Significant Beneficial Ownership (SBO) rules are a crucial aspect of corporate governance, ensuring transparency in the ownership structure of companies. Under Section 90 of the Companies Act, 2013, individuals holding a significant stake in a company must declare their beneficial ownership. Companies Act, Companies Act 2013, Significant Beneficial Owner
2. Introduction:
Significant Beneficial Ownership (SBO) rules are a crucial aspect of corporate governance, ensuring
transparency in the ownership structure of companies. Under Section 90 of the Companies Act, 2013,
individuals holding a significant stake in a company must declare their beneficial ownership. This concept
is divided into three key parts: percentage of holding/voting power, significant influence, and control.
Act:
Section 90 of Companies Act, 2013 says “Every individual, who acting alone or together, or through one or
more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of
not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company
or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27)
of section 2, over the company (herein referred to as “significant beneficial owner”), shall make a
declaration to the company, specifying the nature of his interest and other particulars, in such manner and
within such period of acquisition of the beneficial interest or rights and any change thereof, as may be
prescribed:….”
3. Concept:
Although in this Section, 25% threshold is defined for declaring an individual as SBO, however Central Government has
prescribed 10% limit under the Rules. So if an individual holds director plus indirect or only indirect holding of 10%
or more in a company, then only he will be counted as SBO. Any percentage less than that say 9.55% indirect
holding is not required to be reported. While ‘control’ is specifically defined under Companies Act, 2013, there is
no universal definition of ‘significant influence’. Its provision wise definition is given which also points to holding at
least 20% of shares/voting rights.
With that said, the basis question comes to definition of SBO on the basis of shareholding. As far as control is
concerned, one can say that Managing Director has control over the company hence he is SBO although there are
exceptions always as it is a subjective term.
Rules: As per point no. (h) of Rule 2 (definitions), “significant beneficial owner” in relation to a reporting company
means an individual referred to in sub-section (1) of Section 90, who acting alone or together, or through one or
more persons or trust, possesses one or more of the following rights or entitlements in such reporting company,
namely:
(i) holds indirectly, or together with any direct holdings, not less than ten percent, of the shares; (ii) holds indirectly, or
together with any direct holdings, not less than ten percent, of the voting rights in the shares; (iii) has right to
receive or participate in not less than ten per cent, of the total distributable dividend, or any other distribution, in
a financial year through indirect holdings alone, or together with any direct holdings; (iv) has right to exercise, or
actually exercises, significant influence or control, in any manner other than through direct-holdings alone:
Explanation I – For the purpose of this clause, if an individual does not hold any right or entitlement indirectly
under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner. Further, direct
holding is defined under Explanation II.
4. Under Explanation III, detailed instances such as through a company or HUF or Trust are mentioned in which
indirect holding can be found. Concept: Explanation I to the definition of Significant Beneficial Owner
clearly mentions that if an individual does not have any indirect holding, he will not be counted as SBO.
Hence, only direct holding will not be considered in simple cases. However, there is a catch under
Explanation IV of the said Rule 2. According to this, ‘if individual or individuals…..act with a common intent
or purpose or exercise control or significant influence, pursuant to agreement or understanding, formal or
informal….they shall be deemed to be acting together’.
So, if say A & B are brothers and holding shares in C Private Limited, then if they are actually acting together,
having same say and acting as one literally and technically, they will be counted as beneficial owners. It
does not matter that they are holding only direct shares without indirect holding. On the other hand, if
they are acting alone and without each other’s influence, it will not be counted SBO. Reporting
Requirement Form BEN-2 (after receipt of Form BEN-1) has to be filed by the reporting company whenever
any person becomes SBO or if any change takes place in his holding. It may be positive or negative change.
Companies Act, Companies Act 2013, Significant Beneficial Owner