| Reference Date | Version | September 07, 2024 | 1.0 |
| Keywords | Beneficial ownership, significant beneficial ownership, directors, subjective test, objective test |
| Legislation(s)/Policies |
(i) Companies Act, 2013 (ii) Companies (Significant Beneficial Owners) Rules, 2018 (iii) Companies (Management & Administration) Rules, 2014 (iv) Companies (Adjudication of Penalties) Rules, 2014 |
| Jurisdiction | India |
Disclosure and compliance constitute only one aspect. Intricacies may be involved concerning such contractual arrangements, and corporate and commercial legal advisors may require their implication and assistance.
Introduction
There is a distinction between holding or acquiring legal interest and holding or acquiring beneficial interest in a company.
Disclosure of beneficial ownership helps identify behind-the-scenes decision-makers and promotes transparency and accountability.
The Companies Act, 2013 requires disclosure by both persons holding legal interest and persons holding beneficial interest in a company.
The law also imposes obligations on companies to identify and disclose significant beneficial owners (SBOs).
This article examines the legal framework governing SBOs in the context of the adjudication order passed by the Registrar of Companies of Delhi and Haryana against LinkedIn India Technology Private Limited.
Background
The concept of beneficial ownership originated from recommendations made by the Financial Action Task Force (FATF) in 2012 concerning transparency and beneficial ownership of legal persons and arrangements.
FATF recommended that countries maintain accurate and updated information on beneficial ownership to prevent misuse of corporate structures for illegal purposes such as tax evasion and money laundering.
Section 89 of the Companies Act, 2013 introduced obligations concerning disclosure of beneficial interest.
Persons holding legal interest and persons holding beneficial interest are required to disclose such interests to the company.
However, Section 89 did not initially impose any independent obligation on companies regarding persons holding beneficial interest.
In 2017, Section 90 was amended following recommendations of the Companies Law Committee, 2016 to specifically address significant beneficial ownership.
A significant beneficial owner is generally a person holding at least 10% beneficial interest in a company.
Section 90 of the Act
Key elements of Section 90 include:
- Individuals holding beneficial interest of not less than 10% in shares or voting rights may qualify as SBOs.
- Persons having the right to exercise significant influence or control over a company may also qualify as SBOs.
- Control includes the right to appoint majority directors or control management and policy decisions.
- Every SBO is required to make a declaration to the company specifying the nature of such interest.
- Companies are obligated to identify SBOs and issue notices seeking disclosure.
- Failure to provide satisfactory information may result in restrictions on transfer rights and suspension of voting rights.
- Companies must maintain a register of SBOs and file returns with the Registrar of Companies in Form BEN-2.
Determination of SBO
The Companies (Significant Beneficial Owners) Rules, 2018 provide the framework for determining SBOs.
An individual may be considered an SBO if acting alone or together with others, the individual:
- Holds directly or indirectly not less than 10% shares or voting rights.
- Has the right to receive at least 10% of distributable dividend or distribution.
- Exercises or has the right to exercise significant influence or control.
The SBO Rules recognize both direct and indirect holdings through body corporates, holding companies and pooled investment vehicles.
Objective and Subjective Tests
- Objective Test: Based on shareholding threshold of 10%.
- Subjective Test: Based on significant influence or control determined through factual analysis.
LinkedIn Case
The Registrar of Companies imposed penalties against LinkedIn Technology Information Private Limited for alleged violations under Sections 89 and 90 of the Companies Act, 2013.
The Order attracted significant attention because it attempted to widen the ambit of SBO determination to include global employees of group companies.
The RoC relied heavily on the subjective test under the SBO Rules.
Holding-Subsidiary Test
- LinkedIn Corporation was identified as the holding company of the Subject Company.
- The RoC observed that certain directors were common between LinkedIn Corporation and the Subject Company.
- Mr. Ryan Roslansky, CEO and President of LinkedIn Corporation, was considered to possess control over the Subject Company.
- Mr. Satya Nadella, CEO of Microsoft Corporation, was also considered an SBO due to his supervisory role over LinkedIn Corporation.
Reporting Channel Test
- Directors serving on the Subject Company’s Board were employees of Microsoft Corporation or LinkedIn Corporation.
- These directors did not receive remuneration from the Subject Company.
- The reporting structure indicated that the directors ultimately reported to Mr. Satya Nadella or Mr. Ryan Roslansky.
- The RoC concluded that these reporting structures indicated exercise of control and significant influence.
Financial Control Test
- The RoC examined board resolutions relating to financial signatories and banking operations.
- Microsoft Corporation maintained overarching control over treasury and financial operations.
- The RoC considered this arrangement indicative of pervasive financial control by Microsoft Corporation.
- It was concluded that Mr. Satya Nadella possessed the right to exercise significant influence and control over the Subject Company.
Penalties Imposed
Penalty for Violation of Section 89
| Relevant Section | Penalty Imposed On | Penalty Amount |
| Section 89(1) | LinkedIn Technology Unlimited Company | INR 2,80,400/- |
| Section 89(2) | LinkedIn Ireland Unlimited Company | INR 2,80,400/- |
Penalty for Violation of Section 90
| Relevant Section | Penalty Imposed On | Penalty Amount |
| Section 90(1) & 90(10) | Mr. Satya Nadella | INR 2,00,000/- |
| Section 90(1) & 90(10) | Mr. Ryan Roslansky | INR 2,00,000/- |
| Section 90(4A) & 90(11) | LinkedIn Technology Information Private Limited | INR 5,00,000/- |
| Section 90(5) & 450 | Directors including Whole Time Directors | INR 3,50,000/- |
Viewpoint
The Order presents an opportunity to study issues surrounding significant influence under the SBO Rules.
The words “power to participate” read with “directly or indirectly” cast a wide net while determining significant influence.
This also raises questions regarding the role of directors and the independence of Boards of Directors.
Section 166 of the Companies Act imposes fiduciary duties on directors to act in good faith and in the best interests of the company and its stakeholders.
It remains debatable whether individuals associated with advisory boards or flagship companies within business conglomerates should automatically qualify as SBOs.
There is a need for greater clarity regarding the objective behind disclosure obligations concerning beneficial ownership and significant beneficial ownership.
Legal Support in Corporate and Commercial Sector
Ashwini Panwar (Mr) and Rachit Singh (Mr)
Associate at Alaya Legal
