‘Shell companies’ have been in the news recently. On how monies are laundered, laws are avoided/evaded, benami properties are held, etc. through such companies. Curious is that even shares of these companies may be held benami, making it difficult to catch true culprits. There are laws to deal with benami holdings including the most prominent Prohibition of Benami Property Transactions Act, 1988, which was substantially amended in 2016. A further step is being taken with an apparent intention to tackle such benami holdings. This is through the newly introduced Section 90 by the Companies Amendment Act 2017. The provision, however, awaits notification which may come any day now.
Section 89 of the Companies Act 2013 deals with disclosure of beneficial interests. But section 90 goes much further. It requires individuals who hold or control significant holding in a company should disclose such fact to the Company. The Company will record this in a specified register and also make disclosures to the Registrar.
The following types of holdings/control are required to be disclosed:
1. Beneficial interest of at least 25% (or such other prescribed percentage) in shares of a company
2. Right to exercise significant influence or control.
3. Actual exercising of significant influence or control.
Such holding, etc. would be by an individual either by himself or together or through other persons including even persons outside India. The holding/control may be in a private, public or even a listed company.
If the Company has reason to believe that there is a person who has such holding/control, it needs to notify such person to make a disclosure. If such person does not make a disclosure, the Company has to approach the Tribunal to investigate. If it is found by the Tribunal that there exists such holding, etc., then it may direct that the transfer of such shares shall be restricted and all rights relating to such shares shall be suspended.
There are penalties if such individuals do not make such disclosure. A penalty of Rs. 1 to 10 lakhs plus upto Rs. 1000 for every day of delay can be levied. False disclosures can result in prosecution.
The implications of this are quite wide. Almost each and every company will see such disclosures, unless the holding are so widely held that no individual or group hold a significant holding/control. It applies to all companies – private, public or listed. These disclosures will then have to be recorded and then filed to Registrar. There will be massive paperwork, even if one-time. A husband-wife company where each holds such 50% will require disclosure by both persons. Private equity firms will have to make such disclosures. Listed companies will have to make such disclosures. Even if none of these are benami holdings.
Even foreign shareholders are covered.
The wording is wide and, at some places, ambiguous. Certain definitions are not given and hence may result in further ambiguity. Take some examples.
If an individual holds/controls ‘together’ with another person, disclosure is required. However, it is not clear what ‘together’ means. Does it have a meaning similar to ‘persons acting in concert’ as defined in detail under the SEBI SAST Regulations?
Often directors, trustees, etc. may exercise voting rights for companies, trusts, etc. Will they too have to make disclosures? The Central Government may, however, exempt categories of persons from making disclosures.
The term “beneficial interest” has too been given a new and wide definition.
Shareholding particularly in groups and listed companies may be held in complex structures. Is the law sufficient to unravel such structures to find out who, if any, are ultimate persons who hold shares or have or exercise control? SEBI and RBI have given guidance under certain circumstances how to find who are real ultimate owners. But the Act does not give any guidance.
Apparently, the provision will apply to existing holdings as well as fresh acquisitions. Hence, a one-time declaration would have to be made.
In any case, will the objective of detecting benami holdings be achieved? The Prohibition of Benami Property Transactions Act provides for confiscation of the properties and prosecution of persons involved. Thus, making such a disclosure could be invitation for such serious actions. The penalties for not making such disclosures, though significant in amount, are not very large and does not result in any prosecution under the Act.
Companies have an obligation to notify persons who hold shares or control to such extent if it has reason to believe. If they do not take action, they too may face action.
Clearly, this provision needs reconsideration. It ought not be notified and brought into effect. Ideally, a revised and well drafted provision should be introduced or, second best, through circulars and rules, the implications need to be diluted and restricted.