Introduction
Ownership is the most important aspect of corporate governance and is integral to understanding how assets and shares in companies are held and managed. There are two forms of ownership with respect to corporate entities: legal ownership and beneficial ownership.
Legal ownership (also referred to as ‘registered ownership’) pertains to the individual or entity whose name is officially recorded in the company’s register of members as the holder of shares, as given under s. 88 of the Companies Act, 2013 (‘CA 2013’). This person has the legal title and associated rights such as voting rights, dividend rights, and the right to inspect books of accounts. In contrast, beneficial ownership pertains to the individual or entity that enjoys the economic benefits of ownership irrespective of who holds the legal title. A natural person can be regarded as a beneficial owner if they are the ultimate owner or controller of a legal entity, either through their ownership stakes or by exercising effective control through other methods. In simpler terms, the beneficial owner is a person who enjoys all the rights and benefits of a shareholder through a registered or legal owner.
The distinction between the two forms of ownership is not merely a matter of legal definition. Still, it is important to maintain transparency and accountability in adherence to corporate governance norms and regulatory compliance. Lack of clarity in ownership structures can lead to regulatory breaches and may incur heavy penalties. For instance, in the case of LinkedIn Technology Information Private Limited (‘LinkedIn India’), the Registrar of Companies (‘RoC’) imposed a fine of Rs. 27,10,800 on LinkedIn India, along with its directors and beneficial owners comprising Mr. Satya Nadella and Mr. Ryan Roslansky since they failed to meet disclosure requirements under beneficial ownership norms[i].
Moreover, recognizing and accurately disclosing beneficial ownership further prevents the misuse of corporate structures for illicit activities such as money laundering, terrorist financing, etc. This article discusses the interplay between registered and beneficial ownership, the legal framework governing beneficial ownership in India, the RoC’s order imposing penalties on LinkedIn India for its failure to identify significant beneficial owners ('SBO') and to fulfil disclosure obligations under CA 2013, and the broader implications of this order.
The Distinction Between Legal and Beneficial Ownership:
| Legal Ownership | Beneficial Ownership |
Legal Title | Held by a registered owner | Not necessarily held |
Voting Rights | Yes | Indirect or none |
Economic Benefits | Direct | Indirect |
Control | Direct control | Indirect influence |
Chapter I- Legal Framework Governing Beneficial Ownership
A. Financial Action Task Force (‘FATF’) Recommendations
The concept of beneficial ownership in India has been taken from the 2012 recommendations of the FATF. This inter-governmental organisation aims to combat money laundering and terrorist and proliferation financing. As per Recommendation 24 of FATF- ‘Countries should take measures to prevent the misuse of legal persons for money laundering or terrorist financing. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities’[ii]. The main aim behind Recommendation 24 is that companies and other authorities should be able to obtain and access beneficial ownership information properly. Further, the interpretative note to Recommendation 24 provides detailed guidance on achieving transparency in legal entities. This involves identifying different types of legal persons, outlining processes for their establishment and maintaining publicly accessible registers containing essential company information on legal status, directors, and shareholders[iii]. Such transparency not only facilitates risk assessment for money laundering and terrorist financing but also supports effective regulatory oversight.
As per the interpretative note, to determine beneficial ownership:
the authorities must access basic information about the company, including legal ownership, control structures, shareholder details, and directors’ information.
all companies must be registered in a national company registry, which should record essential information such as the company name, incorporation proof, office address and regulatory documents.
companies should maintain a register of shareholders detailing their names, shares held and voting rights.
the above information must be accessible within the country at the company’s registered office or other authorised location.
These recommendations have significantly influenced global and national regulations, including India’s approach to beneficial ownership.
