The Executive Chairman and CEO of the American Multinational Corporation (Microsoft), Mr. Satya Nadella, was fined by the Ministry of Corporate Affairs for not complying with the norms of Significant Beneficial Ownership connected to LinkedIn Technology. According to an order by the Registrar of Companies (RoC) of Delhi & Haryana, Mr. Nadella and eight other executives were fined approximately 27 Lakhs for violating Section 90 of the Companies Act, 2013. This incident brings us to consider the key concept of SBO that is pertinent to the businesses to comply with to avoid such charges being imposed on them. Before dwelling on any further news narratives, an analysis of decoding the SBO chain is crucial.
Section 90 of the Companies Act, 2013 requires that it is the duty of those individuals who directly or indirectly hold substantial or significant benefits over the company, to disclose their interests, especially when their name is not entered in the register of members as the holder of such shares. This provision has been brought into place to ensure transparency and prevent any misuse of the corporate vehicle. Additionally, these changes have also been brought into the picture to ensure that India, being a member of FATF since 2010, is committed to its stance against money laundering and proliferation financing by providing transparency about the Beneficial Owner of a legal entity.
Now coming to the determination of the SBO, Section 90 of the Companies Act read with Companies (Significant Beneficial Owners) Rules, 2018 prescribe two tests namely: the objective test and the subjective test. The objective test stipulates that a person can be termed as an SBO if he/she holds 10% shares at the reporting company level with a mandatory indirect shareholding along with a possibility of direct shareholding of the SBO coupled with a majority holding through the ownership chain. The Subjective Test postulates that an SBO can also be determined by checking if the person can exercise a significant influence or control in any manner regarding the affairs of the company other than direct shareholding. “Significant influence” refers to the ability to directly or indirectly participate in the reporting company’s financial and operating policy decisions; it does not imply joint or controlling authority over those decisions.
The law requires that individuals and companies abide by the norms laid down in the Companies Act regarding the SBO. The individual identified as an SBO must make a declaration to the company by specifying the nature of his interest. Then, the company with an SBO must maintain and record these details in a register of the significant beneficial owners that shall be open for examination and scrutiny by the members of the company.
Firstly, it is the duty of every SBO to file a declaration in Form No. BEN-1 to the company filling in the required details. These details are available for all the members of the company to examine. Secondly, after the declaration is received by the company, it is the duty of the company to file a return in Form No. BEN-2 with the Registrar within thirty days from the date of receipt of such declaration by the SBO. Lastly, the company must maintain a register of these significant beneficial owners in form No. BEN-3.
Since these factors are to be properly taken into consideration and be understood by the SBO, it places an onus and a lot of responsibility on the SBO and the company to diligently identify their underlying interests and control over the company and to duly disclose them.
However, there might be instances where the Company might not be able to identify which individual is a Significant Beneficial Owner. In such a circumstance, Section 90(5) of the Companies Act, 2013 comes into the picture. In this case, a company needs to issue a notice seeking information as per Section 90(5) in Form No. BEN-4. A company must send a notice to anyone (whether they are a member of the company or not) if the company knows or has reason to believe that the person is a significant beneficial owner, knows who the significant beneficial owner is or might know someone who does, or was a significant beneficial owner within the last three years. This notice is required for those who haven’t registered as a significant beneficial owner with the company, as the law requires.
These are the basic rules for the identification of an SBO by a company. However, there is a lot of misconception in interpreting the concept of SBO. That is the reason why many people find this concept overreaching and deny their liability by stating that they are not the actual beneficial owners of the company. Even in the current case, in response to the RoC, the company stated that Mr. Nadella cannot be considered a significant beneficial owner of LinkedIn India as he fulfils his duties as a professional serving at the pleasure of his respective boards and shareholders. The Company stated that if the employers terminated Mr. Nadella, he would not be able to discharge his duties, which indicates the lack of authority of Mr. Nadella over LinkedIn India. However, what most people fail to understand is that the law is much wider in its ambit and includes even indirect control and significant influence of an individual over the company. On these lines, the company’s (Microsoft) answers were deemed inadequate by the registrar’s office, which stated that the company ignores the fact that significant beneficial owners are determined by the test of control or significant influence.
Therefore, compliance as per Section 90 of the Companies Act is extremely important for the company and its significant beneficial owners, as the lack of thereof could lead to fines being imposed on them. Although it might increase some compliance burden on the companies, it has various advantages over just possibly adding to the companies’ compliance burden. Knowing the owners of a body corporate would help that company take the proper action if it wanted to hostilely take over another company. The companies won’t have to reply individually to numerous regulatory bodies about beneficial ownership, which is an additional advantage. Most significantly, their shares would be more investible since the general public would view them as more reliable.
