DNA MONEY EXCLUSIVE: Shell co crackdown – Centre tightens rules on ownership disclosure of companies

Seeking to crack down on shell companies and create transparency in the corporate structure, the government has come out with stringent rules on beneficial ownership to help it track down the true owner of a company.

Under the latest rules notified by Ministry of Corporate Affairs (MCA), the government has made it mandatory for the individuals holding 10% or more in a company but not registered as shareholder to declare their interest as "significant beneficial owners".

Experts said the true ownership of a corporate entity can be hidden by individuals by creating complex ownership structures for money laundering, tax evasion and benami transactions.

As per the Companies (Significant Beneficial Owners) Rules, 2018, significant beneficiary owner has been defined as an individual whose name is not registered with the company as the shareholder but is holding ultimate beneficial interest of not less than 10% in it. It will apply to both listed and unlisted companies.

Individuals have been given 90 days to file details with the company in which he or she holds the significant beneficial ownership. Similarly, companies have been asked to file the information on such shareholders with the Registrar of Companies (RoC) within 30 days. Those who fail to disclose the details will have to face legal action that includes a fine of Rs 10 lakh and imprisonment of a maximum of five years. The rules have come into effect from June 13.

The government will now be able to get access to beneficial ownership information and use it to prosecute individuals and companies involved in creating complex ownership structures, a government official involved in the drafting of the rules said.

Calling it a major step in the right direction towards curbing transactions, Sakate Khaitan, senior partner at Khaitan Legal Associates, said, "The rules will result in identifying the individual who is the ultimate holder of the company. This will lead to a significant amount of transparency in corporate structure and identification of the person who benefits from the company. The number of shell companies will come down drastically and will have a reverberating impact on the government's fight against black money," said Khaitan.

"These are quite good measures against money laundering. The only concern is that it increases additional compliance for the foreign portfolio investors, which may be worrisome," says Ramakant Rai, partner at Trilegal.

The rules apply to the individuals holding ultimate beneficial interest in companies, trusts as well as partnership firms. However, mutual funds, alternative investment funds, real estate investment trusts (Reits) and infrastructure Investment Trusts (InvITs) regulated under Sebi Act have been exempted from it.

If an individual fails to inform the company about beneficiary interest, the company will now be able to drag such person to the National Company Law Tribunal (NCLT), seeking a suspension of voting rights and dividend payout. So far, it was mandatory for the companies and not the individuals to declare any beneficiary interest in the filing to the RoC. However, if the individuals holding ultimate ownership did not declare it, the companies were not liable to file the information with the government.

PEELING LAYERS

• Individuals holding 10% or more in a company but not registered as shareholder would have to declare their interest as "significant beneficial owners"
   
• Individuals have been given 90 days to file details with the company in which he or she holds the significant beneficial ownership