BEN-2 and its Compliance in India

Why penal action under the provision of sub-section (11) of Section 90 of the Companies Act, 2013, should be initiated against the Company and Officer in Default and how startups can take the benefit of Lesser penalties under Section 466 B?

Penal action under sub-section (11) of Section 90 of the Companies Act, 2013 can be initiated against a company and its officer in default for non-compliance (Delay in filing BEN-2) with the provisions related to Significant Beneficial Ownership (SBO). The objective of initiating such penal action is to ensure compliance with the disclosure requirements regarding significant beneficial owners and to promote transparency within corporate structures.

The Companies Act, 2013 mandates that every company must identify and maintain a register of significant beneficial owners (SBO) where it is mandatory for companies to diligently adhere to these provisions and make accurate disclosures within the specified timelines.

Startups can benefit from lesser penalties under Section 466 B of the Companies Act, 2013 to promote startups and small companies by reducing the burden of penalties for certain non-compliances. Startups can take advantage of this provision to mitigate the penalties imposed on them for non-compliance with the SBO requirements. By availing the benefits of Section 466B, startups can request the waiver or imposition of minimum penalties. This provision acknowledges the challenges faced by startups and provides them with an opportunity to rectify non-compliances while minimizing the financial burden of penalties.

To avail the benefits under Section 466B, startups should proactively communicate with the regulatory authorities, such as the Registrar of Companies (RoC) / MCA and submit a request for either waiver or imposition of minimum penalties, along with supporting documents and justifications. Startups should consult with Compliance Calendar, having a Team of company secretaries who are well-versed in company law to navigate the process effectively.

By understanding the provisions of Section 466B, startups can address their non-compliance with SBO regulations while availing the benefits of reduced penalties, thus promoting their growth and compliance within the legal framework.

What is Compliances of BEN-2?

Firstly, every company in India and individuals must understand and comply with these provisions to ensure proper disclosure and transparency regarding beneficial ownership of shares as required by the Companies Act, 2013. Compliance with the provisions of sub section (4) of Section 90 of the Companies Act, 2013 and Rule-4 of the Companies (Significant Beneficial Owners) Rules, 2018 is mandatory for filing of Form BEN-2. 

Significant Beneficial Owner (SBO) Compliance in India

It refers to the regulatory requirements imposed by the Companies Act, 2013, with regard to identifying and reporting individuals who hold significant beneficial ownership in a company. The aim of these regulations is to enhance transparency and prevent the misuse of corporate structures for illicit activities.

As per Section 90 of the Companies Act, 2013, an individual is considered a significant beneficial owner if they meet one or more of the following criteria: -

1. Directly or indirectly holding at least 10% of the shares in the company.

2. Directly or indirectly holding the right to exercise or the actual exercise of significant influence or control over the company.

3. Directly or indirectly holding or receiving at least 10% of the total distributable dividend or any other distribution.

The Companies (Significant Beneficial Owners) Rules, 2018 read with Companies (Significant Beneficial Owners) Amendment Rules, 2019, detailed guidelines on identifying and reporting significant beneficial owners (SBO). According to these rules, every company is required to maintain a Significant Beneficial Owner Register (SBO Register) to record the details of such owners and must be regularly updated and made available for inspection by the appropriate authorities like ROC/MCA.

Further, every significant beneficial owner (SBO) is obligated to disclose their interest to the company within the specified timeline. The company, in turn, is responsible for reporting these details to the Registrar of Companies (RoC) through the appropriate filing forms, such as Form BEN-1 and Form BEN-2.

Legal Provisions 

After Introduction of this Rule, Every SBO or shareholder is obligated to furnish the declaration within 90 days from the applicability of the rule in BEN-1.

In case a shareholder withholds information or provides incorrect or incomplete information, the company should approach the National Company Law Tribunal (NCLT) for appropriate action against the SBO.

