SBOSIGNIFICANT BENEFICIAL OWNER From Discover to Disclosure Shifted

SBO=SIGNIFICANT BENEFICIAL OWNER From Discover to Disclosure Shifted the Onus PPT updated till August 10, 2018 Views expressed are of my own and this presentation is based on my understanding of Section 89 and 90 of CA 2013 and Rules made thereunder AMITA DESAI & CO 1

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Sr. Contents of Presentation No. 1 SBO- not a new concept – BUT WORLD WIDE- Purpose of such identification 2 FATF –(Financial Action Task Force )- Recommendation 24 3 CLC Recommendation 4 5 Section 89 and Section 90 read with the Companies (SBO) Rules, 2018 and way forward to treat SBO as Officer in Default / RPT FAQs and challenges to identify Real SBO/ UBO 6 Examples and clarifications required AMITA DESAI & CO 3

OECD--Organisation for Economic Co-operation and Development OECD is an intergovernmental economic organisation with 36 member countries, founded in 1961 to stimulate economic progress and world trade. The principles of Corporate Governance concerning the development of frameworks for disclosure and transparency has mention as follow by OECD A sound corporate governance infrastructure should combine transparency, accountability and integrity, which requires knowledge of beneficial ownership and ownership & control structures in Listed Companies. Source- OECD Report on Beneficial Ownership Disclosure in Asian Publicly Listed Companies 2017 AMITA DESAI & CO 4

SBO-Not a New Concept Identification of Ultimate Beneficial Owner (UBO) -The Master Mind AMITA DESAI & CO 5

LIFTING THE CORPORATE VEIL AMITA DESAI & CO 6

SBO PROVISIONS IN OTHER COUNTRIES AMITA DESAI & CO 7

UNITED KINGDOM-PSC As per the English Companies Act, 2006 as amended in 2015, certain Companies and LLPs are required to create and maintain a ‘Persons with Significant Control’ (PSC) Register and make it available to public, as well as file the information with the UK Companies House. Ø From June 30, 2016, UK companies (except listed companies) and LLPs are required to declare this information when issuing their Annual Confirmation statement to Companies House. Ø A publicly accessible central registry of UK company beneficial ownership information has also been established. Meaning of PSC- A person of significant control is someone that holds > 25% of shares or voting rights in a company or has the right to appoint or remove the majority of the board of directors or otherwise exercises significant influence or control. Ø AMITA DESAI & CO 8

UNITED STATES-Beneficial Ownership The term "beneficial owner" is defined under Securities and Exchange Commission (SEC) under Schedule 13 D rules. It includes any person who directly or indirectly shares, voting power or investment power (the power to sell the security). Disclosure: When a person or group of persons acquires – Beneficial Ownership of more than 5% of a voting class of a Company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934, they are required to file a return as mentioned in Schedule 13 D with the SEC. AMITA DESAI & CO 9

AUSTRALIA- Relevant Interest Beneficial Owner is not defined in the Corporation Act, 2001 or Australian Securities and Investments Commission (AISC). However, the closest concept is “Relevant Interest” Relevant Interest in corporate body arises if individual holds voting power >20%, or control of corporate body or managed investment scheme. AISC may exempt individual from disclosure requirements. Register of Relevant Interest is publicly available and Company may charge a fee to view this Register Failure to disclose relevant interest in response to notice issued by AISCfine and/or 6 months’ imprisonment. AMITA DESAI & CO 10

SINGAPORE-Controller “Controller” means individual or legal entity with “Significant Interest” in or “Significant Control” over company. “Significant Interest” and “Significant Control” in general, mean having right to appoint/remove majority of directors or holding >25% of shares /capital/ voting power. Companies must minimally send notice to every Registrable Controller annually. Companies, foreign companies, and LLPs (unless exempted) (collectively “companies”) must maintain beneficial ownership information in Register of Registrable Controllers. AMITA DESAI & CO 11

SINGAPORE-Controller 1. If company knows/has reasonable grounds to believe particulars of controller are outdated or incorrect, it must send Notice to controller within 2 business days. 2. If controller informs company that his/her particulars are outdated and provides updated particulars, company should update register within 2 business days after receiving information. Exemption from disclosure • Listed companies (subject to disclosure requirements under different laws) • Singapore Financial Institutions • Companies Wholly Owned by the Government • Public Companies • LLPs in which all partners are exempted. AMITA DESAI & CO 12

SINGAPORE-Controller Persons/Entities with Access to information about Beneficial Owner Accounting and Corporate Regulatory Authority and other public agencies in connection with administering or enforcing any written law (register of registrable controllers not available to public) Types of Penalties for Nondisclosure, False Information : Failure to comply with requirements (criminal offense): fine of up to SG$5, 000 (about US$3, 650). Source- Report of The Law Library Congress AMITA DESAI & CO 13

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FATF ( Financial Action Task Force) FATF is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. It develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. FATF has suggested recommendations (Note 24) which requires each country to develop mechanism to ensure that adequate, accurate and timely information is made available on beneficial ownership and control of companies and other legal persons (beneficial ownership information) that are created in the country Purpose : 1. To prevent misuse of legal person/ corporate vehicle 2. To fight against issue of money laundering and funding for terrorist activities AMITA DESAI & CO 15

