Beneficial ownership norms in focus as MNCs face scrutiny

The latest ruling by the Registrar of Companies (RoC) in the LinkedIn Technology Information case for violating significant beneficial ownership (SBO) norms has brought the amended rules into the spotlight.

Experts suggest that more entities, particularly multinational companies (MNCs), are expected to face greater scrutiny.

“Companies are closely watching this space.

"If Satya Nadella (Microsoft CEO) can be deemed a significant beneficial owner, then by that logic, several global CEOs would need to declare themselves as significant beneficial owners,” a senior executive at a Big Four firm said.

Section 90 of the Companies Act deals with identifying individuals who own a beneficial interest in a company.

It requires companies to disclose SBO details.

On May 22, the Ministry of Corporate Affairs (MCA) imposed a fine of Rs 27.1 lakh on Nadella and eight other executives for violating SBO norms related to LinkedIn Techn­ology Information, according to an order by RoC for Delhi and Haryana.

In its 63-page order, the RoC said that the company and its officers failed to send a notice, as mandatorily required by Rule 2A (2) of the Companies (Significant Beneficial Owners) Rules.

“LinkedIn, on its website, has disclosed that Ryan Roslansky reports to Nadella and is part of Microsoft’s senior leadership team... Nadella is also a significant beneficial owner of the subject company under Section 90.”

Experts noted that the SBO provisions have faced compliance issues since their introduction due to interpretational challenges.

“The recent RoC orders on SBO compliance will force MNCs and other companies to rethink their position on disclosures related to SBO provisions, as it appears that the MCA is viewing terms like ‘control’ and ‘significant influence’ from a much broader perspective,” said Ankit Singhi, partner at Corporate Professionals.

The RoC’s order clarified that the law does not require a significant beneficial owner to necessarily take part in the day-to-day operations of a company or have direct control over its affairs.

“All were given time, and now the MCA is checking who has complied with the requirements and who has not. It is a fair ask.

"The law has been in place since 2013. The rules have been there for a long time, and it is fair if the MCA asks companies to comply,” Mehul Modi, partner at Deloitte India, said.

The law intends to identify individuals or groups who can influence companies without directly owning shares.

“Who is at the end of the line of ownership? You cannot have an individual.

"There has to be a living individual who is the brain behind the entity,” Modi added.

Earlier this month, the MCA discovered that the founder and CEO of a large private equity firm had violated the law by not disclosing themselves as significant beneficial owners.

The case involved Leixir Resources, which is owned by Leixir Intermediate Corp, while the ultimate holding company is ComVest Leixir Holdings LLC.

Some company law experts believe that the law specifically targets funds or companies with opaque structures where it is hard to pinpoint an individual as the significant owner.

In Leixir’s case, the RoC observed that the general partner and the investment mana­ger of ComVest Investment Partners V LP were corporate bodies.

“Thus, in line with the rules, the CEO of the investment manager ought to have been reported as a significant beneficial owner,” the RoC order stated.

In January, a similar violation was discovered by the RoC in the case of an Indian company, Metec Electronics, and its associated individuals and entities for concealing their beneficial ownership links to a Chinese group.

The RoC imposed penalties totalling Rs 10.21 lakh on China’s Metec Electronics and three individuals.

Experts believe that as India aims to become a developed country by 2047 and expects increased economic activity, ensuring transparency in all disclosures is crucial.

“The intention of the law is clear.

"We need to protect investors. Reporting has to become more mature.

"It applies to foreign firms as much as it does to domestic ones.

"Big companies have enough resources to ensure these compliances are in place,” said Rishi Agarwal, co-founder and CEO of TeamLease RegTech.