B. The Companies Act, 2013
The concept that a share can have a different registered owner from its actual beneficial owner has long been recognized in Indian law under s. 187C of the earlier Companies Act, 1956 (‘CA 1956’), shareholders were allowed to transfer the beneficial interest in a share to another person, including corporate entities. Despite this, the company law framework did not define the term ‘beneficial ownership.’ Previously, s. 187C of the CA,1956, typically required disclosure only when shares were held by individuals as nominees for others, often overlooking indirect beneficial interests like voting agreements. This approach changed significantly after the FATF recommendations were released in 2012.
India, a member of FATF since 2010, incorporated the principles given in Recommendation 24 into its legal framework. In February 2016, the report of the Companies Law Committee suggested that companies should be required to obtain details about their beneficial owners and maintain them in a register[iv]. As a result, through the Companies (Amendment) Act, 2017, the Ministry of Corporate Affairs (‘MCA’) introduced the concept of SBO under the CA 2013 to prevent the misuse of corporate structures from unlawful activities. The law governing SBO has been codified under ss. 89 and 90 of the CA 2013 read with Companies (SBO) Rules, 2018 (‘SBO Rules’)[v].
S. 89 of the CA 2013 requires that:
Firstly, if the registered owner of shares does not hold a beneficial interest in those shares, the registered owner must file declarations with the company. Similarly, the beneficial owner must also declare their interest and the registered holder’s details. In case there are any changes in the above details, both the registered and beneficial owner must report them to the company.
Secondly, the Central Government is empowered to establish rules for disclosing beneficial ownership; non-compliance with such rules can result in heavy penalties.
Lastly, once the registered and beneficial owners make a declaration, the company must update its register and file a return with the RoC.
S. 90 of the CA 2013 requires that:
Firstly, every individual, whether acting alone or with others, or through one or more persons or trusts, including those residing outside India, who possesses a beneficial interest of at least 25% per cent in the shares of a company[vi] or who has the right to exercise or is actually exercising significant influence or control over the company (as defined in s. 2(27)), is required to make a declaration to the company.
The term ‘control’ encompasses the authority to appoint a majority of the directors or to influence the management or policy decisions of a company. This influence can be exerted by an individual or a group acting together directly or indirectly. It can arise from their shareholding, management rights, voting agreements or any other means.
Further, the term ‘significant influence’ is defined as the power to participate, directly or indirectly, in the financial and operational policy decisions of a company. However, it does not encompass control or joint control over those policies. Since both the above terms are very wide and abstract, they are open to interpretation.
Secondly, companies should identify and declare their SBOs, who are individuals holding a significant percentage of shares or having significant control or influence over the company.
From both ss. 89 and 90 of the CA 2013, it can be inferred that the individual has the primary responsibility to disclose information regarding SBO to the company, while the company has the secondary responsibility to take necessary steps to identify the SBO and ensure that it complies with all disclosure requirements. The primary difference between us. 89 and 90 is that s. 89 focuses on the declaration of beneficial interest in a share, while s. 90 is concerned with identifying the SBO.
C. SBO Rules
Contrary to what is given in the Act, as per the SBO Rules, an SBO is defined as an individual who, directly or indirectly, holds at least 10% of shares, voting rights, or entitlements to dividends in a company[vii]. Additionally, it includes individuals who exercise significant influence or control over the company through means other than direct holdings.
The following key terms, summarized from the SBO Rules, are essential for understanding how SBO is determined:
Term | Meaning |
Beneficial Interest | Beneficial Interest in a Share includes:
|
Significant Influence | Power to participate, directly or indirectly, in Financial & Operating Policy decisions (but not having Control or joint Control of such policies) |
Control | Includes right to:
|
Majority Stake |
|
SBO | A person having one or more of the following rights or entitlements:
|
Direct and Indirect Holdings:
The SBO Rules specify that direct holdings refer to shares held in the individual’s own name, while indirect holdings encompass ownership through various entities such as body corporates, partnerships, trusts, or pooled investment vehicles[viii]. The criteria for indirect holdings are as follows:
i. Body Corporate: An individual is considered to hold indirectly if they hold a majority stake in the body corporate or its ultimate holding company.
