This article has been written by Bhavana Nair, a student of Army Institute of Law, Mohali
A beneficial interest is the right to profit from the ownership of another party’s shares. When discussing trusts, the term “beneficial interest” is frequently used to describe when someone has a vested interest in the trust’s assets. A person’s right under a contract they have with another party is known as a beneficial interest (third party).
“A right or expectancy in something (such as a trust or an estate), as opposed to legal title to that thing,” according to Black’s Law Dictionary, is referred to as a “beneficial interest.” A beneficial interest is further separated from the rights of someone who holds title to the assets and/or performance obligations, such as a trustee, but who does not participate in the advantages, such as an official.
In order to meet the requirement for the minimum number of members, one frequently seen procedure during the establishment of wholly-owned subsidiary companies is the subscription of shares through a person or persons who act as the company’s nominee. As soon as the subsidiary company is incorporated, the company becomes a registered member and the nominee becomes a beneficial owner.
A registered owner is the other type of ownership. The registered shareholders—also known as the “registered or ostensible member”—have a legal interest in the shares. A person who has their name listed in the Register of Members as the owner of shares in a corporation but does not have a beneficial interest in those shares is referred to as a registered owner.
Specific Rights of Beneficial Owner
- To exercise any or all the rights attached to the shares.
- To receive and participate in the dividends
- To receive and participate in other distribution in the shares (right offer, bonus shares etc).
Declaration of beneficial interest in shares
A may occasionally register shares of which he is the true owner in the name of B. B is the trustee, and A is the beneficial owner. In other words, B acts as A’s trustee when holding the shares. Now that just B’s name will be listed in the company’s member register, B alone is the member entitled to the rights bound by membership liability. Under the previous regime, the company was not permitted to acknowledge the existence of such a trust. However, Section 89 of the current company law requires that individual to declare to the company the name and other information of the person who possesses a beneficial interest in the shares in the way and within the time frame specified.
Every person who has or obtains a beneficial interest in shares of a company is required by the Act to file a statement outlining the nature of the interest, the person whose name the shares are registered in the company’s books, and any other information that may be prescribed. Both the registered owner and the beneficial owner must submit a declaration if any changes are made to these details, along with any additional information that may be required by law. The central government has the power to enact regulations that specify how beneficial ownership and interest should be held and disclosed.
Within 30 days of the date the declaration with the specified fee was received, a notation of the declaration must be added to the members’ register and the registrar must be notified of it in the prescribed manner. According to Section 403, a fee would be added for a delayed filing. The beneficial owner who fails to make the requisite declaration will not be able to enforce his rights. The company’s duty and right to pay dividend to the person who is on the register is not to be prejudiced.
Prescribed form
Every person who owns or acquires a beneficial interest in a company’s shares is also required to submit a declaration to the company in duplicate by way of form MGT-5 within 30 days of acquiring the beneficial interest, describing the nature of his interest and the details of the person in whose name the shares are registered in the company’s books. The Companies (Management and Administration) Amendment Rules, 2016 eliminated the demand that the declaration be completed in duplicate.
Within 30 days of receiving the declaration, the company must file a return in form MGT-6 with the Registrar and make a record of the declaration in the register of members.
Punishment
If the registered owner and beneficial owner fail to file the declaration without a valid explanation, they may be subject to fines of up to Rs. 50,000 or, if the default is ongoing, Rs. 1000 per day. The company and each defaulting officer become subject to a punishment of Rs. 500 extending up to Rs. 1000 for each day of failure if the company fails to file the return with the register within the time frame prescribed in Section 403(1)(first proviso) as provided under Section 89(5) of the Companies Act, 2013.
As held in Hardoon v. Belilios, it is the beneficiary who is ultimately liable for the calls. He must indemnify the trustee against calls and perhaps the company may directly sue him in the rights of the beneficiary.
The company could however take notice of a trust for its own benefit without entering it in the register. In S Parameswari v. Kamadhenu Metal Rolling Mills (P) Ltd a managing director’s wife filed a winding-up lawsuit after arguing with her husband and wanted to teach him a lesson. Her husband provided all funding for the shares she owned. The court ruled that the firm was permitted to take note of this fact and bring it to the court in order to demonstrate that the petition was not legitimately brought to put pressure on the managing director to resolve the family conflict.
Investigation of beneficial ownership
As stated in Section 90, the Central Government may appoint one or more competent people to examine and provide a report regarding the beneficial ownership of any shares or class of shares where it appears that there are sufficient grounds to do so. Such an investigation shall be subject to the provisions of Section 216 as if such an investigation had been requested pursuant to that section.
Procedure for Investigation
The Central Government may occasionally be required by the public interest to be aware of the people who have a financial interest in a company, control its policies, or have a major impact on them. In light of this, Section 216 states that the Government may designate one or more inspectors to look into and report on the membership of the company and other issues pertaining to it when there is a good reason to do so. To determine who is or has been financially interested in the success or failure of the company, whether real or apparent, or who is able to control or materially influence the company’s policy, the tribunal has the authority to order that the affairs of the company be investigated with regard to ownership while dealing with any proceedings before it.
The government is then required to appoint inspectors. The inspector will have the authority to look into any circumstances that seem to point to the existence of an arrangement or understanding that, while not legally enforceable, has been or is likely to be followed by the company in practise, subject to any limitations imposed by the government.
Difference between Beneficial Owner and Significant Beneficial Owner
Every person, including trusts and people residing outside of India, who acts alone, jointly, or via one or more other people acting in trust, has beneficial interests.
Significant Beneficial Owner is defined as a benefit owner with a minimum 10% ultimate beneficial interest who is not listed in the company’s membership register. The percentage of interest must be checked in order to verify the relationship between Beneficial Owner and Significant Beneficial Owner. Even if the interest is greater than or less than 10%, the beneficial owner is still required to disclose information as per Section 89. However, the Significant Beneficial Owner’s disclosure requirement won’t be fulfilled unless the interest is at least 10%.
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