Recommendation of FATF for Mechanism to develop 1. Identify and describe the different types, forms and basic features of legal persons in the country. 2. Requiring companies or company registries to obtain and hold up-to-date information on the companies’ beneficial ownership 3. Transparent and timely disclosure 4. Information to be publically available 5. Power with authorities like enforcement and other authorities 6. Onus on the legal entity to give such disclosure of beneficial holder in time 7. Dissemination of information and analysis of information 8. Information to be made available to foreign authorities 9. Requiring one natural person resident in the country is accountable to provide all information about beneficial ownership. AMITA DESAI & CO 16

RECOMMENDATION - 24 OF FATF In particular, countries that have legal persons that are able to issue bearer shares or bearer share warrants, or which allow Nominee Shareholders or Nominee Directors, should take effective measures to ensure that they are not misused for money laundering or terrorist financing. AMITA DESAI & CO 17

COMPANY LAW COMMITTEE REPORT (CLC) CLC was set up on 4 th June 2015 to make recommendation to the Government on issues arising from the implementation of CA 2013 In the Report of the CLC, issued in February 2016, they recommended amendments with respect to Beneficial Interest in Shares and Register of Beneficial Owners of a Company. AMITA DESAI & CO 18

PURPOSE OF INTRODUCTION OF SBO 1. Misuse of corporate vehicles for corrupt or illegal purposes, including for terrorist activities. 2. Complex structures and chains of corporate vehicles are used to hide the real owner behind the transactions made using these structures. 3. Jurisdictions world over have been putting in place mechanisms to identify the natural person controlling a corporate entity. 4. Following recommendations of Financial Action Task Force (FATF), India has also tightened the concepts of beneficial interest and beneficial owner as contained in the Prevention of Money Laundering Act as well as AMITA DESAI & CO 19

PURPOSE OF INTRODUCTION OF SBO CLC had recommended to omit the proviso to Section 2 (87) relating to restriction on number of layers of subsidiaries to 2 considering it might have substantial bearing on the functioning, structuring and the ability of Companies to raise funds. Further it has proposed to introduce a Register of Beneficial Owners of a Company, which would address the need to know the ultimate beneficial owners in complex corporate structures. However, MCA had notified the proviso to Section 2 (87) on September 20, 2017 along with Companies (Restriction on Number of Layers) Rules 2017. AMITA DESAI & CO 20

Reference in CLC-for Beneficial owner FATF CLC PMLA (RBI) SEBI AMITA DESAI & CO 21

Recommendation of CLC has recommended the following amendments in the CA 2013 in order to curb money laundering practices and to identify the natural person controlling a corporate entity : A. Provide a definition of Beneficial Interest in a share and beneficial ownership in a Company B. Companies and individuals be obligated to provide information on beneficial ownership held in the Company AMITA DESAI & CO 22

RECOMMENDATIONS OF CLC C. Companies be mandated to maintain register of beneficial ownership and provide periodic information to registry (MCA 21) D. Companies not complying with the provisions be liable for penalty and criminal prosecution AMITA DESAI & CO 23

Determination of BO as per PMLA (a) where the client is a company, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has a controlling ownership interest or who exercises control through other means. Explanation: 1. “Controlling ownership interest” means ownership of or entitlement to >25 % of shares or capital or profits of the company; 2. “Control” shall include the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements; AMITA DESAI & CO 24

Determination of BO as per PMLA (b) where the client is a partnership firm, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has ownership of/entitlement to > 15 % of capital or profits of the partnership; (c) where the client is an unincorporated association or body of individuals, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has ownership of or entitlement to > 15% of the property or capital or profits of such association or body of individuals; AMITA DESAI & CO 25

Determination of BO as per PMLA (d) where no natural person is identified under (a) or (b) or (c) above, the beneficial owner is the relevant natural person who holds the position of senior managing official; (e) where the client is a trust, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 15 % or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership; and (f) where the client or the owner of the controlling interest is a company listed on a stock exchange, or is a subsidiary of such a company, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such companies. AMITA DESAI & CO 26

SEBI Circular dated 31 st December 2010 On December 31, 2010, SEBI had issued a circular covering issues related to Know Your Client (KYC) norms, Anti- Money Laundering (AML), Client Due Diligence (CDD) and Combating Financing of Terrorism (CFT). For the purpose of Client Due Diligence (CDD), The Beneficial Owner was defined as - The natural person or persons who ultimately own, control or influence a client and/or persons on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement. AMITA DESAI & CO 27

SEBI Circular dated April 10, 2018 for FPI Identification and verification of Beneficial Owners as per above circular (i) Beneficial Owner (BO) is the natural person(s) who ultimately owns or controls an FPI and should be identified in accordance with Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. (ii) Accordingly, BOs of FPIs having structure of company or trust should be identified on controlling ownership interest (also termed as ownership or entitlement) and control basis. The BOs in case of partnership firm and unincorporated association of individuals should be identified on ownership or entitlement basis. AMITA DESAI & CO 28

