SBO- A Preface
The concept of significant beneficial ownership (SBO) was introduced in India to stop bad actors from hiding behind companies for illegal activities. It's like shining a bright light on the real owners who control a company. This helps prevent things like money laundering, terrorism financing, and tax evasion. It also makes companies more honest and accountable, which is good for everyone involved.
The global effort to identify real individuals stems from the recognition that artificial legal entities are on the rise. Although these entities ultimately belong to real individuals, the ownership is often obscured by intricate networks of holdings and cross-holdings, making it difficult to ascertain ownership in most cases. These artificial legal entities are frequently exploited for illicit activities, including international criminal activities. It is crucial to uncover the individuals behind these companies to monitor their actions and ensure they can be held responsible.
In essence, companies themselves lack consciousness; their driving force and decision-makers are real individuals. The concept of identifying these natural persons aims to link companies back to the actual individuals who control them.
Introduction in India
In India, the introduction of the significant beneficial owner (SBO) system was no ordinary move. It came into play through the Companies Act 2013 and the Prevention of Money Laundering Act 2002, guided by the heavyweight recommendations of the Financial Action Task Force (FATF). FATF wasn't pulling punches; they recommeded that the government make sure they could quickly and accurately access information about who's calling the shots in companies. This meant setting up a beneficial ownership register or similar mechanisms to swiftly give authorities the upper hand in the fight against financial wrongdoing.
Before, the Prevention of Money Laundering Act (PMLA) in combination with the Prevention of Money Laundering (Maintenance of Records) Rules of 2005 had a clear definition of an SBO. They considered a company as an SBO if it held or had the right to hold 25% of the shares, capital, or profits of another company, or if it could appoint most of that company's directors or control its management and policies. However, in March 2023, changes were made to the PMLA rules to bring them in line with the criteria specified by the Companies Act and the Companies (Significant Beneficial Owners) Rules of 2018.
Legal Provision
A person is considered as a Significant Beneficial Owner (SBO) if he/she, whether acting alone, together or through one or more individuals or trust holds a beneficial interest of at least 10% (25% previously). The beneficial interest could be in the form of a company’s shares or the right to exercise significant influence or control over the company. These individuals, as already stated, must make a declaration to the company specifying the nature of his/her interest and other essential particulars in the prescribed manner and within the permitted time frame.
The Amended SBO Rules provide that a Significant Beneficial Owner is an individual (as specified above), who:
Holds indirectly, or along with any direct holdings, at least 10% per cent of the shares of the company.
Holds indirectly, or along with any direct holdings, at least 10% of the voting rights in the shares of the company.
Has been vested with the right to receive or participate in at least 10% of the total distributable dividend, or any other distribution in a financial year solely through indirect holdings, or along with any direct holdings.
Has been vested with the right of exercising significant influence* or control through direct-holdings and other means.
*Significant Influence: Means 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
Explanation III of rule 2(1)(h) of the rules prescribes the mechanism for identifying an SBO in different types of corporate structures.
What's a Reporting Company?
Means a Company as defined under section 2(20) of the Companies Act, 2013, which required to comply with the provisions of Section 90 & identify the SBO. Further, cause him to comply with provisions related to SBO.
Section 90 states the responsibilities of Reporting Company (4 BENs)
BEN-1 (Declaration of Significant Beneficial Owner): If you're a person who has a significant say in a company (i.e are an SBO), you need to fill out this form within 90 days of the new rules starting. If anything changes in your ownership later, you should update this form within 30 days.
BEN-2 (Return of Significant Beneficial Owner): Once the company gets the BEN-1 form from you, they have to submit another form, BEN-2, to the Registrar within 30 days. This tells the government who the Significant Beneficial Owners are.
BEN-3 (Register of Beneficial Owner): This isn't a form you fill out, but it's like a special list that the company keeps. It includes all the names and details of people who have a significant say in the company. It's called the Register of Beneficial Owner.
BEN-4 (Notice to Get Information): If the company thinks someone might be a Significant Beneficial Owner or knows someone who might know, they can send them a notice in the BEN-4 form. This notice asks for information about their ownership in the company. They can do this even if the person is not a member of the company.
If someone doesn't give the required information, the Reporting Company can go to the National Company Law Tribunal (NCLT) to ask for restrictions on their shares.
The concept of Significant Beneficial Ownership (SBO) in India is driven by a compelling need. It serves as a potent tool to combat financial crimes, enhance transparency in corporate structures, align with global standards set by organizations like the FATF, thwart the misuse of shell companies, and ultimately foster improved corporate governance. By requiring the identification of those with significant influence over companies, SBO regulations not only strengthen the country's ability to combat illicit financial activities but also promote accountability and responsible business conduct.
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(Disclaimer: The views expressed in this article are strictly personal opinions of the author and do not necessarily reflect the views or opinions of the company or organisation they may be associated with. This article is intended for informational purposes only and should not be construed as legal or professional advice. Readers are encouraged to seek professional guidance or consult relevant experts for specific legal or professional matters.)
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