Indian units of more MNCs under beneficial ownership glare

Earlier this month, the RoC in Uttar Pradesh held in separate orders that Samsung SDI India Pvt. Ltd and Samsung Display Co. Noida Ltd failed to identify Lee Jae-Yong, executive chairman of South Korea's Samsung Electronics Co. Ltd, as a “significant beneficial owner (SBO)." Last month, the RoC for Delhi and Haryana imposed penalties of over ₹27 lakh on LinkedIn Technology Information Pvt. Ltd. set up in India, Microsoft Corp. chief executive Satya Nadella, LinkedIn CEO Ryan Roslansky and seven other individuals for alleged violation of SBO reporting norms.

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One of the persons cited above said India is adding about 150,000 new businesses every year, including companies and limited liability partnerships (LLPs), and would soon be reaching the level of some of the developed countries in Europe. “In such a scenario, unless the quality of enforcement is good, it can cause problems in future," the person said on condition of anonymity.

Part of larger effort

Regulatory action against alleged non-disclosure of beneficial owners is part of a larger effort to enhance the quality of enquiries by RoCs, who have been proactive in the last few years in removing defunct companies from the official registry and in detecting shell companies.

“It is a fact that bigger companies create complex structures. Not all of them are for wrongful purpose and in many cases, it may be for efficiency in taxation or in organizing business. Be that as it may, who is controlling the business should not be hidden. It is the duty of the company to identify and report its beneficial owners," said the person quoted above. “Companies have to come clean on who is owning them. It is like an internal know your customer (KYC) for them," the person said.

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Emails sent to the ministry of corporate affairs and to the RoCs on 18 June and to Samsung and Linkedin on Friday seeking comments for the story remained unanswered at the time of publishing.

In wake of FATF review

A second person, who also spoke on condition of anonymity, said that the emphasis on enforcement of provisions on significant beneficial ownership comes in the context of a country review by the Financial Action Task Force (FATF), a global standard-setter in the fight against money laundering, financing of terrorism and proliferation of weapons of mass destruction.

FATF says on its website that an assessment of India is underway. However, the first person quoted above said that every enforcement action cannot be linked to the FATF review and that India is a top performer in effectiveness in systems meant to check money laundering and financing of terrorism and proliferation.

Also read |  LinkedIn reviewing order after RoC fines it for violating beneficial-owner rules

The first person denied that enforcement of beneficial ownership reporting norms affects ease of doing business, saying that insufficient regulation dealing with complex corporate structures was responsible for the global financial meltdown of 2007-08.

Special attention needed

Experts pointed out that the issue of beneficial ownership needs special attention from businesses. Regulations lay the responsibility of disclosure on the individual, who himself holds significant beneficial ownership and the company, if the company is of the view that a person is an SBO and falls within the eligibility criteria which are shareholding, voting rights or control, explained Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm.

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“From the recent orders issued by RoCs, it can be considered that the department is going beyond the letter of law and identifying/ analysing the corporate structures keenly to identify potential SBOs. It is critical for companies to do the litmus test thoroughly, taking into view the intention of the law to identify who is actually benefitting from the company with respect to the ownership aspect," said Sehgal.

Vishwas Panjiar, Partner at Nangia Andersen LLP, a business advisory firm said that it should be kept in mind by companies that filings, no matter how innocuous they seem, should be undertaken with utmost diligence.