SEBI Circular dated April 10, 2018 for FPI (iii)The materiality threshold for identification of BOs of FPIs on controlling ownership interest (or ownership/ entitlement) basis shall be same as prescribed in PMLA Rules i. e. 25% in case of company and 15% in case of partnership firm, trust & unincorporated association of persons. (iv) In respect of FPIs coming from “high risk jurisdictions” as referred in SEBI Master circular No. CIR/ISD/AML/2010 dated December 31, 2010 the intermediaries may apply lower materiality threshold of 10% for identification of BO and also ensure KYC documentation as applicable for category III FPIs. (v) The materiality threshold to identify the BO should be first applied at the level of FPI and next look through principle shall be applied to identify the beneficial owner of the material shareholder/ owner entity. AMITA DESAI & CO 29

SEBI Circular dated April 10, 2018 for FPI RI NRI PIOs NOT ELIGIBLE TO MAKE INVEST MENTS AS AN FOREIGN PORTFOLIO INVESTMENT AMITA DESAI & CO 30

SEBI Circular dated April 10, 2018 for FPI Non-Resident Indians (NRIs) / Overseas Citizen of India (OCI) cannot invest through FPIs. However, if an FPI is Category II Investment Manager of other FPIs & is non- investing entity, it may be promoted by NRIs/ OCIs. It is also clarified that Resident Indian cannot be a BO of FPI. Further, these FPIs are given time of six months from the date of this circular to change their structure or close their existing position in Indian securities market. Also, FPIs should certify that they will not issue bearer shares. AMITA DESAI & CO 31

SEBI Circular dated April 10, 2018 for FPI All existing FPIs whose clubbed investment in equity shares of a company is in breach of the provisions of Regulation 21(7) in view of this circular are given time of 6 months from the date of this circular to ensure compliance. In respect of any future breach of clubbing limit, there shall be 2 options: (a) The said investments shall be treated as Foreign Direct Investment from the date of breach, or, (b) FPI in breach shall have to divest its holding within 5 trading days from the date of settlement of the trades to bring its shareholding below 10% of the paid up capital of the company. AMITA DESAI & CO 32

MCA’s one more step towards Swatch Company Abhiyan Clean Up of Tainted Money AMITA DESAI & CO 33

The Companies ( Amendment )Act 2017 Amendment in Section 89 and revised Section 90 AND The Companies (SBO) Rules, 2018 AMITA DESAI & CO 34

Beneficial Owner –Common Parlance Section 89 --Declaration about Beneficial Owner (BO): BO is a legal term where specific property rights in equity belong to a person even though legal title of the property belongs to another person. �For Example: when shares of a mutual fund are held by a custodian bank or when securities are held by a broker in their name, the true owner is the beneficial owner, even though, for safety and convenience, the bank or broker holds title. �( WOS--- 1 / 6 share in the name of Trustee for Pvt / Public co) AMITA DESAI & CO 35

Compliance of Section 89 - Form MGT 4, 5 & 6 A person whose name is entered in the register of members of a company as the holder of shares but who does not hold the beneficial interest in such shares (Registered Owner), such person shall make a declaration to that effect in Form MGT-4 within 30 days from the date on which his name is entered in the register of members. Every person holding and exempted from furnishing declaration or acquiring a beneficial interest in share of a Company not registered in his name (Beneficial Owner)shall file with the Company, a declaration disclosing such interest in Form MGT- 5 to the company within 30 days after acquiring such Beneficial inertest. Any change occurs in the beneficial interest shall also be intimated to Company, within a period of thirty days AMITA DESAI & CO 36

Obligation of Company u/s 89 MGT-4 MGT-5 MGT-6 COMPANY AMITA DESAI & CO 37

New Definition of Beneficial Interest u/s 89 (10) Section 89(10) of CA 2013 as amended by CAA 2017, notified on June 13, 2018 reads that Beneficial Interest in a share includes, directly or indirectly through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to – q Exercise or cause to be exercised any or all of the rights attached to such share; or q Receive or participate in any dividend or other distribution in respect of such share AMITA DESAI & CO 38

Old Section 90 • CG to discover / investigate the Beneficial Ownership Substituted Section 90 • Now company and SBO to disclose name of SBO AMITA DESAI & CO 39

Definition of Significant Beneficial Owner-(SBO ) Section 90 (1) reads that every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India ü ü Holds ‘Beneficial interest’ of > 25% or such % as may be prescribed in shares of a Company or the right to exercise or the actual exercising of ‘Significant Influence’ or ( 20% of total voting power/ control of or participation in business decision ‘Control’ over the Company (Right to appoint majority director or control the management or policy decision directly or indirectly)– Ref Section ---2(27) AMITA DESAI & CO 40

SIGNIFICANT INFLUENCE The term significant Influence is explained under the definition of Associate Company defined under Section 2(6) of CA 2013 as amended by CAA 2017 ‘Significant Influence’ means control of at least 20% of total voting power, or control of or participation in business decisions under an agreement. Significant Influence according to Accounting Standard (AS) 23: As regards to share ownership, if an investor holds, directly or indirectly through subsidiary(ies), 20% or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly through subsidiary(ies), less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. AMITA DESAI & CO 41

