[Chirag Motwani and Ananya Badaya are 4th year law students at Hidayatullah National Law University, Raipur]
A “significant beneficial owner” (“SBO”) is an individual who directly or indirectly controls a company or substantially holds beneficial interest in the company and whose name is not registered as a holder of shares in the books of the company. Section 90 of the Companies Act, 2013 mandates such an individual to make certain disclosures so as to allow transparency with respect to the actual individuals behind these companies and thereby hold such persons accountable in cases of money laundering and tax evasion. However, in many cases, such individuals, whether deliberately or fortuitously, fail to disclose this information to the public and attract actions from institutions such as Securities and Exchange Board of India, the Ministry of Corporate Affairs (“MCA”), etc.
Recently, the Registrar of Companies (“ROC”) under the MCA had issued orders against LinkedIn India and Samsung India, which sparked deliberations over the scope of application of section 90. In both instances, the ROC established a link between the companies and their parent companies and thus held the Chief Executive Officers (“CEOs”) of the parent companies as SBOs.
This post aims to discuss the far-reaching consequences of the recent orders and aims to provide a basis for the systematic application of subjective tests to protect corporate vehicles from an obscure application of section 90. The post first deals with the understanding of the concept of SBO; then analyses the orders of LinkedIn and Samsung; and finally provides suggestions to overcome the challenges of SBO requirements.
Contours of SBO
The provision for SBO was incorporated into the Act with the objective to improve corporate governance and were based on the recommendations of Financial Action Task Force (“FATF”). FATF is an inter-governmental body established in 1989 which emerged as a pivotal force in shaping global anti-money laundering and counter-terrorist financing standards. In 2012, the FATF issued recommendations which focused on tackling illicit financial transactions and money laundering by identifying the ultimate beneficial owner in corporate structures. Recommendations 24 and 25 explicitly advocated member states to have sufficient and accurate information regarding the beneficial owner of the company that can be accessed by the competent authorities so as to prevent corrupt and illegal activities. India, as a member state of the FATF, initially introduced the SBO provisions through an amendment to the Prevention of Money Laundering Rules, 2005
Section 90 of the Act mandates an individual with significant beneficial ownership (at the threshold prescribed in the corresponding rules) in a company to make a declaration in form BEN-1 within thirty days of acquiring such ownership or changes therein. Further, the SBO is also defined under Rule 2(1)(h) of the Companies (Significant Beneficial Owners) Amendment Rules, 2019 (“SBO Rules”) as an individual who either acts alone or together, or through one or more person or trust and fulfils any of the following criteria:
- holds at least 10% of the shares indirectly or together with any direct holdings;
- holds at least 10% of the voting rights in the shares indirectly or together with any direct holdings;
- through indirect holding alone, or together with any direct holding has the right to receive or participate in at least 10% of total distributable dividend or, any other distribution, in a financial year;
- has a right to exercise or actually exercises, significant influence or control, in any manner other than thorough direct holdings alone;
Subjective Test
While the objective test for determining an SBO has strict parameters and thresholds, the legislature had realized that the companies would find a way to circumvent the law through means that keep the “real” SBO outside the objective tests’ boundaries. In order to combat this situation, the legislature added another test in the form of a subjective test. The test provides that if an individual exercises “significant influence” and “control” over the corporate structure, such individual can be identified as an SBO. Section 2(27) of the Act defines control as the “right to appoint majority of the Directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner” and significant influence is defined under Rule 2(1)(i) of the SBO Rules as the “power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies”.
Dissection of the LinkedIn and Samsung Orders
The orders passed against LinkedIn and Samsung by the MCA are worth considering as these have reignited the debate concerning the correct method for determination of SBO. The ROC for Delhi and Haryana issued a formal adjudication on May 22, 2024, determining that LinkedIn India had submitted inaccurate regulatory filings. Consequently, the ROC initiated a compliance inquiry under Sections 89 and 90 of the Act. The ROC appeared to question whether LinkedIn Corporation held the status of a holding company for LinkedIn India, given the absence of explicit evidence supporting this relationship in the provided organizational charts. Furthermore, the ROC indicated that the directors of LinkedIn India, who received no remuneration and seemed to represent the interests of LinkedIn Corporation and/or Microsoft Corporation, might be considered nominees of these parent entities. The ROC concluded that LinkedIn Corporation exercised control over LinkedIn India through its ability to influence the composition of LinkedIn India’s board of directors. This control was attributed to the overlapping directorships and reporting structures within the corporate hierarchy. The ROC further asserted that the acquisition of LinkedIn Corporation by Microsoft Corporation extended this control to Microsoft’s CEO, Satya Nadella. Building upon its findings regarding control, the ROC deemed both Satya Nadella and Ryan Roslansky, the CEOs of Microsoft and LinkedIn Corporation respectively, as ‘significant beneficial owners’ of LinkedIn India.
Similarly, the ROC also held Samsung Display Noida Private Limited (“Samsung Noida”) liable for the non-disclosure of SBO details. Samsung Noida, the reporting company failed to disclose that it was a wholly owned subsidiary of Samsung Display Corporation which in turn is ultimately owned by Samsung Electronics Corporation, Korea (84.2%) and Samsung SDI Corporation, Korea (15.8%). It was identified that Mr. Lee Kun Hee along with his family had a stake of 21.46% in Samsung Electronics Corporation, Korea (“SEC”). Further, it was found that Mr. Lee Jae Yong (son of late Mr. Lee Kun Hee) and other family members had a significant stake in Samsung Life Insurance Co. Ltd. and Samsung C&T which respectively hold 8.64% and 5.01% in SEC. In extension of the objective control, the family also exercised subjective control as Mr. Kun Hee’s son Mr. Yong was appointed executive chairman of the company on the recommendations of Board Chairman and Independent Directors. This finding was considered substantial as there existed no necessity for the appointment of Executive Chairman since the company already had a Chairman of Board of Directors and further there was no requirement under the Articles of Incorporation for the same. Therefore, Mr. Yong who was given unbridled power despite SEC having a Board Chairman was held as an SBO by the ROC for holding a proxy-control through a “legally remote mechanism” based upon the above-mentioned facts.
These orders passed by the ROC so far have proved to be a hornet’s nest for the companies as they are now required to re-think their corporate structures in line with such orders which have provided the ROC a latitude of discretion in such matters. The cumulative effect of such orders is that it has made foreign companies rethink their corporate structures in order to be in line with the Act and its allied rules. A logical extension of such ramification is that the companies would refrain from opening their branches in India which is contrary to India’s ambitions.
Furthermore, the decision to hold the CEOs of the companies liable is incoherent as the CEOs are themselves the employees of the company and do not have actual power to exercise such control as they are subject to the Board of Directors of the company. One situation wherein the CEOs of the companies could have been held liable in such manner would have been if the entity would have been a Pooled Investment Vehicle wherein these CEOs were acting as professional managers of the said entity thus exercising control and influence. However, neither Satya Nadella and Ryan Roslansky nor Lee Jae Yong can be attributed to be such professional managers in the context that they could exercise such control and influence. What is intriguing to note is that the ROC relied on the speeches and demeanor of Ryan Roslansky in order to lay emphasis that he has exercised a certain amount of control and influence upon LinkedIn India and thus has been held liable. This approach taken by the ROC is incorrect so far as the demeanor, speeches and body language of such CEOs and other officers are concerned. This is so because this criterion majorly depends upon the charm and personality of the officers rather than an objective criterion. Furthermore, a closer look at the SBO provisions based upon the FATF recommendations lays emphasis on the identification of a person who is actually benefiting out of the company rather than a person who is responsible to BOD and is deriving salaries from the company.
The Way Forward
The recent orders by the ROC were not based upon the objective test but rather upon the subjective test which raises concerns over the adequacy of the SBO provisions. The subjective test in itself is ambiguous as the SBO provisions stand in limbo against other laws such as Income Tax Act, Prevention of Money Laundering Act etc. but still cause confusion as to the applicability of the SBO provisions. The confusion needs to be cleared so as to enable seamless applicability of the SBO provisions and to promote ease of doing business.
Furthermore, in situations wherein the ambiguity of law might lead to injustice to the individual in question, law should be interpreted in the individual’s favour. As lucidly expressed by Winn L.J. in Allen v. Thorn Electrical Industries(England and Wales), the court’s role is akin to that of a guardian of the common law, protecting it from undue encroachment by statute. In this case it was emphasized that where a statute is ambiguous and there are external indications of Parliament’s intent to impose the strictest possible interpretation, the court must resist this inclination. Instead, the court should adopt a construction that mitigates the statute’s impact on the public, preserving existing rights and liberties. This approach ensures that the law is applied equitably and does not impose unreasonable burdens on individuals. In essence, the court is obligated to reconcile the letter of the law with its potential consequences, opting for an interpretation that minimizes hardship. This obiter dicta of the judgment is used widely to consider the potential impact of a statute upon rights and liberties of individuals and aligns with a liberal approach to protection of such rights and liberties.
Hence, to conclude, even though the subjective test lays down such powers to the MCA to identify the SBO by looking at various circumstances that have not been strictly defined, the ROC cannot actually impinge the individuals’ rights and liberties and in such cases the ROC should not have such far reaching powers that can run counter to India’s goal of ensuring ease of doing business.
– Chirag Motwani & Ananya Badaya