Beneficial ownership of shares

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New Delhi | Published: September 1, 2018 1:08:46 AM

The real issue creating problems is whether the chain of ownership needs to be seen only one level above or if it needs to go right up to the top to find an individual or a natural person really owning the shares.

Beneficial ownership of shares

There is some trouble, yet again, caused to companies. This time it is because of the ambiguous language in the Companies Act, 2013, for declaration of beneficial interest in shares. Although the intention of the legislation is good, the implementation, as always, is a chaos. Section 89 of the Companies Act deals with the declaration of beneficial interest. A newly introduced Section 90 deals with declaration of “significant” beneficial interest. While Section 89 applies when there is an acquisition of a beneficial interest in shares, Section 90 applies in cases when that acquisition of beneficial interest is “significant”.

Section 90 also applies when “significant influence” or “control” is exercised over a company.

Therefore, for the purposes of acquisition of beneficial interest, it is most critical to first examine whether what is being acquired is a beneficial interest in shares or not. In this regard, the Companies Act provides that a beneficial interest in shares means a right or entitlement acquired, directly or indirectly, whether through a contract, arrangement or in any other manner, by a person acting alone or with someone which gives that person a right to exercise or cause to be exercised any or all of the rights attached to such shares; or receive or participate in any dividend or other distribution in respect of such shares.

Therefore, following from this, unless beneficial interest is acquired, neither Section 89 nor Section 90 will apply.

Once it is established (in terms of the meaning above) that beneficial interest is acquired, declaration under Section 89 or Section 90 will have to be made. Section 90 applies in cases when the beneficial interest acquired is 10% or more and Section 89 applies when it is less than 10%.

The real issue creating problems is whether the chain of ownership needs to be seen only one level above or if it needs to go right up to the top to find an individual or a natural person really owning the shares.
The poorly drafted sections and the related Companies (Significant Beneficial Owners) Rules, 2018, are giving rise to divergent views. So, to understand the real intention, it is important to see the recommendations of the Company Law Committee which suggested these provisions. To quote from the Committee’s report wherein it was said that “complex structures and chains of corporate vehicles are used to hide the real owner behind the transactions made using these structures. Realising this, jurisdictions world over have been putting in place mechanisms to identify the natural person controlling a corporate entity.”

The above reasoning clarifies that, to determine the real owner, the chain needs to go right upto the top to find an individual or a natural person and not just one level up. This is further substantiated by use of the word “individual” in Section 90(1). Further, the Rules also use words like “holding ultimate beneficial interest” and also describe various cases on how to determine a natural person when it cannot be easily determined.

Therefore, the intention seems to be to trace the individual/natural person, who is the real owner of the shares. Having said this, it is important to re-iterate that first it needs to be proved that the person making the disclosure holds the “beneficial interest in shares” as described above. If such beneficial interest is not held, then neither Section 89 nor Section 90 will apply. Any other interpretation would mean that every individual holding 10% or more will need to make the declaration under Section 90. Similarly, if a company is a shareholder (of another company), then all individuals holding 10% or more of that shareholder company will need to make a declaration. Such an interpretation cannot be the intention, otherwise every case will require lifting the corporate veil of that corporate shareholder in complete disregard of the separate legal entity concept of a company. That cannot be the intention.

Partner with J Sagar Associates. (Views are personal)

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