Once the declaration is received from the SBO, the company must file the BEN-2 Form within 30 days. The Form BEN-2 must be signed by a director, manager, CEO, CFO, or company secretary of the company. It also needs to be certified by a practicing professional such as a Chartered Accountant (CA), Company Secretary (CS), or Cost and Management Accountant (CMA) in whole-time practice.

• Significant (Indirect) Control refers to control exercised by owners through one or more layers of companies in the reporting company. This means that the owners have control over entities that, in turn, exert control over the reporting company.

• Significant (Indirect) Influence, on the other hand, refers to the owner having influence in those entities that subsequently influence the reporting company. In this case, the owner possesses influence over entities that have an impact on the operations or decisions of the reporting company.

Exemption Given for delay filing in the year 2020 at very first-time reporting in India: pursuant to General Circular No. 30 of 2020 dated 28th September 2020 (CFSS-2020) no late filing fees is payable if BEN-2 is filed by 31st December 2020.

Concept of "Beneficial Interest"

Section 89(10) of the Companies Act, 2013 defines the concept of "beneficial interest" in relation to shares. According to this section, for the purposes of Section 89 and Section 90 of the Companies Act, beneficial interest in a share includes the following:

1. The right or entitlement of a person, either alone or together with any other person, to exercise or cause to be exercised any or all of the rights attached to such share; or

2. The right or entitlement of a person, either alone or together with any other person, to receive or participate in any dividend or other distribution in respect of such share.

In simpler terms, beneficial interest refers to the ownership rights and entitlements associated with a share, whether it involves the exercise of rights attached to the share or receiving dividends and other distributions related to the share. This definition encompasses both direct and indirect ownership, including rights held through contracts, arrangements, or any other means.

Concept of "Registered Owner"

As per Rule 2(1)(c) of the erstwhile Rules, the term "registered owner" is defined as follows: a person whose name is entered in the register of members of a company as the holder of shares in that company, but who does not hold beneficial interest in such shares.

In other words, the registered owner is the individual whose name appears in the official register of members of a company as the legal holder of shares. However, it is important to note that the registered owner may not necessarily be the beneficial owner of those shares. The beneficial owner refers to the individual or entity who enjoys the benefits and rights associated with the shares, even if their name is not listed in the register of members.

This distinction between registered ownership and beneficial ownership is significant in cases where shares are held on behalf of another person or entity, such as in the case of nominees or trustees. While the registered owner's name is officially recorded, the beneficial owner ultimately holds the economic and ownership rights related to the shares. It is essential for companies to maintain accurate records of both registered owners and beneficial owners to ensure compliance with legal requirements and to facilitate proper governance and communication with shareholders.

Penalty for Non-Compliance

Non-compliance with SBO regulations can lead to penalties and legal consequences for both the company and the significant beneficial owner. Hence, it is crucial for companies and individuals to understand and fulfill their obligations under the Significant Beneficial Owner compliance framework in India.

Like Under provisions of sub section (11) of Section 90 talks about the delay in reporting of BEN-2, where the company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day, after the first during which such failure continues, subject to a maximum of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for each day, after the first during which such failure continues, subject to a maximum of one lakh rupees.

Relaxation to a reporting for some companies in India 

As per Rule 8 (b) of the Companies (Significant Beneficial Owners) Rules, 2018, there is a relaxation provided to a reporting company. If Rule 8(b) is applicable to a company, despite having a clearly identifiable Significant Beneficial Owner (SBO), the company is not required to file the particulars of such SBO in Form BEN-2.

The purpose of this relaxation is to streamline the reporting requirements for companies and to avoid duplication of information. Rule 8 (b) specifies certain conditions under which a reporting company is exempted from filing Form BEN-2 for a clearly identifiable SBO. However, it is important to note that the exemption is subject to meeting the criteria mentioned in the rule.

