Will the new Section 90 unravel benami holdings in companies? Or will it misfire?

Section 90 and related provisions of the Companies Act, 2013, have been brought into force on 13th June 2018 alongwith related Rules. I had discussed earlier here some issues on Section 90, at a time when the new provisions were made part of the Act through the Companies Amendment Act 2017 but were not yet brought into force. Now that they have been duly brought into force and require action, their implications deserve a relook.

Section 90 requires, to simplify a little, a ‘significant beneficial owner’ in a company to make disclosure. This includes persons having at least 10% beneficial shareholding or the right to exercise or actually or exercises ‘significant influence’ or ‘control’.

The disclosures have to be made to the Company within 90 days of the new law coming into force. The Company would then have to make disclosures to the Registrar within 30 days of receipt of such disclosures.

The aim of these new requirements appears to be, on the one hand, to help uncover benami holdings. In other words, it desires disclosure of persons who really own significant beneficial holding or have significant influence or control over the company, as opposed to the legal owners. On the other hand, it seeks to help bring on record those who by virtue of agreements, arrangements, etc. are entitled to various beneficial rights to shares or exercise significant influence or control. Moreover, shareholdings/control held/exercised through structures such as companies, firms, trusts, etc. are also intended to be unravelled. Certain methods have been provided for this in the Rules.

The intention appears to be to find the natural person who owns significant beneficial holding or has or exercises significant influence or control over a company. Such person may be in India or abroad.

The new provisions are applicable to, with certain exceptions, all types of companies, small or big, public or private. The Rules make exceptions for certain SEBI regulated entities. Clearly, then, lakhs of companies will have to examine whether these new requirements apply to them.

The question remains how far the poor/ambiguous wording will create problems on one hand and defeat the intention on the other. Will it result in disclosures being required practically for each and every company, even if the beneficial owners/those who control the Company are already on record? The wide definition in Section 89(10)/90 read with the modified definition in the Rules raise concerns.

Terms such as “significant influence” are used but not defined. This results in uncertainty. The term “control” is defined but it applies to a very narrow set of persons only. Apparently, to cover persons acting in concert, it is required that persons ‘acting alone or together’ will be clubbed in respect of their shareholding/influence/control. However, this term has not been defined.

The Rules provide for ascertainment of the significant beneficial owner where the owner on record is not a natural person. The aim appears to be to go to the next level of entities. However, the provisions appear to be far from sufficient to tackle holdings held through complex structures such as chain of companies, cross/circular holdings, etc.

The definition of beneficial holding includes entitlements of rights over shares “through any contract, arrangement or otherwise”.

Obligation has also been placed on the Company to require persons to make disclosures if it has reason to believe that such persons are covered by these provisions. If such persons do not make a disclosure, the Company has to refer the matter to the National Company Law Tribunal for directions that may include restrictions over such shares.

The disclosures have to be one time and thereafter for changes as well as by new acquirers.

Non-disclosures will attract fines. False disclosures may result in prosecution.

In the coming months, companies and their legal/beneficial owners and other persons will have to examine these provisions to determine whether and how they apply to them. Those who make disclosures will have to examine whether the provisions of Benami Transactions Prohibition Act that provides for stringent actions for benami holders will be attracted.

I have also written a piece in Firstpost dealing with some of these issues.

About the author

CA Jayant Thakur

1 comment

  • As per Rule 1(2) of the Companies (Significant Beneficial Owners) Rules, 20l8, ‘They shall come into force on the date of their publication in the Official GazeIte’.
    Has the Rule been published in Gazette ?
    Till yesterday MCA website was showing as ‘Notification awaited’ in Companies Rules Tab of Ebook.

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