CONTROL The term Control is explained under Section 2(27) of CA 2013 : “Control" shall include 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 As per AS 21, Control means(a) the ownership, directly or indirectly through subsidiary(ies), of more than onehalf of the voting power of an enterprise; or (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities. AMITA DESAI & CO 42

Definition of SBO in Rules Rule defines “Significant Beneficial Owner” as an individual as per section 90(1) read with Section 89 (10), but whose name is not entered in the Register of Members of a company as the holder of such shares and the Term “Significant Beneficial Ownership” is construed accordingly. It has further explained how an SBO is determined, in case of persons other than individual or natural persons. Continued… AMITA DESAI & CO. 43

Expl 1 - Determination of SBO for certain legal entity WHEN MEMBER IS A 1. COMPANY Natural Persons acting alone or together with other natural persons, or through one or more other persons or trust holding not less than 10% of Share Cap. Of Co. or who exercises significant influence or control in the Co. through other means 2. PARTNERSHIP FIRM Natural Persons acting alone or together with other natural persons, or through one or more other persons or trust holding not less than 10% of Share Cap. Or has entitlement of not less than 10% of profit of partnership 3. NO Natural Person Identified in 1 and 2 TRUST ( THROUGH TRUSTEE) The SBO is the relevant natural person who holds the position of Senior Managing Official Identification of the author of the trust , the trustee, the beneficiaries with not less than 10% interest in the trust and any other natural person exercising ultimate effective control over trust through chain of control or ownership AMITA DESAI & CO 44

Expl-2 – Quasi Capital Global Depository Receipts (GDR), Compulsory Convertible Preference Shares (CCP) or Compulsorily Convertible Debentures (CCD) shall be treated as ‘Shares’ for the purpose of Rule 2 (e) of the Companies (SBO) Rules, 2018. Hence for the purpose of calculation of 10% shareholding the shareholding should be considered on a fully diluted basis. AMITA DESAI & CO 45

Rule -3 SBO to make declaration to Company Form BEN -1: SBO shall make declaration of his beneficial interest to the Company in Form BEN-1… Challenge to write reason for not holding in his/her/it name under point 5 (iv) Details in Form BEN-1: Details of SBO and registered owner are required to be mentioned such as PAN, CIN (in case of company), nationality, passport no. and Occupation and name of father or spouse. – Reason of not holding in his name Attachment with BEN -1: (a) Proof of Identity of Registered Owner and SBO and (b) Instrument under which Significant Beneficial Interest is created/transferred/changed. Continued… AMITA DESAI & CO. 46

Obligation for filing of declaration in Time If SBO is already holding Significant Beneficial Ownership , then the declaration to be made within 90 days from the commencement of the Rules i. e. on or before 11 th September, 2018 and within 30 days in case of any change in his Significant Beneficial Ownership. Continued… AMITA DESAI & CO. 47

Obligation for filing of declaration in Time In case of acquisition of Significant Beneficial Ownership, after the Rules then the declaration to be made within 30 days of acquiring or any change in such ownership Continued… AMITA DESAI & CO. 48

Company to file Form BEN-2 with Ro. C ( in Public domain) Form BEN-2 : The Company is required to file with Ro. C , Form BEN-2 , in respect of declaration it has received from SBO, within 30 days from the date of receipt of such declaration or any changes therein with fees as prescribed in Companies (Registration of Offices and Fees) Rules, 2014 Details in Form BEN-2 : Details of SBO , Registered Owner and particulars of shares. Form should provide for submission of details of more than one SBO. Attachment : Form BEN -1 Continued… AMITA DESAI & CO. 49

Immediate Disclosure by SBO and the Company BEN-1 to be given by SBO to the Company within 90 days from 13 th June, 2018 BEN-2 is to be filed by Company with the Ro. C within 30 days from receipt of BEN-1 AMITA DESAI & CO 50

Disclosure upon changes in SBO BEN-1 to be given by SBO to the Company within 30 days from acquiring/change in Beneficial Interest BEN-2 is to be filed by Company with the Ro. C within 30 days from receipt of BEN-1 AMITA DESAI & CO 51

Register of SBO by all companies A Company shall maintain a Register of Significant Beneficial Owner (SBO) in Form BEN-3 and shall make changes if any. The Register to contain particulars of SBO and shares held by SBO The Register shall be open for inspection during business hours, at such reasonable time of not less than 2 hours, on every working day as the board may decide, by any member of the company on payment of such fee as may be specified by the company but not exceeding Rs. 50 for each inspection. AMITA DESAI & CO 52

Obligation of Company and SBO under Section 90 FORM BEN-1 FORM BEN-2 SBO Ro. C BEN-3 (Register) AMITA DESAI & CO 53

Obligation of Company and SBO under Section 90 X FORM BEN-1 ? FORM BEN-4 SBO Information received is not satisfactory SBO fails to give info. from 30 days of Notice Co. is duty bound to AMITA DESAI & CO 54