ii. Hindu Undivided Family (HUF): If the individual is the Karta of the HUF.
iii. Partnership: If the individual is a partner, holds a majority stake in a corporate partner, or is the ultimate holding company of a corporate partner.
iv. Trust: Depending on the type of trust, the individual could be a trustee (discretionary or charitable trust), a beneficiary (specific trust), or the author/settlor (revocable trust).
v. Pooled Investment Vehicles (‘PIVs’): If the individual is a general partner, investment manager, or CEO of a body corporate/partnership that acts as an investment manager, provided the investment vehicle is based in a FATF member state with an International Organization of Securities Commissions member securities market regulator.
The law further sets a twin test for determining SBOs, which involves an objective and subjective analysis. The objective test checks whether the individual, directly or indirectly, holds at least 10% of the shares, whereas the subjective test checks whether the individual has the right to exercise significant influence or control beyond actual ownership[ix].
D. Compliance Checklist
As per the Act and the SBO Rules, SBOs are required to declare their beneficial interests to the company and the RoC, detailing the nature and extent of their interests, within the prescribed timeframe following acquisition or any changes:
Section/ Rule | Form | Description | Filing Trigger Date/ Deadline | Responsibility | Filed before Whom |
S. 89(1)of the CA 2013 read with r. 9(1) of Companies (Management & Administration) Rules, 2014 | MGT-4 | Declaration by the registered owner of shares who does not hold the beneficial interest in such shares | Within 30 days from Date of Creation of Beneficial Interest | Registered Owner | Company |
Ss. 89(2) & (3) of the CA 2013, read with r. 9(2) of Companies (Management & Administration) Rules, 2014 | MGT-5 | Declaration by the beneficial owner who holds or acquires beneficial interest in shares but whose name is not entered in the register of members | Within 30 days from Date of Creation of Beneficial Interest | Beneficial Owner | Company |
S. 89(6) of the CA 2013, read with r. 9(3) of Companies (Management & Administration) Rules, 2014 | MGT-6 | Return to the Registrar with respect to the declaration under s. 89 received by the company. | Within 30 days from the Date of Receipt of Declaration | Company | RoC |
R. 3 of the SBO Rules, read with s. 90(1) of the CA 2013 | BEN-1 | Declaration by the beneficial owner who holds or acquires SBO in shares | Within 30 days of acquiring significant beneficial interest or change therein | SBO | Company |
R. 4 of the SBO Rules, read with s. 90(4) of the CA 2013 | BEN-2 | Return to the Registrar in respect of declaration under section 90 | Within 30 days from the date of receipt of BEN-1 | Company | RoC |
R. 5 of the SBO Rules read with s. 90(2) of the CA 2013 | BEN-3 | Register of beneficial owners holding significant beneficial interest | Shall be open for inspection by any member of the company during business hours on working day | Company | NA |
R. 6 of the SBO Rules read with s. 90(5) of the CA 2013 | BEN-4 | Notice seeking information about SBO | NA | Company | A person whom the company believes might be an SBO [individual will have to give a reply within 30 days of receipt of notice] |
Chapter II- The LinkedIn India Case
Facts
In this case, LinkedIn Technology Unlimited Company (‘LinkedIn Technology’) and LinkedIn Ireland Unlimited Company (‘LinkedIn Ireland’) were listed as registered holders and beneficial owners of one share in LinkedIn India. Microsoft Corporation, whose CEO and Chairman is Satya Nadella, is the ultimate parent company of LinkedIn India. Although LinkedIn Corporation, USA (‘LinkedIn Corporation’), was not directly in the ownership chain, it was still mentioned as a holding company in LinkedIn India’s financial statements with Ryan Roslansky as its CEO.
