Understanding Significant Beneficial Ownership (SBO) Rules

The concept of significant beneficial ownership under the Companies Act of 2013 has become a pivotal element in corporate governance and transparency. With the layers of various entities like companies or limited liability partnerships (LLPs), the Ministry of Corporate Affairs (MCA) introduced the idea of Significant Beneficial Ownership (SBO) Rules, which identifies those individuals who indirectly control significant holdings in the company. For instance, Mr X is exercising significant beneficial ownership in XYZ Limited if he owns more than 50% of the shares in ABC Limited and ABC Limited has 11% of the shares in XYZ Limited.

Definition and significance of SBO

Significant Beneficial Ownership (SBO) Rules refers to the concept of finding individuals who ultimately hold substantial control or ownership in a company, even if their names might not be directly listed on official records. Significant Beneficial Ownership (SBO) Rules under Section 90, Companies Act 2013 refers to the ownership of shares or the right to exercise significant influence or control over a company.

 Regarding a Reporting Company (RC), a Significant Beneficial Owner (SBO) is defined as: (1) an individual mentioned in section 90(1),

Whoever, either by themselves, in concert with others, or through a trust, has one or more of the following Rights or Entitlements (RoE) in such Reporting Company (RC):

• holds indirectly, or in conjunction with any direct holdings, not less than 10% of the shares;
• holds indirectly, or in conjunction with any direct holdings, not less than 10% of the voting rights in the shares; 
• has the right to receive or take part in not less than 10% of the total distributable dividend, or any other payout, made in a fiscal year solely or in conjunction with any direct holdings;
•  possesses the ability to exercise, or really does exercise, a sizable amount of influence or control, in any other way outside direct-holdings only:

Difference between beneficial owner and significant beneficial owner

The difference between a beneficial owner and a significant beneficial owner lies in the level of ownership or control they hold within a company and the thresholds set by regulatory authorities.

• Beneficial Owner:
  • A beneficial owner is an individual who directly or indirectly enjoys the benefits of ownership, such as receiving dividends, voting rights, or exercising control over shares, even if their name might not appear on official records.
  • This term encompasses individuals who have a certain level of ownership or control within a company. They could be individuals or entities holding a specific percentage of shares or having significant influence.
  • The definition of a beneficial owner may vary based on legal jurisdictions and can encompass a broader spectrum of ownership interests.
• Significant Beneficial Owner (SBO):
  • A significant beneficial owner is a subset of beneficial owners who hold a significant level of control or ownership in a company, as defined by specific thresholds set by regulatory authorities or legal frameworks.
  • SBO regulations aim to identify individuals who hold a certain percentage of shares, voting rights, or have the ability to influence decision-making beyond a defined threshold.
  • The determination of significant beneficial ownership involves a more detailed and specific analysis to identify those with substantial control or interests, typically focusing on those with higher ownership stakes or considerable influence.

In essence, while both terms relate to ownership or control within a company, the significant beneficial owner is a more narrowly defined category within the broader concept of beneficial ownership. The “significant” aspect often entails meeting specific criteria or thresholds set by regulatory bodies to identify individuals with substantial control or ownership interests in a company.

Key Components of SBO Rules

In accordance with Section 90 of the Companies Act, 2013 (the “Act”), the MCA made the Companies (Significant Beneficial Owners) Rules, 2018 (the “SBO Rules”) via a notification dated June 14, 2018. Subsequently, the MCA replaced the Companies (Significant Beneficial Owner) Rules, 2018 with effect from February 11, 2019, via a notification dated February 8, 2019, taking into account different practical challenges in putting the SBO Rules’ provisions into practice. The reporting corporation must file Form BEN-2 with MCA in accordance with the aforementioned rules; the deadline for filing has already been extended several times, and it was last extended on March 31, 2020. However, in light of the nationwide lockdown and in accordance with the Company Fresh Start Scheme, 2020 (CFSS), which the MCA introduced on March 30, 2020, the MCA has granted several relaxations for filing various forms, including Form BEN-2. As a result, the reporting entity may now file Form BEN-2 with the MCA until September 30, 2020.

