By Bharat Varadachari
Identification of the beneficial owners behind legal entities remains a tricky yet crucial endeavour in the global fight against money laundering and terrorist financing. Despite well-intentioned efforts, country-level initiatives targeted at improving transparency have often lacked clarity and incisiveness.
Drafting the original Companies (Significant Beneficial Owners) Rules, 2018, would have entailed a complex exercise given the government was faced with multiple choices for key design elements like applicability, exemptions, definition of compliances and penalties. Countries like the UK, Singapore and Hong Kong introduced nuanced guidelines to demystify the concepts when they embarked on similar journeys. The Rules prescribed in June 2018 stirred much debate due to several open and interpretative issues. While the latest amendments, no doubt, address many of these issues, they could have covered further ground.
A question that merits discussion is the extent to which the amended provisions may help promote the identification of the real ownership, influence or control of businesses operating in the country, where needed.
1. In certain cases, the Rules issued by the ministry of corporate affairs (MCA) in 2018 required the senior managing official (SMO) of a company to be treated as the significant beneficial owner (SBO), where no SBO was identified. Several EU countries treat SMOs or equivalents as the ultimate beneficial owner where the qualifying criteria are not met or cannot be verified (Denmark, Ireland, Hungary, Italy). Countries like the UK, Singapore and Hong Kong do not require a default treatment of one or more executives as SBO-equivalent, if the prescribed conditions are not satisfied. A specific entry in the prescribed register to the effect that there is no person who meets the qualifying criteria is the only requirement. Arguably, this approach is suitable for countries with stronger monitoring and enforcement mechanisms and relatedly higher levels of compliance and self-governance.
While the amended Rules in India have dispensed with the approach of identifying SMO, the new definition of the term significant influence treats any person with the power to participate in the operating and financial policy decisions of the company as an SBO. Identifying persons who are visibly essaying their assigned roles in an organisation or whose details are available with the government (for example, directors), as SBOs, may not serve any useful purpose. But given the potential risks, the MCA is possibly seeking maximum information from senior executives occupying positions of influence in a company to assign greater accountability over the conduct of its financial and operating affairs.
2. The amended Rules explicitly provide that the reporting responsibilities with respect to SBOs only apply to companies incorporated in India. Potential misuse of legal forms of presence is not restricted to companies and given that the (MCA) is also the administrative ministry for LLPs and partnership firms in India, the SBO reporting requirements may be extended to these legal forms in due course.
3. Borrowing a page from the widely followed global approach and the AML/KYC guidelines issued by SEBI/RBI, companies whose shares are listed on a stock exchange in India or outside India or subsidiaries of such listed companies could have also been exempted from SBO regulations, given their existing stringent disclosure requirements.
4. The amended Rules place strong emphasis on a company s investigative process but prescribe no penalties for failure to issue the mandated enquiry notices or refer matters to the NCLT where it receives unsatisfactory or no responses. Given the sheer volume of compliance across the country, effective monitoring/audit mechanisms will be needed for verification and enforcement of the compliances in identified high-risk cases.
With the amended Rules and revised forms now notified, speedy issuance of supplementary guidance/FAQs would go a long way in ensuring that corporate India is better equipped to fulfil its compliance obligations.
-The author is national leader, Global Compliance and Reporting, EY India. Views are personal