Cos can move NCLT to lift veil on hidden beneficial owners

The onus of reporting the ultimate natural persons, or the true owners, lies with the companies following a legislative change in February 2019. This reporting requirement encompasses individuals with significant beneficial ownership and significant control through shareholding or other legal arrangements, including the right to receive dividends.

The ministry is nudging companies to be proactive in detecting and reporting to the authorities individuals who hold significant beneficial interests in them but remain anonymous by letting proxies collect dividends or attend general meetings.

“To enforce compliance with the (Companies) Act, the company can issue a notice... to any person whom they know or have reasonable cause to believe is a significant beneficial owner of the company...If the person refuses to respond, enforcement can be pursued through NCLT," the ministry said in its latest monthly update.

The company can apply to the tribunal seeking a direction for the person to disclose the required information, the ministry said.

Through the Companies (Significant Beneficial Owners) Amendment Rules, 2019, MCA allowed wide powers to firms to identify and issue notice to persons who are suspected to be enjoying the rights attached to the members of the company, said Noorul, a partner at law firm Lakshmikumaran & Sridharan Attorneys.

“The companies need not be a mute spectator and wait until voluntary declaration from the significant beneficial owners (SBOs). They may issue a notice and seek the information. If there is no response to such notice, the company may approach NCLT and seek to restrict the transfer of interest on such shares, suspension of the right to receive dividend/voting rights, etc. This may restrict the significant beneficial owners from gaining the undue advantage of their holding and enhances transparency through statutory reporting and judicial mechanism," Noorul, who uses just one name, said.

The government has been trying to make corporate ownership more transparent as complex webs of legal entities often mask the ultimate ownership of companies, and it becomes hard to detect irregularities like diversion of funds and money laundering.

Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm, said the concept of significant beneficial ownership aims to ensure transparency and prevent money laundering and illicit financial activities in line with the provisions of the Financial Action Task Force (FATF) by identifying and disclosing individuals who exert substantial control over a company, even if their ownership is not directly apparent on the face of it. “Companies approaching NCLT will augment the overall purpose of the SBO regulations by ensuring that the veil is lifted and authenticity and genuineness of who is behind the key decisions of the company can be identified," said Sehgal.

The ministry also explained in its monthly update that the trigger points that may raise suspicion of someone being a beneficial owner for a company include instances where the company receives a request to pay dividends to someone other than the registered shareholder. The ministry explained that every person who holds significant beneficial ownership is required to report the same to the company within a month of acquiring this status. The firm, in turn, is required to inform the Registrar of Companies.

Experts had in the past suggested that there could be a limit on the number of step-down subsidiaries a company can set up in order to have more visibility on the corporate structure, but policymakers opted for infusing more reporting obligations and transparency rather than taking away altogether the flexibility in organizing business through more than two levels of step-down subsidiaries.