How to Identify and Report Significant Beneficial Owners Under Section 90 of the Companies Act 2013

Kaustav Chowdhury
54 minutes ago
8 min read

Corporate transparency has become a central focus of Indian company law, particularly with the introduction of provisions targeting the identification of individuals who ultimately own or control companies. Section 90 of the Companies Act, 2013, read with the Companies (Significant Beneficial Owners) Rules, 2018 (as amended in 2019), establishes a comprehensive framework requiring companies to identify and report Significant Beneficial Owners (SBOs). This article provides a step-by-step guide for compliance professionals and company secretaries on how to identify SBOs, file the required declarations and returns, and navigate the consequences of non-compliance.

Background and Legislative Framework

Section 90 was introduced to address the issue of opaque ownership structures where the true owners of shares remain hidden behind layers of nominees, trusts, and corporate entities. The provision creates a dual obligation: individuals who qualify as SBOs must declare their status to the company, and the company must report these declarations to the Registrar of Companies (ROC).

The Companies (Significant Beneficial Owners) Rules, 2018 were initially notified to operationalize Section 90. However, these rules underwent significant revision through the Companies (Significant Beneficial Owners) Amendment Rules, 2019, notified on February 8, 2019, which introduced clearer definitions and reduced the threshold for SBO identification from 25% to 10%.

The key definitions under this framework are as follows:

Registered Owner: A person whose name appears in the register of members of a company but who does not hold the beneficial interest in such shares.
Beneficial Owner: The true or real owner who enjoys the benefits of ownership through the registered owner.
Significant Beneficial Owner (Rule 2(1)(h)): An individual who, acting alone or together, or through one or more persons or trusts, holds indirectly or together with direct holdings: not less than 10% of shares; not less than 10% of voting rights; the right to receive or participate in not less than 10% of total distributable dividend or other distributions; or the right to exercise or actually exercises significant influence or control over the company.

Section 90(4A) places an affirmative duty on every company to take necessary steps to identify individuals who are SBOs and require them to comply with the declaration requirements. This means companies cannot simply wait for declarations to arrive; they must proactively seek out SBO information.

Step 1: Determine Whether Your Company Is Subject to SBO Requirements

Before initiating the identification process, confirm that your company is not exempt from the SBO framework. The following categories of entities are exempt from SBO reporting obligations:

Holding by the Central Government or State Government, provided the government holds not less than 51% of the paid-up share capital of the company
Investment vehicles regulated by SEBI, including Mutual Funds, Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs)
Entities regulated by the Reserve Bank of India, including Non-Banking Financial Companies (NBFCs) and Core Investment Companies (CICs)
Investment vehicles regulated by the Insurance Regulatory and Development Authority of India (IRDAI)

If your company does not fall within these exemptions, you must proceed with SBO identification and reporting.

Step 2: Identify Persons Holding Shares on Behalf of Others

Review your register of members and identify any members who may be holding shares as nominees, agents, or on behalf of other individuals. Common indicators of beneficial ownership arrangements include:

Shares held by body corporates, partnership firms, trusts, or Hindu Undivided Families (HUFs)
Shares held by individuals who are known to act on behalf of others
Complex holding structures involving multiple layers of entities
Patterns of shareholding that suggest indirect control by a single individual

The company should examine its records, correspondence, and any other available information to trace the chain of ownership back to the individual who ultimately holds the beneficial interest.

Step 3: Issue Notice in Form BEN-4

Under Section 90(5), the company has the power to issue a notice to any person whom it has reason to believe is an SBO or holds shares on behalf of an SBO. Form BEN-4 is the prescribed notice for this purpose. The notice requires the recipient to provide information about:

The nature and extent of beneficial interest held
The identity of the individual who is the significant beneficial owner
Any changes in the beneficial ownership structure

The company must maintain a record of all notices issued and responses received. This step is critical for establishing the company's due diligence in identifying SBOs, particularly in cases where the ownership structure is not immediately transparent.

Step 4: Receive and Process Declaration in Form BEN-1

Once identified, every individual who qualifies as an SBO must file a declaration in Form BEN-1 with the reporting company. The key requirements for this declaration are:

The declaration must be filed within 30 days of acquiring SBO status
Any change in the SBO's particulars must also be declared within 30 days of such change
The declaration must contain accurate details of the individual's identity, the nature and extent of the beneficial interest, and the manner in which it is held

The company should establish internal procedures to receive, verify, and record BEN-1 declarations. A designated officer, typically the company secretary, should be responsible for overseeing this process and ensuring timely action on each declaration received.

Step 5: File Return in Form BEN-2 with the ROC

After receiving a BEN-1 declaration, the company must file a return in Form BEN-2 with the Registrar of Companies within 30 days of receipt. The form captures the details provided in the BEN-1 declaration and creates a public record of the SBO information. Following the MCA's 2024 amendment, the enhanced Form BEN-2 has been aligned with the V3 portal requirements, and companies must ensure that filings are made through the updated MCA portal interface.

The Board of Directors should ensure that the company secretary or a designated officer is authorized to file BEN-2 returns in a timely manner. Proper conduct of board meetings to authorize such filings is essential for maintaining compliance. For detailed guidance on board meeting procedures, refer to this guide on conducting board meetings under the Companies Act, 2013 and SS-1.

Step 6: Maintain the Register of Significant Beneficial Owners

Section 90(2) requires every company to maintain a register of SBOs in the prescribed form. This register must contain the following information:

The name, address, and other particulars of each SBO
The nature and extent of the beneficial interest held
The date on which the individual became an SBO
Any changes in the beneficial interest, including the date of each change

The register must be kept at the registered office of the company and is open for inspection during business hours. It forms part of the company's statutory records and must be preserved in accordance with the record retention requirements under the Act.

Step 7: Take Action Against Non-Compliant Persons

If a person fails to respond to a BEN-4 notice or provide the required information, the company has recourse under Section 90(7) to Section 90(9). The available enforcement mechanisms are:

The company may apply to the National Company Law Tribunal (NCLT) within 15 days for a restriction order on the shares held by the non-compliant person
The Tribunal must decide the application within 60 days of receipt
Restrictions that may be imposed include transfer restrictions and suspension of rights to dividend or any other distribution
The affected person may apply for relaxation of restrictions within one year; if no such application is made, the shares are transferred under Section 125(5) of the Act

The company must act promptly in pursuing non-compliant persons, as failure to do so may itself attract penalties under the Act.

Penalties for Non-Compliance

The penalty framework under Section 90 imposes significant financial consequences on both SBOs and companies. The MCA has granted the ROC expanded adjudication powers under Section 454 for imposing these penalties, enabling faster enforcement. For more details on the ROC's enhanced powers, see this article on MCA's expanded adjudication powers under Section 454.

For the Significant Beneficial Owner (Section 90(10))

Initial penalty: Rs 50,000
Continuing failure: Rs 1,000 per day, subject to a maximum of Rs 2,00,000

For the Company (Section 90(11))

Initial penalty for the company: Rs 1,00,000
Continuing failure: Rs 500 per day, subject to a maximum of Rs 5,00,000
Officer in default: Rs 25,000 initial penalty; continuing failure Rs 200 per day, subject to a maximum of Rs 1,00,000

Officers in default, including directors, must ensure that they hold valid Director Identification Numbers (DINs) and are properly appointed to avoid personal liability. For guidance on obtaining a DIN and appointing directors, see this resource on the DIN and director appointment process under the Companies Act, 2013.

Practical Implications

The SBO framework has several practical implications for companies and their advisors that must be carefully considered:

Companies with complex holding structures, particularly those involving trusts, partnership firms, and multi-layered corporate entities, must conduct thorough ownership mapping exercises to identify all individuals who meet the SBO thresholds
Private equity and venture capital-backed companies should review their shareholder agreements and nominee arrangements to ensure SBO compliance, as these structures frequently trigger the reporting requirements
The extension of the SBO framework to Limited Liability Partnerships through the LLP (Significant Beneficial Owners) Rules, 2023, notified on November 9, 2023, means that LLPs must now also identify and report their significant beneficial owners using a similar process
The MCA has intensified scrutiny of SBO compliance in recent years, with increased enforcement activity in 2024, making timely compliance more critical than ever for avoiding penalties and regulatory action
Companies undergoing restructuring, mergers, or acquisitions should conduct SBO due diligence as part of the transaction process to identify any gaps in compliance before completion

Compliance Checklist and Action Items

To ensure full compliance with Section 90 and the SBO Rules, companies should use the following checklist as a guide:

Verify whether any exemptions (government holding, SEBI/RBI/IRDAI regulated vehicles) apply to the company
Review the register of members to identify potential nominee or beneficial holders
Issue Form BEN-4 notices to all persons suspected of holding shares on behalf of others
Establish an internal process for receiving and verifying Form BEN-1 declarations
File Form BEN-2 returns with the ROC within 30 days of receiving each BEN-1 declaration
Maintain an up-to-date register of SBOs at the registered office
Report any changes in SBO status within the prescribed 30-day timelines
Apply to the NCLT within 15 days if any person fails to provide the required information
Conduct periodic reviews of the ownership structure, particularly after share transfers or changes in control
Document all steps taken to identify SBOs as evidence of the company's compliance with Section 90(4A)

Conclusion

Compliance with Section 90 of the Companies Act, 2013 is not merely a regulatory formality; it is a critical component of corporate governance and transparency. The SBO framework requires companies to look beyond the names in their register of members and identify the individuals who truly own and control the entity. With the MCA's increased enforcement activity and the expansion of the framework to LLPs through the 2023 Rules, companies and their advisors must prioritize SBO compliance as an ongoing obligation rather than a one-time exercise.

By following the step-by-step process outlined in this article, from verifying exemptions and identifying potential SBOs through issuing BEN-4 notices, processing BEN-1 declarations, filing BEN-2 returns, and maintaining proper registers, companies can ensure that they meet their obligations under the Act. Proactive compliance not only helps avoid the significant penalties prescribed under Sections 90(10) and 90(11), but also contributes to the broader goal of corporate transparency in India and strengthens the company's governance framework for the benefit of all stakeholders.