The concept of Significant Beneficial Ownership (SBO) was introduced to uncover the true individuals controlling companies that often hide behind complex investment structures and multiple corporate layers. The Ministry of Corporate Affairs (MCA) notified the Companies (Significant Beneficial Owners) Rules, 2018, read with Section 90 of the Companies Act, 2013, to enhance transparency. However, ambiguities in the initial framework led to the Companies (Significant Beneficial Owners) Amendment Rules, 2019, which clarified provisions and imposed more structured compliance requirements.
Under the SBO Rules, individuals who indirectly or directly hold at least 10% of shares, voting rights, dividend rights, or who exercise significant influence or control, must be identified as SBOs. The rules place direct obligations on companies to identify such individuals and ensure compliance through a series of forms—BEN-1 (declaration by SBO), BEN-2 (return filed with Registrar), BEN-3 (register of SBOs), and BEN-4 (notice issued by company).
Non-compliance attracts severe penalties, including fines, imprisonment, and restrictions on transfer of shares or voting rights. Determining who qualifies as an SBO, especially in layered structures involving partnerships, trusts, or pooled investment vehicles, remains challenging and often open to interpretation. While the rules mark a bold step toward transparency and preventing misuse of corporate vehicles for illicit activities, they also introduce practical difficulties, additional costs, and litigation risks for companies.
The Amendment Rules aim to balance transparency with practicality, but many gray areas persist. Greater clarity, FAQs, or an advance ruling mechanism would help corporates apply these provisions effectively while still meeting the government’s intent of unmasking real owners.
1. Brief overview
Many companies in India are structured with intricate shareholding patterns, making it difficult for regulators to identify the real, natural persons who ultimately control them. To address this, the MCA issued the Companies (Significant Beneficial Owners) Rules, 2018, alongside Section 90 of the Companies Act, 2013, as amended by the Companies (Amendment) Act, 2017. The rules sought to reveal individuals behind complex ownership structures.
However, due to widespread ambiguity and feedback from stakeholders, the framework was revisited. The Companies (Significant Beneficial Owners) Amendment Rules, 2019 were introduced to provide more clarity, effective from the date of their publication in the Gazette. The objective was to provide corporates with clearer compliance pathways and ensure better regulatory oversight.
2. Overall scheme of the SBO Rules
2.1 Who is a Significant Beneficial Owner
An SBO is an individual who, either alone, together with others, or through one or more persons or trusts, holds or exercises certain rights in a reporting company:
- At least 10% of shares, including GDRs, CCPS, or CCDs.
- At least 10% of voting rights.
- At least 10% of distributable dividend or other distributions.
- The ability to exercise, or actually exercises, significant influence or control in ways other than direct holdings alone.
2.2 Compliance requirements
The compliance framework involves both first-time and recurring obligations.
First-time compliance:
- The reporting company issues BEN-4 to members (other than individuals) holding ≥10% shares or rights, seeking SBO information.
- Identified SBOs must file BEN-1 within 90 days.
- The reporting company then files BEN-2 with the Registrar within 30 days of receiving BEN-1.
- The company must maintain a BEN-3 register of SBOs.
- If members fail to provide satisfactory information, the company must approach the Tribunal within 15 days after the 90-day deadline, seeking restrictions on shares.
Recurring compliance:
- Any new SBO or change in SBO requires BEN-1 to be filed within 30 days.
- The company must follow the same process as above for BEN-2 and BEN-3.
A key ambiguity remains: whether BEN-4 notices must be issued every time the shareholding pattern changes in the ownership chain.
3. Consequences of non-compliance with the SBO provisions
The consequences are stringent:
- Failure to provide information: Tribunal may restrict share transfers, suspend dividend rights, or freeze voting rights. If unresolved for a year, shares may be transferred to the Investor Education and Protection Fund (IEPF).
- Failure by individuals to file BEN-1: Punishable by imprisonment up to one year, a fine between ₹1 lakh and ₹10 lakhs, or both. A continuing default attracts ₹1,000 per day additional fine.
- Failure by companies to maintain BEN-3 or file BEN-2: Fine of ₹10–50 lakhs on the company, plus ₹1,000 per day for continuing default.
These provisions highlight the government’s intent to make SBO compliance non-negotiable.
4. Determination of individual who would be a SBO
Determining an SBO can be straightforward when individuals directly hold shares, but complexities arise when entities like body corporates, partnerships, or trusts are involved.
- Body corporate: An individual with a majority stake (>50%) in the body corporate or its ultimate holding company is treated as SBO.
- Hindu Undivided Family: The Karta is considered SBO.
- Partnership/LLP: Partners or those holding a majority stake in partner entities are SBOs.
- Trusts: Trustees (discretionary/charitable), beneficiaries (specific trusts), or settlors/authors (revocable trusts) may qualify.
- Pooled investment vehicles (PIVs): General partners, investment managers, or CEOs of managing entities are SBOs if regulated by FATF-member states.
The Rules also provide illustrative scenarios:
- In a simple company with individual shareholders, only those with indirect holdings qualify as SBOs.
- In multi-layered structures, identifying SBOs often becomes uncertain. For example, an individual with only a small effective interest (e.g., 4%) could still technically qualify as SBO due to majority control in an ultimate holding company.
Such ambiguities make compliance challenging and subject to interpretation.
5. Exemptions/ non-applicability of SBO provisions in certain cases
SBO Rules are not applicable where shares are held by:
- Investor Education and Protection Fund (IEPF).
- Holding reporting company (details disclosed via BEN-2).
- Central or State Governments, local authorities, or their controlled entities.
- SEBI-registered investment vehicles like mutual funds, AIFs, REITs, and InVITs.
- RBI, IRDAI, or PFRDA-regulated investment vehicles.
6. Brief overview of Form BEN 1 & Form BEN 2
- Form BEN-1: Filed by individuals, it requires disclosure of personal details, indirect holdings, and nature of rights. Attachments may include agreements showing significant influence or control.
- Form BEN-2: Filed by companies with the Registrar, consolidating BEN-1 declarations. It must be certified by a practicing professional and filed within 30 days of receiving BEN-1.
These forms ensure that SBO disclosures are systematically captured and made available for regulatory scrutiny.
7. Challenges
Despite improvements in the 2019 Rules, several challenges remain:
- Ambiguity in definitions: Terms like “acting together,” “significant influence,” and “control” remain open to multiple interpretations.
- Multi-layered structures: Companies may not know the identity of ultimate owners, and parent entities may resist disclosure due to confidentiality.
- Practical difficulties: In complex scenarios, effective holding may be too small to justify SBO classification, yet the rules may still trigger compliance.
- Overlap with other laws: SBO disclosure obligations may intersect with requirements under Income-tax Act, FEMA, SEBI, and IBC.
These factors increase compliance burden and litigation risk for companies.
8. Concluding remarks
The SBO Rules represent a bold attempt to bring transparency in corporate ownership and align India with global standards on combating money laundering and round-tripping of funds. However, the practical burden on companies is significant. Severe penalties, including imprisonment, transfer of shares to IEPF, and Tribunal interventions, make non-compliance highly risky.
While the intent of the government is commendable, ease of doing business suffers when provisions are overly complex. Relaxations, FAQs, or an advance ruling mechanism would help companies navigate gray areas and apply the provisions with greater certainty. For genuine corporates, clarity is essential so they can comply without disproportionate risk, while still meeting the law’s ultimate aim of unmasking real beneficial owners.
