In the wake of the monumental decision by the Government of India to demonetize the currencies in 2016, the Benami Transactions (Prohibitions) Act 1988 was modified and renamed as Prohibition of Benami Property Transactions Act 1988 (hereinafter referred to as the “Benami Act”). The Benami Act came into effect on November 01, 2016. It came into effect so as to not make the demonetization render pointless. It was observed later that a large number of companies have layers of investments in each other making it difficult for regulators to find out who the real owners of these Companies are. The Ministry of Corporate Affairs (MCA) vide notification dated June 13, 2018 introduced the Companies (Significant Beneficial Owners) Rules, 2018 (hereinafter referred to as “SBO Rules”) read along with Section 90 of the Companies Act 2013 (as amended in 2017) to unmask the real owners of the company. The SBO Rules were further amended by introducing the Companies (Significant Beneficial Owners) Amendment Rules, 2019, to remove ambiguities and address the concerns of the stakeholders. The rule came into force to reduce illegal activities like tax evasion, money laundering, benami transactions etc., and mandate all Companies to furnish a declaration to the Registrar of Companies (ROC) concerning their Significant Beneficial Owner. This article elucidates into the concept of Significant Beneficial Owners and if the declaration made by them provides immunization against the prosecution under Benami Act.
Who is a Significant
Beneficial Owner (SBO)?
The SBO rules were made after the recommendations made by the Financial Action Task Force (FATF), an inter-governmental, independent body who is recognized by global standards to take action against money laundering and terrorism. Section 89(10) defines beneficial interest for the purposes of Section 89 and 90. It is a very broad and inclusive definition to cover beneficial interest in shares held directly or indirectly, through any contract, arrangement, or otherwise, the rights or entitlements of a person alone or together to:
- Exercise or cause to be exercised any or all of the rights attached to such share.
- Receive or participate in any dividend or other distribution in respect of such share.
As per Rule 2(1) (h) of the SBO Rules, SBO is an ‘Individual who acting alone or together, or through one or more persons or trust exercises rights or entitlements in the Reporting Company by way of holding 10% shares or 10% voting rights or right to receive 10% or more dividend, both indirect and direct holdings or right taken together or such individual exercise significant influence or control, indirectly or along with direct holding in the Reporting Company.
What are Benami transactions?
A Benami transaction means a
transaction in which the asset is transferred in the name of another
individual, while the transaction is
paid, directly or indirectly, by other persons who
enjoy and reap the benefits, whether in future or in immediacy. Benami
Property, as per Section 2(8) of the Benami Act, has been
defined as any property being the subject matter of a benami transaction,
including the proceeds of that property. The Competent Authority within the
ambit of Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act, 1976 has recently been notified as the
Adjudicating Authority under the Benami Act vide its notification w.e.f 1st
July, 2021.
As per Section 2(9) of the Benami Act, some transactions not treated as
Benami Transactions are:
When the property is held by—
- a Karta, or a member of the Hindu undivided family (HUF), and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;
- any person being an individual, holding the property in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;
- any person in the name of his brother or sister or lineal ascendant or descendant (parents or children), where the names of brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; and
- a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 and any other person as may be notified by the Central Government for this purpose; For eg: Trust.
Current Legal Position in India
The term ‘Property’, as defined under Section 2(26), has been widened to include movable assets. The new definition states that “property” means assets of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title to or interest in the property and where the property is capable of conversion into some other form, then the property in the converted form and also includes the proceeds from the property. ‘Shares’ under Section 44 of the Companies Act are treated as movable property, therefore, it can be held as ‘benami nature’ and can be attached and confiscated under the Benami Act. Therefore, a declaration of beneficial ownership acts as a precursor for the Government to further investigate benami transactions. SBO disclosures would enable the authorities to “follow the money” in monetary examinations including suspect accounts/assets held by Benamidars.
Section 89 and Section 90 deals with identification of a natural person for every company who is the SBO. Once the SBOs are identified, the Company is only required to maintain a record of the same and file it with the Registrar. So, the intent is to have the natural person identified who may be held responsible/ accountable in case of suspicious activity/ malafide activities of the Company along with the officers of the Company. These provisions have been framed more from the Prevention of Money Laundering (PML) perspective.
Holding beneficial interest in a company is not illegal and there is no such assumption that the transaction made is of benami nature. Contrarily, filing of such declarations will be a window to the competent authorities to investigate such beneficial interests. The beneficial and registered owner must provide a legal justification for such holdings in the declaration along with relevant evidentiary documents. It is important to note that the burden of proof lies on the person asserting such nature of the transaction.
The Ministry of Corporate Affairs vide its notification dated March 24, 2021 amended Schedule III of the Act which prescribes the format of financial statements which should now include the details of proceedings under this Act, along with disclosure of beneficiaries, amount etc., in the financial statements of the company. Under CARO 2020, the auditors of the company are required to report whether any proceedings have been initiated under the Benami Act against the Company and whether the details of the property held benami has been disclosed in the financial statements. It is to be noted that the Central Government recently extended the time limit for issuance of notice and passing of Order under the Act to March 31, 2022 on considering the representations made by various stakeholders on account of COVID-19 pandemic on September 17, 2021.
In conclusion, the declarations made under the Companies Act and
the disclosures in financial statements are necessary, but
does not prove that the securities are not within the
purview of the Benami Act. The declarations made under the Companies Act do not provide immunization
to holder of securities under the Benami Act. Filing of declarations under the
Companies Act does not regularize or provide a justification to a Benami
Transaction.
About the Author: This post is prepared by Aayushi Jain, Law Student from Amity Law School, Noida. She can be reached at aayushijain.law@gmail.com
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