Global private equity (PE) funds are likely to be among those most affected by the beneficial ownership norms notified by the Ministry of Corporate Affairs under Section 90 of the Companies Act, 2013.
According to the new rules, a company can suspend control rights on its shares if the PE fund does not disclose the beneficial owner.
This has the potential to lead to disputes between companies and PE funds going forward, as companies can approach the National Company Law Tribunal if appropriate disclosures are not made. The filing date for identifying significant beneficial owners (SBOs) is September 11.
Shares under the Companies Act, 2013, refer to a share in the share capital of the company and include stock.
Under the SBO norms, ‘share’ also includes instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures.
SBO rules are not applicable to domestic pooled investment vehicles or investment funds such as mutual funds, alternative investment funds, real estate investment trusts, and infrastructure investment trusts regulated by the Securities and Exchange Board of India. Funds that come through the foreign direct investment route, however, will come under its ambit.
“The beneficial owner has to make the disclosure, but the company also has to maintain records,” said a person familiar with the matter. “This will give undue leverage to promoters and may dissuade PE investors from investing.”
According to a note put out by Deloitte, an SBO means every individual, who acting alone or together with one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of at least 10 per cent, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in Section 2(27) of the 2013 Act, but whose name is not entered in register of members of a company as the holder of such shares.
The SBO test will need to be applied to such entities on a look-through basis through the chain of ownership. The SBO will have to provide information that includes details such as permanent account number, passport number, etc.
An SBO that does not make a declaration to the company could be fined in the range of Rs 100,000 and Rs 1 million. The fine may extend to Rs 1,000 per day of default if the failure is a continuing one.
“If a company fails to maintain registers and/or files returns with the Registrar of Companies or denies inspection of the register of SBO, the company and every officer in default is punishable with a fine in range of Rs 1 million and Rs 5 million and where the failure is a continuing one, a further fine which may extend to Rs 1,000 for every day during which the default continues,” the Deloitte report says.
If a person wilfully furnishes false or incorrect information, or suppresses any material information of which the declarant was aware of in the declaration made, is liable to be punished for fraud under Section 447 of the 2013 Act.