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Introduction
The enactment of the Companies (Amendment) Act, 2017 (the “2017 Amendment”) has introduced significant complexities for Indian corporations in the identification and declaration of Significant Beneficial Owners (“SBO”). This legislative change has necessitated a thorough and precise approach to compliance, presenting numerous challenges for companies striving to meet the new regulatory requirements.
The regime governing SBO, as delineated under Section 90 of the Companies Act, 2013 (the “Act”), and the Companies (Significant Beneficial Owners) Rules, 2018 (the “SBO Rules”), originates from Recommendations 24 and 25 of the Financial Action Task Force (“FATF”) report. These recommendations mandate that member countries ensure the availability of adequate and timely information regarding the ‘beneficial ownership’ and ‘control’ of legal persons[1]. In alignment with the FATF recommendations, the Company Law Committee, 2016, proposed amendments to the Act to compel companies to obtain information pertaining to beneficial ownership.
However, the Companies (Significant Beneficial Owners) Amendment Rules, 2019 (“2019 Amendment”), replaced the SBO rules. The 2019 amendment was introduced to address various interpretative challenges and to ensure better compliance with the requirements for declaring significant beneficial owners. The updated rules lowered the threshold for beneficial ownership from 25% to 10% and provided clearer guidelines on the declaration process.
Legal framework
Section 90 of the Act establishes both quantitative and qualitative criteria for identifying an SBO. According to Section 90(1), any individual who, either independently or in concert with others, or through one or more persons or trusts (including those residing outside India), holds a beneficial interest of not less than 25% (or such other percentage as may be prescribed) in the shares of a company, or possesses the right to exercise, or actually exercises, significant influence or control (as defined in Section 2(27)) over the company, is required to make a declaration to the company. This declaration must specify the nature of the individual’s interest and other relevant particulars, in the manner and within the period prescribed for the acquisition of the beneficial interest or rights, and any subsequent changes thereto.
It is important to note that while Section 90 of the Act, prescribes a threshold of 25% beneficial interest, the SBO Rules, as notified by the Ministry of Corporate Affairs (“MCA”), have reduced this threshold to 10%. According to the SBO Rules, a “significant beneficial owner” in a company is defined as an individual who, either alone, jointly with others, or through one or more persons or trusts, possesses one or more of the following rights or entitlements in the company, either indirectly or in conjunction with direct holdings:
- at least 10% of the shares,
- Control at least 10% of the voting rights,
- has the right to receive or participate in at least 10% of the total distributable dividends or other distributions in a financial year,
- has the right to exercise, or actually exercises, significant influence or control in any way other than just through direct shareholding. If an individual does not hold any right or entitlement indirectly, he shall not be considered to be an SBO.
Compliance requirements for SBO’s
An individual must comply with the SBO Rules in conjunction with Section 90 of the Act and file the requisite BEN forms to avoid penalties. The four BEN forms, along with their descriptions, are as follows:
- BEN-1: It is the duty of every company to identify the SBO and ensure that the individual files a declaration of their beneficial holding in Form BEN-1 within 30 (thirty) days of acquiring such significant beneficial ownership or any change therein. Consequently, it is the company’s responsibility to ascertain the SBO. Should the company fail to identify the SBO, it will be subject to the prescribed consequences.
- BEN-2: Upon receipt of declaration in Form BEN-1, the reporting company shall file a return in E-Form No. BEN-2, within a period of 30 (thirty) days from the date of receipt of such declaration.
- BEN-3: The company shall maintain a register of SBOs in Form No. BEN-3.
- BEN-4: Every reporting company shall in all cases where its member (other than an individual), holds not less than ten per cent of its:- (a) shares, or (b) voting rights, or (c) right to receive or participate in the dividend or any other distribution payable in a financial year, give notice to such member, seeking information, in Form No. BEN-4.