Company to give Notice seeking information about SBO--- An Onerous Obligation Section 90 (5) provides an obligation on the Company to give notice, in Form BEN-4 to any person (whether or not a member of the company) whom the Company knows or has reasonable cause to believe: a) to be a SBO of the Company; b) to be having knowledge of the identity of a SBO or another person likely to have such knowledge; or c) to have been a SBO of the Company at any time during the 3 years immediately preceding the date on which the notice is issued and who is not registered as a SBO with the Company as required under this Section. AMITA DESAI & CO 55

Application to Tribunal As per Section 90 (7) read with Rule 7 the Company shall apply to Tribunal within 15 days from the expiry of the period specified in the Notice, served to the person seeking information of SBO , in following cases: 1. Where the person to whom the Notice was given by the Company fails to give the information required by the Notice within 30 days from the date of Notice OR 2. Where the information given is not satisfactory Continued… AMITA DESAI & CO. 56

Application to Tribunal The Application to Tribunal by the Company is seeking for an order directing that the shares in question be subject to restrictions with respect to the following: (a) Restriction on the transfer of interest attached to such shares (b) Suspension of the right to receive dividend in relation to such shares (c) Suspension of Voting Rights in relation to such Shares (d) Any other restriction on all or any of the rights attached with such Shares AMITA DESAI & CO 57

Application to Tribunal Where an Application is made to Tribunal, the Tribunal may after giving an opportunity of being heard to the parties concerned, make such Order restricting the rights attached with the shares within a period of 60 days of receipt of the Application or such period as may be prescribed. The Company or the person aggrieved by the order of the Tribunal may make an Application to the Tribunal for relaxing or lifting of the restrictions placed. ----- Can Tribunal review its own Order ? ? ? AMITA DESAI & CO 58

Non-Applicability of Rules These Rules are not made applicable to the holding of shares of companies/body corporates, in case of pooled investment vehicles/investment funds such as: 1. Mutual Funds; 2. Alterative Investment Funds (AIFs); ( Grey area) 3. Real Estate Investment Trusts (REITs) and 4. Infrastructure Investment Trusts (Inv. ITs) which are regulated under SEBI Act. AMITA DESAI & CO 59

Non-Applicability of Rules In case of Public Charitable Trust , where the beneficiary are public at large There is no need to identify SBO AMITA DESAI & CO 60

Consequences of Non-compliance If person (SBO) fails to provide information about his Beneficial Interest as per Section 90 (1) then such person shall be liable for penalty, (i) which is minimum Rs. 1 lakh to maximum Rs. 10 lakh (ii) where the failure is a continuing one, with a further fine which may extend to Rs. 1000/- for every day after the first during which the failure continues Continued… AMITA DESAI & CO. 61

Consequences of Non-compliance If a Company, required to maintain Register under Section 90 (2) and file the information in return under Section 90 (4), fails to do so or denies inspection, the Company and every officer in default shall be punishable with 1. Fine –Minimum Rs. 10 lakhs to Maximum Rs. 50 Lakhs 2. If the failure is a continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the failure continues. AMITA DESAI & CO 62

Consequences of Non-compliance If a person willfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under Section 90, he shall be liable to action under Section 447, which is punishment for Fraud: In relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. AMITA DESAI & CO 63

FRAUD: Amount of FRAUD : Amount of less more than Rs. 10 Lac or more than 1% of Turnover than Rs. 10 Lac or 1% of Turnover (whichever is lower) Imprisonment. Minimum 6 months max 10 yrs & Fine- one time of amount of fraud to max 3 times of amount of fraud Where Fraud involves public interest, term of imprisonment shall not be less than 3 years FRAUD AS PER SECTION 447 (whichever is lower) Imprisonment 5 years OR fine which may extend to Rs. 20 Lac OR both Provided that the Fraud does not involve Public Interest AMITA DESAI & CO 64

Shift of Onus on Company and its members Declaration of Significant Beneficial Ownership is a mutual exercise of the Company and its Shareholder. A Company can wait till its shareholder declares his Significant Beneficial ownership in Form BEN-1 or the Company can identify its significant beneficial shareholders and issue them a notice in Form BEN-4. This will mandate the shareholders to identify natural person and obtain their declaration in Form BEN-1 and submit the same to the Company within 30 days of receipt of Notice. Going forward SBO may be considered as Officer- In -Default & also for Related Party Transactions, Loan to Directors etc AMITA DESAI & CO 65

ILLUSTRATION NO. 1 MR. BEN IS A BENEFICIAL OWNER (100%) XYZ PVT LTD (76%) Mr. X Mr. Y (8%) (9%) PQR LTD (82%) Mr. Z (7%) Mr. B (9%) Mr. A (9%) ABC LTD AMITA DESAI & CO 66

Ultimate Beneficial Owner (UBO) to be a Natural Person Since Mr. Ben is holding 76% in PQR. Ltd which is holding 82% in XYZ Ltd, hence Mr. Ben is indirectly holding 62. 32% (82%* 76%)of Share Capital of ABC Ltd. Section 90 has been enforced to identify such individuals, who directly or indirectly, holds beneficial interest over the company and whose names does not reflect in the register of members as holder of such shares, hence Mr. Ben is required to give declaration to PQR Ltd. And also to ABC LTD under Section 90(1). AMITA DESAI & CO 67