LinkedIn India stated that the beneficial ownership was acquired by LinkedIn Ireland on 14.01.2024, whereas according to the financial statements, the beneficial ownership existed with it from an earlier date. Therefore, the RoC issued a show-cause notice on 15.02.2024. LinkedIn India claimed that the beneficial ownership had always been with LinkedIn Ireland, also reflected in previous annual returns. However, the RoC took cognizance that the declaration needs to be made as and when created. By virtue of the same, LinkedIn India, LinkedIn Ireland and LinkedIn Technology were imposed penalties under s. 89 of CA 2013.
Further, the RoC also addressed LinkedIn India’s failure to declare its SBOs under s. 90 of the CA 2013. LinkedIn India argued that there were no SBOs since no individual held a majority stake in Microsoft. However, the RoC used a broader interpretation, emphasizing that control or significant influence could also be exercised indirectly.
Analysis by RoC
As part of its objective assessment, the RoC fined LinkedIn India under s. 89 of the CA 2013 for failing to comply with proper disclosure requirements regarding one share in which LinkedIn Technology was the registered holder and LinkedIn Ireland was the beneficial holder.
As a part of its subjective assessment, with respect to s. 90 of CA 2013 read with the SBO Rules[x], the RoC went a step ahead and determined beneficial ownership of Mr. Satya Nadella and Mr. Ryan Roslansky. The RoC assessed beneficial ownership using three tests:
Holding Subsidiary Relationship: As per the analysis by RoC, LinkedIn Corporation can only be the holding company of LinkedIn India if it exercised control over the functioning of its board of directors because, as per the structure charts provided by LinkedIn India, LinkedIn Corporation does not appear to be its holding company. Further, the RoC also argued that two directors served both LinkedIn India and LinkedIn Corporation, and they were the officers of LinkedIn Corporation. This implied that they were logically under the control of LinkedIn Corporation’s CEO, Mr. Ryan Roslansky. Additionally, with Microsoft Corporation’s acquisition of LinkedIn Corporation, the RoC held that LinkedIn Corporation’s CEO would also report to and be under the control of Microsoft Corporation’s CEO, Mr. Satya Nadella.
Reporting Channels: As per RoC’s observations, a significant number of directors of LinkedIn India were employees of LinkedIn Corporation or Microsoft Corporation and reported up to their respective CEOs, Mr. Ryan Roslansky and Mr. Satya Nadella. They were appointed from a pool of Microsoft’s employees, and the individuals appointed were Microsoft’s nominees. Further, the bylaws of Microsoft Corporation also indicated that its CEO has the power to assign responsibilities and has general supervision over the affairs of LinkedIn Corporation.
Financial Control: The RoC concluded that as per the financial statements of LinkedIn India, it was engaged in related party transactions with its other group entities. The Microsoft Treasury also maintained control over the bank accounts of different entities. Additionally, the RoC concluded that there existed a credible financial control that Microsoft Corporation could potentially have over LinkedIn India, thereby enabling the CEO of Microsoft Corporation to have the ‘right to exercise control’ over LinkedIn India.
On the basis of these above tests, the RoC concluded that both Mr. Satya Nadella and Mr. Ryan Roslansky were SBOs of LinkedIn India due to their control and significant influence over the affairs of the company. Therefore, the RoC imposed heavy penalties for violation of both ss. 89 and 90 of the CA 2013.
The Leixir Case [xi]
In another similar case, concerning Leixir Resources Private Limited (‘Leixir India’), a private equity-funded company, was a part of a complex ownership structure involving multiple holding entities. The company’s ultimate ownership is traced back to Leixir Holdings LLC, owned by two limited partner entities (‘LPs’), categorized as PIVs. These LPs were managed by a sole general partner (‘GP’), who delegated the management responsibilities to an investment advisor. Notably, the LPs and the GP were body corporates, adding layers of complexity to the beneficial ownership structure.
In its order dated 06.05.2024, the RoC of NCT Delhi and Haryana imposed penalties on Leixir India for failing to comply with the SBOdisclosure requirements under s. 90 of the CA 2013. The core issue revolved around the identification of the SBO. Leixir India argued that no individual met the criteria of an SBO, as no one held any indirect rights or entitlements in the company. However, the RoC identified Michael Falk, the CEO of the investment manager Comvest Advisors LLC, as the SBO. The RoC’s interpretation was based on the rationale that Falk, in his role, exercised ultimate control over the investment decisions, thereby fitting the definition of an SBO under the SBO rules.
