By Vikrant Rana and Shantam Sharma
The concept of Significant Beneficial Ownership (SBO) has gained importance in India’s corporate regulatory landscape as a measure to improve transparency and curb misuse of corporate structures. Enforced through the Companies Act, 2013 and the Companies (Significant Beneficial Owners) Rules, 2018, SBO provisions seek to uncover the individuals who ultimately control or benefit from companies, even when ownership is indirect or layered through other entities. This article explains the legal framework, key obligations, recent regulatory actions, and practical compliance steps for businesses.
What is Significant Beneficial Ownership?
Significant Beneficial Ownership refers to individuals who, acting alone or together, hold a significant stake or exercise control over a company beyond direct legal ownership. The purpose of identifying SBOs is to reveal the natural persons who ultimately own or control shares or voting rights, or who influence decisions behind the scenes.
The Ministry of Corporate Affairs (MCA) introduced the SBO framework in 2018 based on global standards set by the Financial Action Task Force (FATF). These standards urge jurisdictions to ensure transparency about who truly owns or controls corporate entities to prevent money laundering, tax evasion, and other illicit activities.
Legal Framework and Key Provisions
Section 90 of the Companies Act, 2013 forms the statutory basis for SBO regulations. The Companies (Significant Beneficial Owners) Rules, 2018 (as amended) specify the procedures and forms to be followed. Key aspects include:
- An individual is considered an SBO if they hold at least 10 percent beneficial interest in shares, voting rights, dividend rights, or exercise significant influence or control.
- Beneficial interest can be direct or indirect, including ownership through companies, trusts, or LLPs.
- The primary obligation is on the individual SBO to declare their beneficial interest to the company using Form BEN-1.
- Upon receipt, the company must maintain a register of SBOs (Form BEN-3) and file details with the Registrar of Companies (RoC) through Form BEN-2 within 30 days.
- If there are changes in ownership or control, fresh declarations and filings must be made within 30 days.
Compliance Timeline and Penalties
Timely and accurate disclosure is critical. The timeline requirements are:
- Initial declaration within 90 days from the commencement of the rules.
- Subsequent declarations within 30 days of any change in beneficial ownership.
Non-compliance attracts significant penalties under Section 90 of the Companies Act:
| Offense | Penalty on Company | Penalty on Officers in Default |
| Failure to maintain register or file returns | ₹1,00,000 + ₹500/day (max ₹5,00,000) | ₹25,000 + ₹200/day (max ₹1,00,000) |
Continuing defaults may also result in prosecution, with fines and potential imprisonment for officers.
Recent Enforcement: Case of Contlo Technologies Private Limited
In a notable case from Bangalore, Contlo Technologies Private Limited [1]delayed filing Form BEN-2 by 163 days after receiving a declaration from its SBO. The RoC imposed a penalty of ₹1,81,500 on the company and ₹57,600 each on two defaulting directors.
Key points from this case include:
- The company recognized the default and voluntarily filed for adjudication.
- The RoC provided a personal hearing and considered submissions before imposing penalties.
- This case illustrates that even belated compliance is better than none, but penalties will still apply.
High-Profile Enforcement: The LinkedIn India Order
The Registrar of Companies recently penalized LinkedIn Technology Information Private Limited, [2]its directors, and senior executives of its global holding company, Microsoft Corporation, including CEO Satya Nadella and LinkedIn CEO Ryan Roslansky. The penalties exceeded ₹27 lakh for failing to identify and disclose their SBOs.
The RoC applied an expansive interpretation of SBO to include individuals exercising “significant influence or control,” even without direct ownership. The ruling was based on three tests:
- Holding-Subsidiary Test: Control exercised via board appointments and management structures.
- Reporting-Channel Test: Directors of LinkedIn India were employees nominated by Microsoft or LinkedIn group companies.
- Financial Control Test: Financial transactions were controlled or approved by Microsoft executives.
The order emphasized that CEOs of foreign parent companies could be liable as SBOs if they exercise actual control over the Indian subsidiary, even without direct shareholding.
However, this interpretation is controversial because the SBO Rules [3]primarily focus on ownership or control through shareholding. Critics argue that mere employment or supervisory roles should not qualify as SBO status. This decision may face legal challenges and raises important questions for multinational corporations operating in India.
Impact on Businesses
The SBO regime compels companies to:
- Identify natural persons who exercise significant ownership or control.
- Maintain accurate and up-to-date records of beneficial owners.
- Ensure timely filing of declarations with the RoC.
Failure to comply invites financial penalties, reputational damage, and regulatory scrutiny. Therefore, companies must implement robust processes to capture beneficial ownership data and update filings promptly.
Compliance Checklist for Companies
| Compliance Step | Description | Timeline/Notes |
| Collect and file declarations (Form BEN-1) | Obtain declarations from identified SBOs confirming their beneficial interest. | Within 90 days of rule commencement; within 30 days of change thereafter |
| Maintain Register of SBOs (Form BEN-3) | Keep an updated register of all SBO declarations received by the company. | Continuous update as and when declarations received |
| File return with RoC (Form BEN-2) | Submit details of SBOs to the Registrar of Companies. | Within 30 days of receiving declarations |
| Monitor changes in ownership/control | Track any changes in beneficial ownership or control and update records and filings accordingly. | Within 30 days of change |
Conclusion
The Significant Beneficial Ownership provisions under the Indian Companies Act are essential to promote transparency and good governance. Recent enforcement actions, including those against Contlo Technologies and LinkedIn India, highlight the MCA’s active efforts to ensure compliance and penalize violations.
For businesses, understanding and adhering to SBO rules is not merely a statutory obligation but a crucial step toward building trust and credibility with regulators, investors, and the public. Companies are advised to stay vigilant, update their compliance frameworks regularly, and seek expert advice to navigate the complexities of beneficial ownership disclosures effectively.
[1] https://www.mca.gov.in/bin/dms/getdocument?mds=sXHdDDBh8OvEight9qMNIA%253D%253D&type=open
[2] https://legal-wires.com/content/files/2024/12/LinkedIn-signed-20240522.pdf
[3] Rule 2(e) of Companies (Significant Beneficial Owners) Rules, 2018 read with Section 90 of the Companies Act, 2013