ILLUSTRATION NO. 2 Mr. A Mr. B (50%) U LTD (23%) L LTD (Listed) (50: 50) Joint Venture (20%) Associate Co. (86%) Subsidiary (100%) WOS AMITA DESAI & CO 68

FREQUENTLY ASKED QUESTIONS (FAQs) AMITA DESAI & CO 69

Q-1 How to ascertain SBO in case of a trust where the beneficiary is undefined and unascertainable? A-1 Where the beneficiary can not be identified, then the author of the trust or trustee or any natural person exercising ultimate effective control over the trust through a chain of control or ownership be identified as SBO. AMITA DESAI & CO 70

Q-2 How SBO to be identified in case of AOP/HUF/ Body Corporate/LLP? A-2 Section 89(10) reads that for the purpose of Section 89(10) and for Section 90, beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to— (i) exercise or cause to be exercised any or all of the rights attached to such share; or (ii) receive or participate in any dividend or other distribution in respect of such share Thus, provisions of SBO are applicable to AOP/ HUF/Body Corporate and LLP. Natural Person behind the above entities should be identified as SBO. AMITA DESAI & CO 71

Q-3 How to ascertain % holding if the Company has Instruments like ADR/GDR/CCP/CCD? A-3 Clarification has been provided in the Rules that for instruments like GDR, CCP or CCD shall be treated as ‘shares’ for provisions related to Section 90. Hence , % for SBO is based on fully diluted basis. AMITA DESAI & CO 72

Q-4 Reason for reduced threshold from 25% to 10% from Act to Rule? A-4 Person has certain rights if the holding is at least 10% and it expands the net to identify SBO. 1. AS - 23 the Significant influence is presumed at 20% or more of the voting power of the investee. 2. For ascertaining Associate Company the threshold is kept at 20 % of total voting power or control. AMITA DESAI & CO 73

Q-5 Members who are not Natural Persons but still exempted from the provisions of Section 90? A-5 The Companies (SBO) Rules, 2018 , under Rule 8 specifically exempts the following Members from giving declaration of SBO , even though holding is more than threshold Pooled Investment vehicles/ Investment Funds like 1. Mutual Funds; 2. Alterative Investment Funds (AIFs); ------- Grey Area 3. Real Estate Investment Trusts (REITs) and 4. Infrastructure Investment Trusts (Inv. ITs) which are regulated under SEBI Act. AMITA DESAI & CO 74

Q-6. Who shall be identified as senior-managing official of the Company ? A-6. As per Guidance of FATF, Natural person(s), is responsible strategic decisions that fundamentally affect for the business practices or general direction of the legal person. Also, the natural person(s) who exercises executive control over the daily or regular affairs of the legal person through a senior management position, such as a chief executive officer (CEO), Chief Financial Officer (CFO), managing or executive director, or president can be regarded as senior managing official. However, Directors / KMP may not be the Real Owners, so it is of no use to prosecute them. AMITA DESAI & CO 75

Q-7. What is the reason in definition of SBO in Rule to mention that SBO is – An individual, whose name is not entered in the Register of Member ? A-7. Where an Individual who is registered as a member is holding more than 10% - Natural Person is already identified If the Company is Registered as a member holding more than 10% - Then SBO rules requires such Corporate Member to identify a Natural Person as SBO or otherwise Senior Management Official of that Company be considered as SBO. AMITA DESAI & CO 76

Q-8 Whether exemption granted to Government Companies vide exemption notification dated June 5, 2015 under Section 90 will continue ? A-8 Section 90 is fully substituted hence according to my understanding , the exemption granted by earlier notification dated 5 th June 2015 will not be available to Government Companies. AMITA DESAI & CO 77

Q-9. Who is the Beneficial Owner in case of HUF? Who shall be SBO in case HUF is a shareholder? A-9. There are mainly two types of schools, which govern the Hindu Undivided family. They are (1) Mitakshara Law and (2) Dayabhaga Law. In Mitakshara Law, the son acquires by birth an interest in the ancestral property. Whereas, in Dayabhaga Law, the son’s right arises the first time in case of death of his father. Since, Karta of the HUF represents the HUF in all legal matters, he shall be identified as SBO. AMITA DESAI & CO 78

Q-10. If declaration is received under Section 90 is Company and SBO required to comply with Section 89 as well? A-10. Not necessarily. Section 89 and 90 are to altogether different and independent sections. AMITA DESAI & CO 79

Q-11 How to identify SBO in case the shares are pledged? A-11 If the pledged is invoked and in Register of Members the name of Pledgee is registered then Natural Person behind the Financial institution/Pledgee is required to be identified as SBO. Q-12 How to identify SBO in case of pooling of interest? A-12 Pooling of interest by two of more members should be considered as person acting together and test of threshold limit and exercise of rights attached to shares as prescribed under Section 89 (10) should be applied. AMITA DESAI & CO 80