The key components of Significant Beneficial Ownership (SBO) rules encompass various aspects aimed at identifying and disclosing individuals who hold substantial control or ownership within a company.  These components typically include:

• Identification Criteria:
  • Defining the criteria used to identify significant beneficial owners, considering factors like direct or indirect shareholding, voting rights, or the ability to influence decision-making.
• Thresholds and Percentage Ownership:
  • Establishing specific thresholds or percentage ownership that determine when an individual qualifies as a significant beneficial owner. This could include criteria such as owning a certain percentage of shares or exercising a particular level of control.
• Reporting Requirements:
  • Outlining the obligations for companies to report and disclose information related to significant beneficial owners to regulatory authorities. 
• Documentation and Record-Keeping:
  • Requiring companies to maintain accurate and up-to-date documentation regarding significant beneficial owners, including records of ownership, control structures, and any changes in ownership or control.
• Verification and Investigation Procedures:
  • Defining procedures and processes for verifying the identity of significant beneficial owners and conducting thorough investigations into complex ownership structures to unveil the ultimate beneficiaries or controllers.
• Compliance and Penalties:
  • Specifying consequences for non-compliance with SBO regulations, including penalties or sanctions for companies that fail to adhere to the reporting and disclosure requirements.

Legal Framework and Compliance

The legal framework and compliance surrounding Significant Beneficial Ownership (SBO) involve several key aspects:

Companies Act or Relevant Legislation:

• SBO rules are typically part of the Companies Act or similar legislation in various countries. These laws define the requirements, thresholds, and procedures for identifying and disclosing significant beneficial owners.

Regulatory Guidelines and Notifications:

• Regulatory bodies issue guidelines and notifications that provide detailed instructions and interpretations of SBO rules. These guidelines offer clarity on compliance requirements and reporting procedures

Disclosure and Reporting Obligations:

• Companies are mandated to maintain registers of significant beneficial owners, document ownership structures, and periodically report this information to regulatory authorities. Compliance involves timely and accurate disclosures

Thresholds and Criteria for Identification:

• The legal framework outlines specific thresholds, criteria, and definitions for determining who qualifies as a significant beneficial owner. This includes criteria for direct and indirect ownership, voting rights, and control mechanisms.

Enforcement and Regulatory Oversight:

• Regulatory authorities oversee the implementation and enforcement of SBO rules. They monitor compliance, conduct audits, and have the authority to take actions against non-compliant entities

Updates and Amendments:

• Legal frameworks may undergo updates or amendments to adapt to changing business landscapes or address loopholes. Companies must stay abreast of these changes to maintain compliance.

Impact on Corporate Entities

Significant Beneficial Ownership (SBO) rules greatly impact corporate entities by enforcing transparency. They compel accurate identification and disclosure of individuals holding substantial control or ownership. Compliance necessitates meticulous record-keeping, investigation of complex ownership structures, and timely reporting. SBO regulations foster accountability, mitigating financial risks, and preventing fraudulent activities. Adherence enhances corporate reputation, investor confidence, and regulatory trust. However, compliance efforts often involve administrative burdens and costs for entities, necessitating robust systems to manage and regularly update ownership information to align with regulatory standards.

Conclusion

In conclusion, Significant Beneficial Ownership (SBO) Rules stand as a keystone for transparency and accountability within corporate structures. Mandating the identification and disclosure of individuals with substantial control or ownership, these regulations elevate corporate governance standards. The impact spans from preventing financial improprieties to bolstering investor trust. Yet, while promoting integrity, compliance with SBO rules demands rigorous record-keeping and reporting, posing operational challenges. Nevertheless, the pursuit of transparency through SBO rules remains pivotal, ensuring ethical practices, safeguarding against fraudulent activities, and ultimately fortifying the foundation of responsible corporate behavior.