The RoC’s approach, in this case, was characterized by a purposive interpretation of the SBO rules, emphasizing transparency and accountability. By scrutinizing filings, foreign laws, and the actual control dynamics within the PIV structure, the RoC underscored the importance of accurately reporting beneficial ownership. This decision mirrors the rigour in the LinkedIn India case, where the RoC also focused on uncovering the true beneficial owners within complex corporate structures. This shows RoC’s commitment to maintaining high corporate governance and compliance standards.
Our Analysis
The RoC’s order in the LinkedIn India and Leixir case highlights the increasing scrutiny on compliance with beneficial ownership regulations and the importance of accurate disclosures. Here, companies with complex structures and parent companies in foreign countries will need to be more careful with respect to their direct and indirect holdings and disclosures. Further, in this case, the RoC’s subjective assessment of control and significant influence suggests that even employees, CEOs, and directors can be classified as SBOs if they are found to exercise significant influence over the affairs of the business. This interpretation also raises several questions. As per the explanation given in r. 2(1)(h) of the SBO Rules, an individual is not considered an SBO if they do not hold any right or entitlement indirectly under sub-clauses (i), (ii) and (iii) of the same clause. In this case, neither Mr. Satya Nadella nor Mr. Ryan Roslansky holds more than 10% of the shareholding in LinkedIn India, including voting and dividend rights.
There is a need to have substantial proof of indirect rights and entitlements to consider Mr. Satya Nadella and Mr. Ryan Roslansky as SBOs of LinkedIn India. Moreover, as per Explanation III of Rule 2(1)(h) of the SBO Rules, it has been stated that for an individual to hold an indirect right or entitlement, there is a requirement to hold a majority stake in the holding company. Again, there was no substantial proof that Mr. Satya Nadella and Mr. Ryan Roslansky had a majority stake in LinkedIn India. As neither held majority shares nor special rights through agreements, their control over LinkedIn India’s daily operations and policies was unsubstantiated. Thus, the basis of RoC’s order with respect to violations under s. 90 of the CA 2013 is purely based on the subjective test.
While the stringent approach of RoC can be substantiated by the actual purpose of why the concept of beneficial ownership was introduced, i.e., to prevent money laundering and unlawful activities, the broader application and interpretation of these rules could potentially impact the ease of doing business. Multinational companies will need to modify their reporting and governance models to comply with SBO regulations in India. This would also involve significant administrative changes and will incur costs.
End Notes
[i] Order in the matter of LinkedIn Technology Information Private Limited- https://www.mca.gov.in/bin/dms/getdocument?mds=san%252BPg76sI9tkgd5lcHzZg%253D%253D&type=open
[ii] FATF Recommendations 2012, recommendation 24.
[iii] Interpretive Note to Recommendation 24, paragraph 2.
[iv] Report of The Companies Law Committee, February 2016- https://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf
[v] The Companies (SBO) Rules, 2018 https://www.mca.gov.in/Ministry/pdf/CompaniesOwnersAmendmentRules_08020219.pdf
[vi] The Companies Act, 2013, s. 90(1).
[vii] The Companies (SBO) Rules, 2018, rule 2(h).
[viii] The Companies (SBO) Rules, 2018, rule 2(h).
[ix] The Companies (SBO) Rules, 2018, rule 2(1)(h)(iv).
[x] The Companies (SBO) Rules, 2018, rule 2(1)(h)(iv).
[xi] Order in the matter of Leixir Resources Private Limited- https://www.mca.gov.in/bin/dms/getdocument?mds=x9hGblTAkWTdeV9X9tkaow%253D%253D&type=open
Authored by Muskaan Jain, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.