Q-13 What is the position of Redeemable Preference Shareholders if the Dividend is in arrears for more than 2 years? A-13 If Dividend is in arrears for more than 2 year of Redeemable Preference Shares, according to my understanding , such Preference Shareholders should also be treated at par with Equity Shareholders and identification of SBO should be on fully diluted basis adding these Redeemable Preference Shares also. Q-14 What if the Shareholder is Fund which is not registered with SEBI? A-14 If fund is a Company incorporated outside India then Natural Person behind the Company should be identified as SBO or if there is no Natural Person, the Fund Manager should be considered as SBO. AMITA DESAI & CO 81

Q-15 Are compliances? AIF exempted from Section 90 A-15. Alternative Investment Fund (AIF) means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or Foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. AIF are excluded from the SBO provisions and which may be a loophole which may be misused. AMITA DESAI & CO 82

CHALLENGES in identifying SBO Following can be challenges for implementation of SBO 1. 2. 3. 4. 5. 6. Complex Structures of Companies Breach of Confidentiality Not trained staff to understand to provisions Not having timely, accurate and upto date data Risk of wrong declaration Wrong doers delays and non submission of BEN-2 AMITA DESAI & CO 83

Some other FAQ’s AMITA DESAI & CO 84

Q-1. In the case of multi-layered structures (consider below illustration): Whether the 10% threshold is to be reckoned at every level of a multilayered structure, i. e. at level of subsidiary, listed co. , investment company and also at individual shareholders level – Mr. A? A-1. In our opinion Mr. A needs to be identified as SBO if he is exercising Control or Significant Influence as the percentage holding is not the only criteria to determine SBO AMITA DESAI & CO 85

Q-2. Whether 10% threshold for reckoning applicability of SBO provisions is to be seen on the basis of effective shareholding or on the basis of direct shareholding in the reporting Indian entity? E. g. : Effective shareholding of Mr. A in JV is? A-2. In our opinion Effective Shareholding should be considered as basis of identification of SBO. However percentage holding is not the only criteria to determine SBO, Significant Influence and Control also determines SBO AMITA DESAI & CO 86

Q-3. What is meant by "any change" in beneficial shareholding –MCA may clarify in % terms ~ similar to SEBI Takeover Regulations say every change of 2% or more (upwards / downwards)? A-3. Change can be of any types, like : 1. 2. Change in SBO , his address etc or Change in % Shareholding of SBO Although Section or Rules made thereunder are silent about the change. In our opinion any type of change in SBO is required to be intimated by SBO to the Company and in turn the Company to Registrar of Companies. AMITA DESAI & CO 87

Q-4. In case no single individual is identified as SBO, which entity’s senior managing official should be regarded as SBO – reporting investee company or the investor entity? Consider below illustration. For SBO declaration to Listed Co. – whose senior managing official has to make the declaration – investment company or the listed Co. ? A-4 - Senior Managing official of Investment Company is treated as SBO who is the ultimate decision maker. For SBO declaration to Subsidiary – whose senior managing official has to make the declaration – investment company or the listed Co. or the Subsidiary? A-4 - Senior Managing official of listed company (if no Promoter is identified ) and also Senior Managing official of the Investment Company to be treated as SBO for Subsidiary Company AMITA DESAI & CO 88

Q-5. Who can be identified as senior managing official – Chairman, Managing Director, CEO, CFO or all executive directors? A-5. Person (Natural Person ) who is ultimate decision maker ( for the management of affairs , strategic decisions and policy decisions ) is to be identified as SBO, he may have any designation. AMITA DESAI & CO 89

Q – 6. Whether the use of the words “such as” in Rule 8 of the SBO Rules , would make the pooled vehicles like Mutual Funds, Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (Inv. ITs) as illustrative list? Whether pooled vehicles regulated by SEBI like Foreign Portfolio Investor (FPI), Foreign Venture Capital Investor (FVCI) are exempt from making disclosures? A-6. At present it seems that any investment entity / fund if regulated by SEBI are exempted from giving SBO declarations. � Hedge Funds AMITA DESAI & CO 90

Q-7. Whether SBO rules would apply to off-shore pooling vehicles that are registered and regulated by relevant off-shore regulators and not by SEBI? A-7. The off-shore pooling vehicle may be registered as a Trust or a Company with relevant Off Shore Regulators. Again, the yard stick for deciding SBO is who enjoys voting rights and dividends. The investors in such pooling vehicles are not the one who enjoys voting rights or dividend and hence the Fund Manager or any other person who has controlling rights in these shares is considered as SBO. AMITA DESAI & CO 91

Q-8. Which kind of relations to be considered for ascertaining holding of shares “together” with other persons? e. g. consider below shareholding: Q –Whether Father needs to disclose entire family’s ownership (12+10+8+5=35%) or he discloses only his ownership (12%) in B Ltd. ? A-8. If father is the ultimate decision maker then he is SBO irrespective of the shareholding. pattern. And if all decisions are made jointly by the family, then all need to be identified as SBO AMITA DESAI & CO 92

