Gautam Khaitan gives legal overview on Beneficial Ownership rule

Gautam Khaitan gives a legal overview on the new Beneficial Ownership rules in light of recent FDI regulation changes.

The government had amended the rules to identify and prevent multi-layered structures that aid tax evasions and money laundering, and changes in FDI regulations to regulate investments from China and to evaluate such investments on a case by case basis.

Earlier in 2019, the Ministry of Corporate Affairs (MCA) had issued Companies (Significant Beneficial Owners) Amendment Rules 2019 to bring into effect earlier amendments made in the Companies Act 2013. Later, the government introduced changes in the FDI Regulations with effect from April 2020. Managing Partner of OP Khaitan & Co, Gautam Khaitan says that as beneficial ownership rules are not consistent, the changes in FDI rules have made it ambiguous. The FDI Policy do not provide the calculation methodology for determining beneficial owners. Beneficial Ownership has been defined under other Indian laws, although a uniform definition is not available.This is pertinent since many Indian companies and offshore entities, such as private equity funds investing in India have Chinese investors.

The new FDI Regulation says, “An investment by entities of a country which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country; and (ii) any transfer of ownership of any existing or future foreign direct investment in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within this restriction, requires the prior approval of the Government of India

Gautam Khaitan said that now investments from seven countries that share a boundary with India including China will get delayed in obtaining approvals from the authorities. “This is done to check investments from China. Investments from other neighbouring countries are negligible. Now investments from China will get delayed in the regulatory approvals.” Moreover, the new regulations also require the assessment of beneficial ownership, which is not clarified in the notice issued by the government. “ It is pertinent to note that the restrictions apply even in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction,” he added.

SBO Rules define ‘significant beneficial ownership’ in reference to Indian companies as “any individual who, acting alone or together or through one or more persons or trust, possesses one or more of the following ‘rights or entitlements’ in the Company:

  1. holds, indirectly or together with any direct holdings, not less than 10% of the shares or voting rights (the term “shares” includes compulsorily convertible preference shares, compulsorily convertible debentures, and global depository receipts);
  2. (has the right to receive or participate in not less than 10% of the total distributable dividend or any other distribution in a financial year through indirect holdings alone, or together with any direct holdings; or
  3. has the right to exercise or actually exercises, significant influence or control, in any manner other than through direct holdings alone.

Here, Gautam Khaitan said that the terms ‘control’ and ‘significant influence’ are important. “Control means a right to appoint a majority of directors and/or to control management of the company. Significant influence is the right to participate in the decision making of the company, but it excludes control,” he says. Moreover, he said that the terms are loosely defined and are left for vast interpretations. “Indian laws define beneficial ownership vaguely. The definition of beneficial ownership in India also recognises definitions in the UK and the US,” he adds.

With the abolition of the Foreign Investment Promotion Board a few years ago, the government is trying to gain full control over the regime. To block and filter the investments coming from China, the government has made the whole concept time-consuming, Gautam Khaitan has said. To implement the new FDI rules, the government will have to streamline the whole process while removing the redundancies to ease the funding coming from other regions of the world.

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Written by Priyanshi


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