Powered by AltAlpha AI

Khyati Maurya and Saransh Sood are students of Gujarat National Law University, Gandhinagar.

Introduction

Chapter 7 of the Companies Act 2013 deals with the management and administration of the company. It includes provisions to prevent the misuse of corporate entities to serve the unethical interests of its shareholders, management or promoters. Specifically, section 90 provides for the mandatory disclosure of information regarding the Significant Beneficial Owner (SBO), that is, any natural person capable of exerting a huge influence on the affairs of the company. However, this disclosure requirement regarding the SBO is marred with ambiguity and uncertainty, especially in light of the recent decisions by the Registrar of Companies (RoCs). A disturbing trend is observed amongst the Registrar of Companies (RoCs) to hold the Chief Executive Officers (CEOs) of the (Multi-National Corporations) MNCs as SBOs, as evidenced in the cases of LinkedIn India and Leixir Resources based on the premise that they are capable of exerting substantial influence on the affairs of the subsidiary companies in India. This is primarily due to the lack of proper SBO identification guidelines or rules. This ambiguity raises significant concerns as it sits at the intersection of an individual’s right to privacy and the need for transparency in the corporate ecosystem. In light of this background, this piece attempts to argue for greater objectivity in the SBO identification process and to protect the legislation’s original intent.

The Tests for Significant Beneficial Owner

The concept of SBO is contained in section 90 of the Companies Act 2013 read with the Companies (Significant Beneficial Owners) Rules 2018 (2018 Rules), which provide for the definition of an SBO, its disclosure obligations and the consequences of non-compliance with these statutory requirements. The combined reading of section 90 of the Companies Act and the 2018 Rules reveals a twin test for determining SBOs. These twin tests can be described as an objective and a subjective test.

The objective test requires any person who directly or indirectly holds more than 10% of the equity stake or the voting power or dividend rights in the company to make disclosure as an SBO in the company and it is in turn, mandated by the company to inform the same to the RoC by filling the BEN-2 e-form on the MCA 21 website.

On the other hand, the subjective test requires the determination of whether or not the individual, alone or in concert with someone else, exercises direct or indirect ‘control’ or a ‘significant influence’ over the company’s affairs.  This ‘control’ over the matters of the company is defined under Section 2(27) of the Companies Act 2013 to mean the right to exert influence over the policies or management of the company either directly or indirectly and appoint the majority of directors on its board. The term ‘significant influence has also been defined in Rule 2(1)(i) of the 2018 rules, which defines it as the power to ‘participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies’.

Recent Controversial Decisions

The recent decisions of the RoC, seem to have unsettled the principles regarding the determination of SBOs, thereby necessitating a decision by the apex court clarifying the stance on the principles of determination of the SBO or relevant guidelines from the MCA. It must, however, be noted here that the appeal from the orders of the RoC cannot be preferred to the High Courts and lies before the Regional Director, who is the final authority on such matters under section 454 of the Companies Act 2013. However, the aggrieved person can prefer a writ petition before the High Court under Article 226 of the Indian Constitution.

One such recent case is the matter of Linkedin Technology Information Private Limited, where the RoC Delhi and Haryana held Mr Satya Nadella (CEO of Microsoft Corporation) and Mr Ryan Roslansky (CEO of the Linkedin Corporation), was held as SBO of LinkedIn India. It is surprising because none of the two members had a 10% or more equity stake either directly or indirectly in LinkedIn India, therefore, they clearly did not meet the objective standards laid under the act and the 2018 rules. The reasoning used by the RoC to hold them as SBOs was that both the CEOs were exerting significant influence on LinkedIn India’s decisions by interfering in the directors’ appointment, participating in other strategic decisions, and maintaining a strategic oversight over LinkedIn India. The RoC reached this conclusion based on the information available on the websites of LinkedIn Corporation and the public statements of Mr Roslansky.  

The reliance placed by the ROC on public statements also seems to raise questions concerning the individuals’ right to privacy. There needs to be proper guidelines that clearly define the boundaries of the investigation of the RoC and the permissible evidence that might be used to substantiate the findings. Without such clear guidelines, the ROCs enjoy a free hand in admitting and weighing evidence that might ultimately deteriorate the standards of judicial scrutiny and infuse uncertainty and arbitrariness in the entire decision-making process, while infringing upon the individuals right to privacy.

Another example is the case of Leixir Resources Private Limited, where the ROC held the CEO of the investment manager appointed by the Pooled Investment Vehicles as an SBO of a company that was controlled by the Pooled Investment Vehicle. This case points to two specific challenges. First, it goes beyond the bare text of the 2018 Rules, which provide that the CEO of the PIV can be held to be an SBO but does not provide for the CEO of an Investment manager to be an SBO. Second, this decision loses sight of the fact that the investment managers act in a very professional capacity and bear a fiduciary duty to look after the investment of all their clients. They usually do not benefit from any single investment managed by them. Further, CEOs are the professionals appointed to manage the enterprises and cannot be equated with the Owner of the company. As highlighted above merely being a CEO does not provide for a right to entirely control the affairs of the company. 

Issues Identified

The recent cases of RoC holding the CEOs of multinational corporations to be the SBO under section 90 is inherently problematic as they go beyond the bare text of the law and infuse uncertainty and arbitrariness in the adjudication process in the guise of purposive interpretation. The legislation has always intended to identify and maintain the disclosure of the persons indirectly controlling the corporate entities, who, therefore, benefit from such control. However, holding the CEOs liable to be SBOs goes against the basic idea of the SBO, which is designed to regulate the ‘invisible hands’ behind a corporate structure. However, the complete information regarding the CEOs of multinational corporations is available in the public domain and known to all.

This approach has several loopholes that seem to go against the basic intent of the legislation. First, the CEO is a working professional whom the Board of Directors appoints for a fixed period to manage the company’s affairs. They do not, however, have complete control over the activities of the companies and are subject to various internal checks and balances. There have been several instances where the CEOs have been removed and fired from the companies at the behest of the Board of Directors. Second, they seldom derive the ‘actual benefit’ through the operations of the subsidiary companies as they are seldom the majority shareholders in any such entity. Third, identifying such individuals with minuscule shareholding in the name of exerting control and influence over the company’s affairs may, ultimately, make the objective test of 10% shareholding redundant. While the companies may disclose the CEOs as SBOs, the ‘real’ beneficial owners benefitting from the dividends and profits of the company remain unnoticed.

Conclusion

In such a situation, the Ministry of Corporate Affairs must develop clear guidelines regarding the identification of the SBO. This is vital to maintain uniformity and certainty in the process and ensure that there remains ease of doing business. Otherwise, this might erode the investor confidence and force the MNCs to re-think establishing their subsidiarie

---

[1] Khyati Maurya is a student at Gujarat National Law University

[2] Saransh Sood is a student at Gujarat National Law University