This article has been written by Ms. Preksha Bothra, a 4th year BA LLB student from BMS College of Law, Bengaluru

Introduction:

A share is an instrument that represents a unit of ownership in a company. When an individual or entity owns a share, they become a shareholder in the company. The concept of beneficial ownership arises when a person is entitled to enjoy the benefits of ownership, such as receiving dividends or voting rights, even though the legal ownership of the share is in someone else’s name. In India, the Companies Act, 2013, recognizes the concept of beneficial ownership and requires companies to maintain a register of beneficial owners. In this article, we will explore the concept of beneficial ownership and the declaration of beneficial interest in shares from an Indian perspective.

What is beneficial ownership?

Beneficial ownership refers to the right of a person to enjoy the benefits of ownership, even though the legal title or ownership of an asset or property is in someone else’s name. In the context of shares, beneficial ownership means that a person is entitled to receive dividends, voting rights, and other benefits of ownership, even though the legal ownership of the share is held by another person or entity.

For example, if Mr. X holds shares of a company in his name, but the dividends on those shares are paid to Mr. Y, then Mr. Y is the beneficial owner of the shares. The legal ownership of the shares remains with Mr. X, but Mr. Y enjoys the benefits of ownership.

Declaration of beneficial interest in shares:

In India, the concept of beneficial ownership is recognized under the Companies Act, 2013. Section 89 of the Companies Act, 2013, requires companies to maintain a register of beneficial owners of shares. A beneficial owner is defined as any person who has a beneficial interest in a share, and whose name is not entered in the register of members of the company as the holder of the share.

Every person who holds a beneficial interest in any share of a company is required to make a declaration to the company, specifying the nature of his interest in the share. The declaration must be made in writing and must be signed by the declarant. A declaration in respect of beneficial interest in any share refers to the disclosure of information by a shareholder regarding the ownership of shares in a company. The Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) regulations mandate such declarations to prevent fraudulent practices and ensure transparency in share ownership. The declaration must be made within 30 days from the date on which the person becomes a beneficial owner of the share.

The concept of beneficial ownership pertains to the individual or entity that ultimately benefits from the ownership of shares, despite not being the registered owner of the same. This can occur through the use of complex ownership structures such as trusts, nominee arrangements, or other intermediaries. The declaration of beneficial interest is critical in identifying the ultimate beneficial owner and preventing the misuse of corporate structures for illegal activities such as money laundering, tax evasion, or financing terrorism.

The declaration must contain the following information:

1. Name, address, and PAN (Permanent Account Number) of the declarant.
2. The name of the company in which the share is held.
3. The nature of the interest in the share.
4. The date on which the declarant became a beneficial owner of the share.
5. The number and class of shares in which the declarant holds a beneficial interest.

The Companies Act, 2013, also requires companies to maintain a register of declarations of beneficial ownership. The register must be kept at the registered office of the company and must be open for inspection by any member of the company without charge.

Legal Framework for Declaration of Beneficial Interest:

The Companies Act, 2013, and the SEBI regulations prescribe the legal framework for the declaration of beneficial interest in shares. As per the provisions of the Companies Act, 2013, every individual or entity holding shares in a company is required to disclose the details of their beneficial ownership in the prescribed format. This declaration is mandatory at the time of the initial public offering, and subsequently, every time there is a change in beneficial ownership.

SEBI regulations require the disclosure of the beneficial owner of shares for all listed companies. The regulations mandate that every promoter, shareholder holding more than 25% of the share capital or voting rights, and every person holding control over the management of the company must disclose their beneficial ownership in the company. These disclosures must be made within a specified time frame and in the prescribed format.

In addition to the Companies Act and SEBI regulations, the Income Tax Act, 1961, also requires the disclosure of beneficial ownership for tax purposes. The Act mandates that the beneficial owner of shares must be identified to determine the tax liability of the individual or entity.

Penalties for non-compliance:

The Companies Act, 2013, imposes penalties on companies and individuals who fail to comply with the provisions relating to the declaration of beneficial ownership. If a company fails to maintain a register of beneficial owners or fails to file the necessary returns with the Registrar of Companies, the company and every officer of the company who is in default shall be punishable with a fine.

If a person fails to make a declaration of beneficial ownership or makes a false declaration, he shall be punishable with imprisonment for a term of up to one year or with a fine of up to Rs. 50,000 or with both.

Rationale behind the declaration of beneficial ownership:

The declaration of beneficial ownership serves various purposes. They are:

1. To promote transparency and prevent the misuse of corporate structures for illicit purposes such as money laundering, terrorist financing, tax evasion, and other financial crimes. 
2. The declaration of beneficial ownership enables regulators and law enforcement agencies to identify the real owners of shares and to trace the flow of funds through the corporate structure. This helps in the prevention and detection of financial crimes.
3. It helps in preventing fraudulent practices, such as money laundering, tax evasion, or financing terrorism, by identifying the ultimate beneficial owner of shares. 
4. It also ensures transparency in share ownership and prevents the misuse of corporate structures for illegal activities.
5. The declaration of beneficial ownership is also critical for corporate governance. It helps in identifying conflicts of interest and related-party transactions, which can impact the financial performance of the company. 
6. The identification of beneficial owners also helps in preventing hostile takeovers, as it enables companies to identify potential acquirers and take appropriate measures to safeguard their interests.
7. The declaration of beneficial ownership is also important for investors. It helps investors in making informed investment decisions by providing them with information about the ultimate owners of the company. 
8. It also helps in assessing the risk associated with the investment and ensuring transparency in corporate governance.

Beneficial ownership and taxation:

The declaration of beneficial ownership has implications for taxation as well. In India, dividends on shares are subject to tax. The rate of tax depends on the status of the shareholder and the amount of dividend received. The declaration of beneficial ownership enables the tax authorities to determine the correct person who is entitled to receive the dividend and to levy the tax accordingly.

Challenges in Implementation:

The implementation of the beneficial ownership framework in India has faced various challenges. One of the primary challenges is the lack of clarity regarding the definition of beneficial ownership. The concept of beneficial ownership is complex and can involve various intermediaries and structures. There is a need for a clear and concise definition of beneficial ownership to ensure consistent and accurate reporting.

Another challenge is the lack of standardization in reporting requirements. Different regulators require different formats and information to be disclosed, which can lead to confusion and errors in reporting. There is a need for standardized reporting requirements to ensure consistency in reporting and reduce the compliance burden on companies.

The identification of beneficial ownership can also be challenging, particularly in cases involving complex ownership structures or nominee arrangements. There is a need for robust due diligence processes and verification mechanisms to ensure accurate reporting and prevent the misuse of corporate structures.

Conclusion:

The concept of beneficial ownership is an important aspect of corporate governance and transparency. In India, the Companies Act, 2013, recognizes the concept of beneficial ownership and requires companies to maintain a register of beneficial owners of shares. Every person who holds a beneficial interest in any share of a company is required to make a declaration to the company, specifying the nature of his interest in the share. The declaration must contain certain information, and penalties are imposed for non-compliance.

The declaration of beneficial ownership promotes transparency and helps in the prevention and detection of financial crimes. It also enables shareholders to exercise their rights and responsibilities effectively. The declaration of beneficial ownership has implications for taxation as well, as it enables the tax authorities to determine the correct person who is entitled to receive the dividend and to levy the tax accordingly. Overall, the declaration of beneficial ownership is an important tool for promoting good corporate governance and transparency in the Indian corporate sector.