Consequences of Non-compliance
Pursuant to Sections 90(10), 90(11), and 90(12) of the Act, failure to make the required declaration under Section 90(1) results in a penalty of ₹50,000, with an additional ₹1,000 per day for continuing violations, up to a maximum of ₹200,000. If a company fails to maintain the register, file information, or denies inspection, it faces a penalty of ₹100,000, with an additional ₹500 per day for continuing violations, up to a maximum of ₹500,000. Officers in default are subject to a penalty of ₹25,000, with an additional ₹200 per day for continuing violations, up to a maximum of ₹100,000. Any individual who willfully furnishes false information or suppresses material information in the declaration is subject to action under Section 447 of the Act, (Punishment for Fraud). These penalties are adjudicated by the ROC and are not subject to compounding.
Samsung’s Case Study
Similarly, one of the prime examples of a case on the corporate compliance concerning significant beneficial ownership is the Samsung’s case wherein the MCA issued an order adjudicating penalties under Section 454 of the Act, against Samsung Display Noida Private Limited (“SDNPL”) and its directors for violating Section 90 of the Act. The hearings took place on April 25, 2024, and May 10, 2024. Represented by Advocate Mohit Maheswari, SDNPL failed to comply with the significant beneficial ownership declaration requirements.
Background
SDNPL was incorporated on July 5, 2019, in Noida, Uttar Pradesh. The company was majorly owned by Samsung Display Co. Ltd, Korea (“SDC”) with 99.99% shares, and a minor portion of the share held by Mr. Jin Suk Lee as a nominee. This ownership has remained consistent since its inception, with initial subscribers being SDC with 99.99% shares through Mr. Jaeho Shin and Mr. Jeeyong Chung (negligible share). The ownership has remained the same only the nominee and representative have differed that way.
Upon examination, the Registrar of Companies (“ROC”) determined that SDNPL had not filed e-form BEN-2, which is required for declaring SBOs. In response, SDNPL asserted, based on its self-evaluation, that no individual met the SBO criteria due to the dispersed ownership structure of SDC, Korea, and its ultimate parent company, Samsung Electronics Co., Ltd. (“SEC”), Korea, both of which are listed on the Korean Stock Exchange. SDNPL contended that no single individual or group held a 10% or greater beneficial interest or exercised control in the reporting company through the holding and ultimate holding companies.
The ROC determined that SDNPL’s evaluation failed to consider the nature of indirect holdings or the exercise of control through distributable dividends and significant influence. Consequently, the ROC issued a show cause notice on April 15, 2024, to SDNPL, its directors, and key management personnel (“KMP”), citing non-compliance with Section 90 of the Act, and the SBO Rules.
Response by SDNPL
SDNPL reiterated its earlier position, emphasizing that no individual or group held significant stakes in either the immediate or ultimate holding companies. However, the ROC found this response unsatisfactory, as it failed to address the core requirement of Section 90, which involves identifying individuals with beneficial interests or significant influence, even indirectly.
SDNPL was granted another hearing date on May 10, 2024, but did not fully comply with the requirements. The ROC requested detailed information about the promoters, directors, KMP, and shareholders of major Samsung entities. SDNPL’s responses remained incomplete, particularly concerning the Ultimate Beneficial Owner disclosures required for banking purposes.
Public Information
Publicly available information indicates that SEC, Korea, holds a controlling interest in SDNPL and 232 subsidiaries, with ownership of voting rights. The family of the late Mr. Lee Kun Hee, including his son Lee Jae-Yong, holds significant stakes in SEC, Korea, and other entities, suggesting indirect control over SDNPL. Despite holding a minority share, Lee Jae-Yong was appointed Executive Chairman of SEC, Korea, underscoring his significant influence over the company.
Conclusion
The ROC concluded that SDNPL failed to identify and declare its SBO as required by law. The company did not take the necessary steps to identify individuals exercising significant control or influence, either directly or indirectly. Consequently, the default under Section 90 of the Act, 2013, and the SBO Rules, was established, resulting in penalties for SDNPL and its officers. This order emphasized the importance of transparency in corporate ownership and compliance with statutory requirements, including the timely filing of necessary forms and adherence to prescribed procedures, to ensure accountability and prevent undue influence in corporate governance.
[1] Recommendation 24, The FATF Recommendations, adopted by the FATF Plenary in February 2012, updated as of June 2021.
