From the above analysis, it can be said that a shareholder is generally assumed to be the beneficial owner also, unless there are exceptional scenarios when a disclosure in MGT-4, MGT-5, MGT-6 is needed. This concept of beneficial owner has been in existence in the past many years. However, with the introduction of the concept of SBO, this entire analysis of holding of ‘beneficial interest’ has come into limelight. In October 2023, MCA has vide a notification[2] mandated all companies to designate a person in the Company who shall be responsible for furnishing, and extending co-operation for providing, information to the ROC with respect to beneficial interest in shares of the company. Off late, ROCs have started adjudicating for non-compliance of the disclosure requirements with regard to beneficial owner and SBO. Hence, it is very imperative that every company has a robust system for identifying the beneficial owner and SBO of its shares, even when changes may not be happening at the ownership level (in India in case of MNCs) but changes at the parent level will also require disclosure requirements for each company and its subsidiaries in India. These initiatives of the Government are all aimed at having a transparent ownership structure even in complex conglomerates in India !!!

The article is written by Ms. Deepti Jambigi Joshi – Partner of MMJC and published in Taxmann

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024088/shareholding-vs-beneficial-ownership-experts-opinion

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[1] Definition of ‘benami transaction’ in section 2(9) of The Prohibition of Benami Property Transaction Act, 1988

[2] Sub Rules (4) to (8) inserted Rule 9 in the Companies (Management and Administration) Rules, 2014 with effect from 27 October 2023