These will help create a culture of transparency and healthy corporate governance in the country.
A recent Transparency International report states that G20 countries’ legislative framework to tackle anonymous company ownership has been slow-paced. The misuse of corporate vehicles for tax evasion, money laundering and other illicit purposes has drawn the attention of policymakers across jurisdictions , especially after the leak of 11.5 million confidential documents from the Panamanian law firm Mossack Fonseca in 2016. This brought ‘beneficial ownership’—in which a person/legal entity enjoys the benefits of ownership even though the actual title to shares/property is another’s name— to the centre stage by exposing how complex corporate structures, using chains of corporate vehicles, have been used to conceal the beneficial ownership in offshore tax havens. Tthe Transparency International Report of 2017 showed no significant progress for India, and marked its framework for identifying beneficial owners as simply “average”. India was criticised for the lack of a specific definition for ‘beneficial ownership’ in the Companies Act, 2013. Notably, on several of these counts, India has now made significant progress, particularly after the ministry of corporate affairs (MCA) notified the ‘Companies (Significant Beneficial Owners) Rules, 2018’ (Rules) in June this year.
A robust disclosure regime, with transparency on beneficial ownership and control, is crucial to building confidence in corporates. The OECD recognises that a sound corporate governance infrastructure should combine transparency, accountability and integrity, noting that such disclosures are particularly relevant for jurisdictions that allow bearer shares, nominee shareholder and flee clauses. It also noted that the problem in achieving the same is further compounded by strict bank and corporate secrecy laws that prohibit company registrars, financial institutions, lawyers, accountants, and others from disclosing any information regarding beneficial ownership and control. . The G20/OECD ‘Principles of Corporate Governance’ also highlights the imperative for investors to be informed about the ownership structure of firms (including group relations), and more explicitly, the position of their rights, vis-a-vis the rights of other owners. Such disclosures provide investors and regulators with crucial information about the nature, objectives, and thresholds of ownership within such firms..It also helps identify potential conflicts of interest, related party transactions, influence of owners, including special voting rights, and shareholding through multiple intermediary structures.
The Financial Action Task Force (FATF) released the ‘Guidance on Transparency and Beneficial Owners’ (Guidance) in 2014 which recognises that that out of the several mechanisms available to ensure availability of beneficial ownership information on companies, jurisdictions may require company registries to obtain and hold up-to-date information on beneficial ownership. The UK requires companies to disclose in a central register the details of people with significant control. Singapore, too, mandates similar disclosures on beneficial owners or individuals/legal entities with significant “interests” or “control”.
In India, the Companies Act provisions on beneficial ownership draw from theCompanies Law Committee’s recommenadations that a definition of beneficial ownership be provided apart from companies being mandated to maintain a public register of beneficial owners , with fines and criminal prosecution prescribed for violations. . To this end, the Sections 89 and 90 of the principal legislation were amended via the Companies (Amendment) Act 2017. The recently notified Rules on beneficial ownership —even though not intended to counter money laundering—facilitate regulators in identifying natural persons responsible for the underlying activity of concern or having information to further investigations.
The Rules clarify the threshold of ultimate beneficial interest to be not less than 10%. Keeping in mind the complicated structures created to evade transparency , this has been extended to trusts and partnership firms, including global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures. within the ambit of this provision. While both Singapore and the UK draw the threshold at 25% for determining significant influence or control, the EU proposes to set this at 10% to target laundering.
SEBI-regulated entities have been kept out of the mandate of these rulesIt must be noted that under the existing Indian framework on money laundering, exemptions are provided to listed companies
The Rules also specify disclosure of personal data, in the form of declarations by beneficial owners , including name and address of the company, shares held in physical and demat form, the value of shares in nominal and paid-up form and particulars of the holder of the significant beneficial interest including the name, occupation and nationality. There is a requirement to trace explicit details of the significant beneficial interest—date of creation/acquisition of significant beneficial interest, mode of acquisition of the interest, nature of the interest and percentage of (direct or indirect) voting rights. These details are also mandated from the person from whom the significant beneficial interest was acquired.. The onus of making these declarations rests on the company, and not on the regulator, thereby reducing the ex-ante cost for the regulator.
A FATF report states that shell companies, trusts, certain legal arrangements, nominee shareholders and intermediaries are used to conceal beneficial ownership. As of June 2018, Mossack Fonseca was unable to identify 70% of 28,500 active companies in the British Virgin Islands, as well as 75% of companies in Panama. The regulator in India has taken a considerable step forward in clarifying explicit rules for how corporate structures can be uncomplicated for the purpose of better governance. Well-designed and well-implemented rules should supplement the existing framework on money laundering and will assist both companies and enforcement agencies.
By- Shohini Sengupta & Shehnaz Ahmed, Authors are senior resident fellows in the corporate law and financial regulation vertical of the Vidhi Centre for Legal Policy