Significant Beneficial Ownership (Amendment) Rules, 2019

The Ministry of Corporate Affairs has introduced the Companies (Significant Beneficial Ownership) Amendment Rules, 2019, which replaces the 2018 Rules. This initiative curtails illegal activities such as tax evasion, money laundering, and benami transactions. It mandates all companies to declare information regarding their Significant Beneficial Owners (SBO) to the Registrar of Companies (ROC). This transparency aids government authorities in identifying the true ownership of corporate entities. This article explores the newly established rules in detail.

Significant Beneficial Owner – A Preface

An individual qualifies as a Significant Beneficial Owner if they hold a beneficial interest of at least 10%—previously 25%—either independently or collectively through others or trusts. This interest can be in the form of shares or the ability to exert significant control over the company. These individuals must declare their interests and relevant details to the company in the prescribed format, within the specified timeframe.

The Amended SBO Rules define a Significant Beneficial Owner as an individual who:

Holds indirectly or concurrently with direct holdings at least 10% of the company’s shares.
Possesses 10% or more of the voting rights in the company’s shares.
Is entitled to receive or participate in at least 10% of the total distributable dividend or any other form of distribution within a financial year, solely through indirect holdings or along with direct holdings.
Holds the power to exercise significant influence or control through direct holdings and other means.

Direct Right or Entitlement

Individuals who hold shares directly in their names or have declared beneficial interest in shares under Section 89 of the Act are considered to have a direct right or entitlement in the Reporting Company.

The Amended Rules clarify the criteria for direct holding rights or entitlements in Reporting Companies based on the member's legal structure:

Member Structure	Individual Holding Right or Entitlement
Body Corporate (registered in India or abroad)	Individuals with a majority stake in that member Individuals holding a stake in the ultimate holding company of such member Note – The Amendment Rules identify a Majority Stake as: Holding more than half of the equity share capital in the body corporate. Holding more than half of the voting rights in the body corporate. The right to receive or partake in more than half of the distributable dividend or any other distribution by the body corporate.
Hindu Undivided Family (HUF) through Karta	Karta
Partnership Entity	Partner A person with a majority stake in the body corporate, a partner of the partnership entity A person with a majority stake in the ultimate holding company of the body corporate, a partner of the partnership entity.
Trust	The trustee – if it’s a discretionary or charitable trust The beneficiaries – if it’s a specific trust The author or settlor – if it’s a revocable trust

Responsibilities of the Reporting Company

In compliance with the amended rules, Reporting Companies are tasked with verifying the presence of a Significant Beneficial Owner and obligating them to file a declaration using Form Ben-1. A Notice of Inquiry in Form BEN-4 may be issued if any member holds 10% or more of the company's shares, voting rights, or entitlement to dividends in any financial year.

In addition, a Reporting Company is required to:

File a return in Form BEN-2 with the Registrar for any declaration by an SBO or any changes in the Significant Beneficial Ownership.
Maintain a register of Significant Beneficial Owners in Form BEN-3, containing their names, addresses, date of birth, and ownership details.
Issue a notice to all non-individual members holding more than 10% of shares, requiring SBO disclosure of such members.
Submit an application to the National Company Law Tribunal (NCLT) to impose restrictions on shares if required information is not provided.

Filing of Obligations

Under the amended Rules, every SBO must file a declaration in Form BEN-1 to the respective company within 30 days upon acquiring the status of SBO. Furthermore, SBOs must comply within 90 days of the amended rules enforcement on February 8.

Penalties

The failure to file Form BEN-1 will result in penalties ranging from INR 1,00,000 to INR 10,00,000, with an additional INR 1,000 charged per day for continued offences. Non-compliant companies face fines between INR 10,00,000 to INR 50,00,000, including penalties for responsible individuals, with a daily fine of INR 1,000 for ongoing offences.

Non-applicability of the Amendment

The following entities are exempt from disclosures under the new SBO Rules:

The Investor Education and Protection Fund
The holding reporting company of the reporting company.
The Central Government, state governments, and local authorities.
Entities partly or wholly administered by the Central or state governments.
Investment vehicles registered with the Securities and Exchange Board of India (SEBI).
Investment vehicles regulated by the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDA), or Pension Fund Regulatory and Development Authority.

Back to Learn

Frequently Asked Questions

Common questions about Significant Beneficial Ownership Rules 2019 Update.

A Significant Beneficial Owner (SBO) is an individual who, directly or indirectly, holds at least 10% of the shares or voting rights in a company, or has the right to receive or participate in at least 10% of the distributable dividend or other distributions from the company in a financial year. The person may hold this interest alone, together with other individuals, or through one or more trusts or bodies corporate.

The Significant Beneficial Ownership (Amendment) Rules, 2019 were introduced to curtail illegal activities like tax evasion, money laundering, and benami transactions. By mandating companies to furnish declarations to the Registrar of Companies (ROC) about their Significant Beneficial Owners, the government aims to track the actual holders of ownership of corporate entities more effectively.

As per the amended rules, a reporting company is required to identify the existence of any Significant Beneficial Owners associated with it, ensure that they file a declaration in Form BEN-1, maintain a register of Significant Beneficial Owners in Form BEN-3, and file a return in Form BEN-2 with the Registrar of Companies regarding any declarations made by SBOs or changes in the Significant Beneficial Ownership.

Every Significant Beneficial Owner is required to file a declaration in Form BEN-1 to the respective company within 30 days of acquiring the status of an SBO. Additionally, existing SBOs had to file the same within 90 days of the amended rules coming into force on February 8, 2019.

If an SBO fails to file Form BEN-1, they may be fined between INR 1 lakh and INR 10 lakhs, and an additional fine of INR 1,000 per day for continuing offenses. For non-compliant companies, the penalty is INR 10 lakhs to INR 50 lakhs, and INR 1,000 per day for continuing offenses.

Entities exempt from the SBO disclosure requirements include the Investor Education and Protection Fund, the holding reporting company of the reporting company, central and state governments, local authorities, entities administered by the government, investment vehicles registered with SEBI, and investment vehicles governed by RBI, IRDA, or the Pension Fund Regulatory and Development Authority.

The amended rule defines direct holdings as an individual holding shares in their name or having made a declaration under Section 89 of the Companies Act. Indirect holdings are determined based on the legal structure of the member, such as an individual holding a majority stake in a body corporate that is a member of the reporting company.

If a member holding more than 10% of shares, voting rights, or the right to receive distributions fails to provide information about their Significant Beneficial Owner, the reporting company can issue a notice in Form BEN-4 seeking the required information. If the member still does not comply, the company can file an application with the National Company Law Tribunal (NCLT) to impose restrictions on the shares.

Reporting companies are required to maintain a register of Significant Beneficial Owners in Form BEN-3, which includes their names, addresses, date of birth, and details of their ownership. This register aims to provide a centralized record of the individuals who ultimately control or have a significant beneficial interest in the company.

The amended rule identifies one or more of the following as constituting a majority stake: (1) Holding more than one-half of the equity share capital in the body corporate, (2) Holding more than one-half of the voting rights in the body corporate, or (3) Having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate.