Understanding Significant Beneficial Ownership (SBO) Rules

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Understanding Significant Beneficial Ownership
(SBO) Rules
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• Introduction
• Significant Beneficial Ownership (SBO) rules are
  a crucial aspect of corporate governance,
  ensuring transparency in the ownership structure
  of companies. Under Section 90 of the Companies
  Act, 2013, individuals holding a significant
  stake in a company must declare their beneficial
  ownership. This concept is divided into three key
  parts percentage of holding/voting power,
  significant influence, and control.
• Act
• Section 90 of Companies Act, 2013 says Every
  individual, who acting alone or together, or
  through one or more persons or trust, including a
  trust and persons resident outside India, holds
  beneficial interests, of not less than
  twenty-five per cent. or such other percentage as
  may be prescribed, in shares of a company or the
  right to exercise, or the actual exercising of
  significant influence or control as defined in
  clause (27) of section 2, over the company
  (herein referred to as significant beneficial
  owner), shall make a declaration to the company,
  specifying the nature of his interest and other
  particulars, in such manner and within such
  period of acquisition of the beneficial interest
  or rights and any change thereof, as may be
  prescribed.

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• Concept
• Although in this Section, 25 threshold is
  defined for declaring an individual as SBO,
  however Central Government has prescribed 10
  limit under the Rules. So if an individual holds
  director plus indirect or only indirect holding
  of 10 or more in a company, then only he will be
  counted as SBO. Any percentage less than that say
  9.55 indirect holding is not required to be
  reported. While control is specifically defined
  under Companies Act, 2013, there is no universal
  definition of significant influence. Its
  provision wise definition is given which also
  points to holding at least 20 of shares/voting
  rights.
• With that said, the basis question comes to
  definition of SBO on the basis of shareholding.
  As far as control is concerned, one can say that
  Managing Director has control over the company
  hence he is SBO although there are exceptions
  always as it is a subjective term.
• Rules As per point no. (h) of Rule 2
  (definitions), significant beneficial owner in
  relation to a reporting company means an
  individual referred to in sub-section (1) of
  Section 90, who acting alone or together, or
  through one or more persons or trust, possesses
  one or more of the following rights or
  entitlements in such reporting company, namely
• (i) holds indirectly, or together with any direct
  holdings, not less than ten percent, of the
  shares (ii) holds indirectly, or together with
  any direct holdings, not less than ten percent,
  of the voting rights in the shares (iii) has
  right to receive or participate in not less than
  ten per cent, of the total distributable
  dividend, or any other distribution, in a
  financial year through indirect holdings alone,
  or together with any direct holdings (iv) has
  right to exercise, or actually exercises,
  significant influence or control, in any manner
  other than through direct-holdings alone
  Explanation I For the purpose of this clause,
  if an individual does not hold any right or
  entitlement indirectly under sub-clauses (i),
  (ii) or (iii), he shall not be considered to be a
  significant beneficial owner. Further, direct
  holding is defined under Explanation II.

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• Under Explanation III, detailed instances such as
  through a company or HUF or Trust are mentioned
  in which indirect holding can be found. Concept
  Explanation I to the definition of Significant
  Beneficial Owner clearly mentions that if an
  individual does not have any indirect holding, he
  will not be counted as SBO. Hence, only direct
  holding will not be considered in simple cases.
  However, there is a catch under Explanation IV of
  the said Rule 2. According to this, if
  individual or individuals..act with a common
  intent or purpose or exercise control or
  significant influence, pursuant to agreement or
  understanding, formal or informal.they shall be
  deemed to be acting together.
• So, if say A B are brothers and holding shares
  in C Private Limited, then if they are actually
  acting together, having same say and acting as
  one literally and technically, they will be
  counted as beneficial owners. It does not matter
  that they are holding only direct shares without
  indirect holding. On the other hand, if they are
  acting alone and without each others influence,
  it will not be counted SBO. Reporting Requirement
  Form BEN-2 (after receipt of Form BEN-1) has to
  be filed by the reporting company whenever any
  person becomes SBO or if any change takes place
  in his holding. It may be positive or negative
  change.
• Companies Act, Companies Act 2013, Significant
  Beneficial Owner

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• Non-Applicability Apart from IEPF Authority,
  Government undertakings, investment vehicles
  registered with SEBI or RBI, it is also not
  applicable to holding reporting company. Hence,
  holding will only have to file the details of its
  subsidiary in Form BEN-2. No other details of
  specific persons have to be filed.
• Common Examples 1. Holding and Subsidiary
  Company A is holding 51 shares in company B. It
  is not considered SBO, however company B has to
  file form Ben-2 declaring that company A is its
  holding company. 2. Multiple Shareholders
  Company A has 4 shareholders a, b, c and d. Each
  of them hold 24 shares of A. On the other hand,
  company B has 3 shareholders who are same a, b
  and c, each holding 33.33. In this case, A B
  Company may be counted related party but there is
  no relation of SBO between them. Also, although
  shareholders are holding more than 10 each but
  still no SBO filing will be done if they are not
  acting in concert and have no control. If they
  have significant influence or not is a question
  of doubt because significant influence is not
  separately defined for SBO rules. However, it is
  often counted as no SI. 3. Diverse Shareholders
  Company A has 3 shareholders- X private limited,
  Y HUF and Z Charitable Trust, each holding
  33.33. Now, all of them will be counted for SBO
  filing. We will have to check who is holding
  majority stake in company X private limited, who
  is Karta of HUF and who is trustee of a
  charitable trust. These persons will be counted
  SBO.
• Conclusion Significant Beneficial Ownership
  (SBO) rules are an essential part of corporate
  governance, promoting transparency in ownership
  structures. Understanding the thresholds,
  definitions, and reporting requirements is
  crucial for companies and individuals to ensure
  compliance with these regulations. By adhering to
  SBO rules, businesses can maintain transparency
  and accountability in their ownership structures,
  ultimately contributing to a more transparent and
  responsible corporate environment.Read more
  at https//taxguru.in/company-law/ignificant-bene
  ficial-ownership-sbo-rules.htmlCopyright
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