The specific conditions and criteria for availing the relaxation provided by Rule 8 (b) may vary and are outlined in the Companies (Significant Beneficial Owners) Rules, 2018. Companies need to carefully assess their situation and determine if they meet the requirements for exemption from filing Form BEN-2 for a clearly identifiable SBO.                                        

Understanding Penal Action and Lesser Penalties for Startups and Small Company: Leveraging under Section 466 B of the Companies Act 2013

Startups, being essential drivers of economic growth, can take advantage of lesser penalties under Section 466B of the Companies Act, 2013-

• Waiver or Minimum Penalties: Section 466B offers startups the opportunity to request a waiver or imposition of minimum penalties for non-compliance with SBO requirements. This provision recognizes the challenges faced by startups and aims to reduce their financial burden while promoting their growth.

• Compliance Promotion: By availing lesser penalties, startups are encouraged to rectify non-compliances and promote adherence to the Companies Act, 2013. It fosters a culture of compliance and supports startups in aligning with legal requirements.

• Communication and Documentation: To avail the benefits under Section 466B, startups should proactively communicate with the regulatory authorities, such as the Registrar of Companies (RoC), and submit a request with supporting documents and justifications. Consulting legal professionals ensures accurate compliance and enhances the chances of a favorable outcome.

Calculation of penalty under Section 90 (11) of the Companies Act, 2013

Suppose if Company “C” Filed the BEN-2 in delay on 256 days where penalty will be calculated as given below and The proposed minimum and maximum penalty on company and every officer of the company who is in default shall be as follows: -

Fee Applicability for Filing BEN-2 with MCA

Fee for filing e-Forms or documents in case of company have share capital

Fee for filing e-Forms or documents in case of company not have share capital

Fee applicable: Rupees 200

Additional fee rules (for delay filing on forms BEN-2)

BEN-2 By Every foreign company

Every foreign company that establishes a business presence in India through a Wholly Owned Subsidiary (WOS) is required to comply with the Companies (Significant Beneficial Owners) Rules. This includes filing the BEN-2 form. As per the rules, the foreign company must identify and disclose any significant beneficial owners who hold 10% or more beneficial interest in the company. The BEN-2 form is used to provide the necessary details of these significant beneficial owners. By filing Form BEN-2, foreign companies demonstrate their commitment to transparency and adherence to Indian corporate governance norms. This promotes a trustworthy business environment and strengthens the regulatory framework governing foreign investments (FDI) in India. Therefore, when a foreign company establishes a WOS in India, it falls under the purview of these rules, and the WOS must comply with the requirement of filing Form BEN-2 to provide accurate information about significant beneficial ownership.

Conclusion 

Initiating penal action under sub-section (11) of Section 90 is crucial for enforcing compliance and maintaining transparency within corporate structures. Startups can leverage the benefits of lesser penalties under Section 466 B to reduce their financial burden and promote growth. By understanding the importance of compliance and seeking professional guidance, startups can navigate the regulatory landscape effectively and contribute to a robust business environment.

The  filing of Form BEN-2 is a crucial requirement under the Companies (Significant Beneficial Owners) Rules. It is mandatory for reporting companies to submit Form BEN-2 within 30 days of receiving the declaration and the timely filing of Form BEN-2 is crucial for companies to fulfil their obligations, promote transparency, and adhere to the requirements of the Companies (Significant Beneficial Owners) Rules. In case of delay reporting, Initiating penal action under sub-section (11) of Section 90 is crucial for enforcing compliance and maintaining transparency within corporate structures. Start-ups can leverage the benefits of lesser penalties under Section 466B to reduce their financial burden and promote growth.

To ensure a seamless and accurate filing process of BEN-2 in India, companies take the guidance of Compliance Calendar having team of company secretaries or practicing professionals like Chartered Accountants, Company Secretaries, or Cost and Management Accountants, experts who can provide guidance on the proper completion and certification of the BEN-2 form, ensuring compliance with the regulatory requirements.