Oversight on the beneficial interests in shares just got tightened with the Corporate Affairs Ministry (MCA) now mandating that companies designate a person responsible for furnishing information and extending cooperation to authorities on this front.

This move comes from MCA recently sending advisories to companies to comply with the company law provisions on Beneficial Ownership in shares.

A designated person at the company level is expected to aid the Registrar of Companies or other MCA authorities as a single point of assistance in their inquiries on the beneficial interest of shares and ascertaining the actual owners of enterprises. Also, companies would now be required to disclose the details of the designated person in the annual return filed with the Registrar of Companies (RoC).

Put simply, Beneficial interest in shares refers to the ownership interest or rights associated with shares of a company held by an individual or entity, even if the legal title or ownership of those shares is registered in someone else’s name.

It signifies the true or “beneficial” owner’s interest in and control over the shares despite not being the registered shareholder.

WHO CAN BE DESIGNATED PERSON

MCA has now specified that a designated person could be a Company Secretary or a Key Managerial Personnel (other than a company secretary) or every director (in case there is no company secretary or KMP).

Interestingly, the new requirement has been straightaway enforced with MCA bringing in a “deeming provision” whereby till a company appoints a designated person, the existing Company Secretary or every Managing Director or Manager or every director would be regarded as the designated person.

This MCA move to bring more accountability and responsibility in the reporting of beneficial interest in shares comes days before the Financial Action Task Force (FATF), a global watchdog on money laundering and terror financing, is set to begin its on-site evaluation of India’s measures to combat money laundering.

Also, India’s activities are set to be discussed at the FATF Plenary meeting in June 2024.

The government has since 2018 been taking several measures to bring transparency in the manner in which shares of companies are held and align the country’s regulatory framework with the recommendations of the FATF.

Of late, beneficial ownership in the shares of a company has become a hot topic. Who is the ultimate owner of the entity is an important question, and the answer has a toggling effect on multiple areas, with the key one being a gateway to related parties, said a Partner of a Big 4 accounting firm.

“This latest MCA move is a welcome move in the direction towards ensuring transparency”, this partner said.

Amarjit Chopra, former ICAI President, said that MCA should have specifically named ‘Chief Financial Officer’ as a person who could be appointed as a designated person and pointed out that the CFO name is absent in the latest rule change.

The Companies Act 2013 casts obligations on the person who holds beneficial interest to communicate the same to the company, who in turn was required to file specific forms with the MCA. However, MCA has recently found several breaches in compliance with the beneficial interest provisions, prompting it to send advisories to ensure rigorous compliance, sources said.

Under the current company law, the definition of ‘beneficial interest’ in the shares of a company is quite broad. It includes, directly or indirectly, through contract or otherwise, the right of a person to exercise rights attached to such shares or receive or participate in any dividends or other distribution in respect of the shares. MCA has pegged the threshold for significant beneficial ownership at 10 per cent.

WHY BENEFICIAL INTEREST MATTERS

Beneficial interest matters for several reasons, such as ownership and control, voting rights, taxation, beneficiary rights, and proxy voting.

Beneficial interest helps establish who has the right to vote on company matters. Shareholders with beneficial interests may exercise these rights even if they aren’t the legal owners.

It can impact tax liabilities, as different tax rules may apply to beneficial owners compared to legal owners. This is important for tax planning.

Identifying the beneficial interest in shares is vital for governance, taxation, transparency, and protecting the rights of the ultimate owners of the shares.

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