A recent order by Registrar of Companies (RoC) penalising LinkedIn India for violation of significant beneficial ownership rules has put MNCs operating in India on tenterhooks. The RoC in this case fined Microsoft CEO Satya Nadella and LinkedIn’s global CEO Ryan Roslansky for failure to disclose that they were significant beneficial owners (SBOs) of LinkedIn India.

SBOs are natural persons who indirectly (or along with direct holdings) hold more than 10 per cent stake in an Indian company, or otherwise have ‘significant influence’ or ‘control’ over an Indian company.

In 2016, the Company Law Committee issued recommendations to curb the use of complex structures and chains of corporate vehicles to conceal real ‘owners’ behind companies engaged in money laundering or illegal transactions.

SBO rules were framed pursuant to these recommendations and mandate all individuals who are SBOs of an Indian company to submit a declaration to the company. Thereafter, the company is required to report such declaration to the RoC, and also maintain a register of its SBOs. Further, each company is required to issue a notice (in form BEN-4) to any individual it has ‘reasonable cause to believe’ are its SBOs and to all non-individual shareholders with over 10 per cent stake in the company.

Order, order

In LinkedIn’s case, the RoC order noted that no individual had submitted an SBO declaration to LinkedIn India, and hence the company did not make any RoC filing. It further noted that the company did not issue any BEN-4 notices to its non-individual shareholders. This was seen by RoC as a violation of the SBO rules as, in its view, LinkedIn India had individuals identifiable as SBOs and was required to undertake these compliances.

The RoC order is prone to challenge before the Regional Director on several grounds. First, identifying professional executives as SBOs may not be an appropriate reading of law. The SBO framework seeks to identify individual ‘owners’ while professionals CEOs are only acting in managerial capacity. A CEO’s role is distinct from that of an owner of the company, and may not imply significant influence or control in the sense required under law for an SBO.

Second, such an approach does not advance the purpose of SBO disclosures. Professional managers like CEOs are already subject to regulatory disclosures. For instance, directors on the board of an Indian company are required to submit detailed forms which are publicly available. Similarly, information regarding foreign managerial officers is usually readily available in foreign directories (especially if the foreign entity is listed).

Third, while the current SBO framework is robust enough to identify such individual owners, RoC’s stance in the LinkedIn order results in conflating managers with SBOs. There is room for debate whether the RoC’s order weakens the SBO framework by enabling actual individual owners to disclose details of professional managers as SBOs instead.

While clarity from the regulator would be helpful, all companies having any non-individual shareholders holding over 10 per cent stake should mandatorily issue BEN-4 notices to such shareholders. The legality of this requirement may itself be suspect, as the relevant provision in the SBO rules is framed pursuant to section 90(5) of the Companies Act, which limits BEN-4 issuance to cases where company has ‘reasonable cause’ to believe it has SBOs.

But considering the proactive approach adopted by RoCs in the recent past, companies should strictly comply with this requirement, as it only entails an intimation to be issued to its shareholders. It will further help showcase due diligence on the company’s part if ever called into question by the RoC.

Sen is Partner (General Corporate), and Shrivastava is Senior Associate (General Corporate), Cyril Amarchand Mangaldas