Industry
Mint Explainer: Significant beneficial owners and what the govt wants to know
Summary
- The government has penalized Microsoft-owned LinkedIn for failing to disclose significant beneficial owners
- Laws mandate companies to identify significant beneficial owners to enhance transparency
In an unprecedented move, Microsoft-owned professional networking platform LinkedIn was served a show cause notice and penalized for what the Registrar of Companies (RoC) under the ministry of corporate affairs believed was non-disclosure of significant beneficial ownership of group companies in the Indian entity even though they did not directly hold shares in it.
Those penalised include Microsoft CEO Satya Nadella and LinkedIn Corp global CEO Ryan Roslansky who were classified as significant beneficial owners of LinkedIn Technology Information Pvt Ltd, the Indian entity. The government body sees Microsoft and LinkedIn Corp as the ultimate holding companies of the Indian entity. The RoC order also noted that the Indian company and its officers had failed to take necessary steps to identify its significant beneficial ownership.
The concept of significant beneficial ownership was introduced in the Companies Act, 2013 through an amendment in 2017 and the provision came into effect in June 2018.
Why were the provisions on significant beneficial ownership introduced?
Corporate structures in India and across the world have become complicated over the years, with multiple layers of holding companies and subsidiaries, in some instances registered in different jurisdictions. Because of the complicated web of multiple step-down subsidiaries, determining the actual owners of a business has become onerous. It also makes the task of identifying companies that are related parties difficult.
Further, several companies have registered their holding companies in low-tax jurisdictions or in those that have not adopted measures to combat money laundering and terror financing. In this context, the Financial Action Task Force (FATF), a Paris-headquartered intergovernmental watchdog, recommended a set of tough global beneficial ownership rules to stop criminals from hiding their illicit activities and dirty money behind secret corporate structures. As a FATF member country, India has committed to adopting measures to identify beneficial owners of companies and investments.
Also Read: LinkedIn reviewing order after RoC fines it for allegedly violating beneficial-owner rules
The 2017 amendment of the Companies Act and the Companies (Significant Beneficial Owners) Rules, 2018 are meant to pierce the corporate veil to identify individuals who have beneficial ownership in an investment. These laws and rules require companies to report regularly on their shareholding patterns as well as significant beneficial owners who may or may not hold shares in the specific company. Similarly, in 2023, limited liability partnerships were also directed to report on significant beneficial interest in the statutory filings.
While one of the objectives of the laws on significant beneficial ownership is to curb the use of complex corporate structures for illicit activities, they also bring more transparency in the holding structures of most companies and improve their corporate governance standards. It also helps investors, regulators and professionals to chart how control flows through a group of companies and even provide alerts on hostile takeover attempts.
How does the Companies Act define significant beneficial ownership?
Significant beneficial ownership is not determined by shareholding alone. An individual can be a significant beneficial owner in a company without direct ownership of shares, as the RoC reasoned in its adjudication order where it had identified Nadella and Roslansky as significant beneficial owners.
The Companies Act read together with the Companies (Significant Beneficial Owners) Rules lists four tests for an individual to be considered a significant beneficial owner:
- holds indirectly, or together with any direct holdings, not less than 10% of the shares
- holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares
- has right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings
- has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone
In the LinkedIn case, the RoC relied on the fourth test – having the right to exercise significant influence or control other than through direct holdings – to conclude that Nadella and Roslansky were significant beneficial owners.
The Limited Liability Partnership (Significant Beneficial Owners) Rules include the same set of tests to determine individuals who are significant beneficial owners.
Separately, the Securities and Exchange Board of India has also directed listed companies to disclose details about significant beneficial owners.
What are the obligations of a company in identifying significant beneficial owners?
Companies registered in India must maintain a register of significant beneficial owners. These individuals must file declarations in specific forms upon acquiring significant beneficial ownership and whenever there are changes in that ownership. Upon receiving these declarations, the company must file a return with the RoC.
If a company discovers a significant beneficial owner who has failed to declare their shareholding or control, the company must ensure compliance from the owner. This includes serving notice to the owner to comply with legal requirements and, if necessary, seeking intervention from the National Company Law Tribunal.
