The Companies Act, 2013, brought about several reforms to enhance corporate governance, transparency, and accountability in Indian businesses. One of the significant provisions introduced is Section 90, which deals with the concept of "significant beneficial ownership" (SBO) and seeks to ensure transparency regarding the actual owners of a company. In today’s global economic environment, the true ownership structure of companies is often layered through a complex web of intermediaries, making it difficult to identify the individuals or entities who exercise control. Section 90 addresses this issue by mandating the disclosure of significant beneficial ownership to prevent fraud, money laundering, and other illicit activities.
The Need for Section 90
In many cases, the people who ultimately control companies—referred to as “beneficial owners”—are not always visible in the company's official records. They could be hidden behind layers of investment vehicles, nominee arrangements, or even shell companies. This lack of transparency can facilitate illegal activities such as tax evasion, money laundering, and financing of illicit businesses. Recognizing the importance of transparency, the Indian government introduced Section 90 to ensure that the individuals with substantial control over a company are known to regulatory authorities and the public.
Key Provisions of Section 90
Section 90 mandates individuals or entities holding significant beneficial ownership (SBO) in a company to disclose their interest. Key highlights of this section include:
1. Definition of Significant Beneficial Owner (SBO): An SBO is defined as an individual who holds, directly or indirectly, at least 10% of the shares or voting rights, or has a significant influence or control over the company through other means. The rules under the Companies (Significant Beneficial Owners) Rules, 2018 further elaborate on these criteria.
2. Obligation to Declare Beneficial Ownership: Any individual or entity that qualifies as an SBO must file a declaration with the company, stating the extent of their interest. This declaration needs to be made in Form BEN-1, within 90 days of acquiring the significant ownership or upon commencement of the rules.
3. Company's Responsibility: Companies are required to maintain a register of significant beneficial owners in Form BEN-3 and file the information with the Registrar of Companies (ROC) in Form BEN-2. The company must also send a notice to individuals it reasonably believes to be SBOs, asking them to make the required disclosure.
4. Consequences of Non-Compliance: Non-compliance with Section 90 can lead to severe penalties. Failure to disclose significant beneficial ownership, or giving false information, can result in fines or even imprisonment. Additionally, the company may impose restrictions on the shares, such as suspending voting rights or preventing dividend payments until the disclosure is made.
5. Exemptions: Certain classes of entities, like pooled investment vehicles or mutual funds, regulated under other laws, may be exempt from the SBO disclosure requirement.
Objectives of Section 90
The primary objective of Section 90 is to improve transparency in the ownership of companies. By requiring the disclosure of beneficial owners, the provision helps authorities keep track of the individuals or entities exercising control over a company, thereby preventing illegal practices like tax evasion and money laundering. It also improves corporate governance by holding shareholders accountable for their ownership and control.
Moreover, Section 90 aligns with global standards, such as the Financial Action Task Force (FATF) recommendations on beneficial ownership transparency, which many countries have adopted to combat illicit financial flows. By enforcing these standards, India is working toward creating a cleaner, more accountable corporate environment.
Challenges in Implementation
While Section 90 is a step in the right direction, its implementation has not been without challenges. One of the key issues has been the complex and layered structures of ownership, which often make it difficult to identify the real beneficial owners. In some cases, the ultimate beneficial owners may be located in foreign jurisdictions with different disclosure requirements, complicating the enforcement of Section 90.
Additionally, compliance with the SBO rules requires significant administrative efforts, particularly for companies with complex ownership structures. Both companies and shareholders need to be proactive in maintaining records and ensuring that the disclosures are timely and accurate. Furthermore, enforcing penalties for non-compliance can be challenging, especially in cases where ownership is deliberately obscured through legal loopholes.
Conclusion
Section 90 of the Companies Act, 2013 represents a crucial step toward enhancing corporate transparency and accountability in India. By requiring the disclosure of significant beneficial owners, the law aims to ensure that companies are not controlled by hidden entities or individuals. Although there are challenges in implementation, the provision is expected to strengthen regulatory oversight and prevent malpractices such as money laundering and tax evasion. For companies and shareholders, adhering to these regulations is vital for maintaining transparency and avoiding penalties. Ultimately, Section 90 is an essential tool in building a more transparent and trustworthy corporate landscape in India.
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