Q-9. There are 15 partners in XYZ LLP. None of the partners hold 10% or more in XYZ LLP holds 15% in A Ltd. There are 2 Designated Partners in XYZ LLP. Whether a partner who owns LLP "together" with other partners, need to collectively make disclosure to A Ltd. or both the Designated Partner (being managing partner) of LLP need to disclose to A Ltd. ? A-9 The test is not restricted to just percentage holding in any entity , Significant Influence and Control also has to be identified for the purpose of determining SBO AMITA DESAI & CO 93

Q-10. Who reports the holding through a trust (shares held in a trust), the trustee or the beneficiary? A-10. SBO can be ü author of the trust , ü the trustee, ü the beneficiaries with not less than 10% interest in the trust and ü any other natural person exercising ultimate effective control over trust through chain of control or ownership AMITA DESAI & CO 94

Q-11. How to calculate the beneficial holding in case of Discretionary Trust? If in discretionary trusts there is different mode of distribution of income and different mode of distribution of corpus then how to ascertain 10%? A-11. In case of such a Discretionary Trust also, the Rules on SBO to follow which reads that , where the member is a trust through trustee, the identification of SBO shall include identification of the author of the trust, the trustee, the beneficiaries with not less than ten per cent. interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership; AMITA DESAI & CO 95

Q-12. In the whole section 89, 90 and SBO Rules, the term "effective control" is used only in Explanation I under Rule 2(1)(e) (iv) that is for Trust : where the member is a trust (through trustee), the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with not less than 10% interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership. Kindly clarify the meaning of ‘effective control’. A-12 Effective Control to be construed as having significant influence or control of the management of affairs or policy decisions in the Trust. AMITA DESAI & CO 96

Q-13. Will declaration be required to be filed again in case there is imposition of intermediate holding structure without any change in effective holding? A-13 Before Change : Mr. A as SBO is required to give declaration to Listed Company After Changes Mr. A as SBO is required to give declaration to CIC and also to Listed Company. AMITA DESAI & CO 97

Q-14. In case financial institutions such as LIC of India, or Public Financial Institutions or International Financial Corporation etc. holds more than 10% in the investee company, who would be required to make the SBO declaration to the investee company? A-14. Senior Managing Official of LIC of India or Public Financial Institutions or International Financial Corporation needs to identified as SBO. AMITA DESAI & CO 98

Q-15 In case of shares held in a PSU (Public Sector Undertaking) by the Central Government or State Government which are held in the name of the President of India or the Governor of the respective State, who would be required to make the SBO declaration to the investee company? A-15 Senior Managing Official of PSU/ Government or Semi Government Companies need to be identified as SBO as the exemption granted to Government Companies vide Notification dated June 05, 2015 is not available to this revised Section 90. . AMITA DESAI & CO 99

Q-16. In case of listed entities where the shareholding changes on a daily basis – how to reckon the concept of “change in shareholding” – whether position needs to be seen on a daily basis at close of the day? A-16. Company Secretary or Compliance team of listed Company needs to closely track the SHP / Benpos data with respect to threshold of 10 %. However Control and Significant Influence would not be that volatile. AMITA DESAI & CO 100

Q-17. In case of winding-up of company – does SBO declaration for change in shareholding need to be made? If yes, at what time – passing of special resolution for winding-up? A-17. As long as the Company is not wound up and dissolved, the provisions of section 90 is applicable. SBO need to give declaration to the Company till it is not dissolved. AMITA DESAI & CO 101

Q-18. In case of amalgamation / demerger / capital reduction of a company – does SBO declaration for change in shareholding need to be made? If yes, at what time – on filing of NCLT order with ROC? A-18. In case of amalgamation/ demerger or capital reduction, SBO need to give declaration to the Transferee Company, either upon allotted of shares in exchange or on exercise of control or significant influence in the Transferee Company, ( or even before the Order of NCLT , if by contract, arrangement or otherwise or by mention in the scheme, that effective control of Transferor Company will be with the Board of Transferee Company, then also SBO need to give declaration to Transferor Company). For SBO he must be holding Beneficial Interest as defined u/s 89 (10) that is rights attached to the shares and benefits of dividend on the shares. AMITA DESAI & CO 102

Clarification Required AMITA DESAI & CO 103

Relaxation v/s Lifting of Restriction As per Section 90 (9) , the Company or the person aggrieved by the Order of the Tribunal may make an application to the Tribunal for q relaxing or q lifting of the restrictions Can NCLT review its own Order? What does it mean by relaxation ? AMITA DESAI & CO 104

Whether the regulator will be able to prosecute foreign national who is SBO for any default made by him? AMITA DESAI & CO 105

NON AVAILABILITY OF FORM BEN-2 Effective date - June 13, 2018 Acquisition of Beneficial Interest – June 13, 2018 and BEN-1 is given by SBO BEN- 2 is required to be filed with ROC till- July 14, 2018 however Form BEN-2 is not available AMITA DESAI & CO 106

AMITA DESAI & CO 107

Amita Desai & Co. Company Secretaries 1005, Solaris Hubtown, Prof N S Phadke Marg, Andheri East, Mumbai- India Tel 91 22 2684 5920/21/23 Mobile: 9820177691 Email : info@amitadesai. com Website : www. amitadesai. com AMITA DESAI & CO 108