This is the monthly updates for you on various recent development in Corporate law arena. Corporate Law world is a very happening place now-a-days. It is definitely on a reformative path, whether we accept that or not. The intention of all the recent reforms or regulations may be to curtail “behind the veil “transactions or “binami” transactions but as happened in case of “demonitisation” common man is getting the really shock of it. Putting everyone in same basket or measuring everyone with same sized cup is not a good idea.
The sincere efforts of the Government to identify the shell companies are appreciated. But after seeing the efforts behind the said exercise and its effects on many companies I have a serious doubt on the end result of the same. It all began with deactivating the Companies which has not filed the annual returns for consecutive three years. It is the wild imagination of someone that, the shell companies are those who are not filing any returns. If someone is having the smartness to operate a company as a “shell company” for money laundering then they will be smarter enough to update it records in timely manner. Such real shell companies may have already been escaped out of the net.
Being in the corporate field for more than 17 years I can clearly mention that many of the so called “Shell companies” which got washed out from the system are normal companies which has not filed its returns. Non filing of the returns may be due to several reasons such as business failure, financial failure etc.
The term “Shell Company” is not defined in the Companies Act or any other legislations. Due to that reason, we can term any company as a “shell company”. As the said terminology is widely used in many contexts it is advisable to define the same to bring clarity to the matter. The Government should seriously think about regulating a company/firm based on the involvement of public money in it. If there is hardly any public money and the company is a closely held one , then what is the point in giving the promoters a nightmare from compliance perspective.
However, the massive drive of the Government had given an awareness to the public that, the Corporate laws also have some teeth to bite. So next time before starting a company everyone will think twice or thrice and will start only if they are really serious into it.
DIR 3 KYC
As per the circular issued by the Ministry of Corporate Affairs(MCA) any person who has been allotted “Director Identification Number (DIN/DPIN)” on or before 31st March 2018 and the status of such DIN is ‘Approved’, needs to file form DIR-3 KYC to update KYC details in the system on or before 31st August 2018. This date was extended upto 15th September, 2018 and the DIN’s KYC which are not updated has been marked as “Deactivated” in the website of the MCA.
Even though the DIR 3 KYC is a very simple eform, filling it up and filing the same was really a tedious exercise. It was just like running from pillar to post in many cases due to numerous reasons. In some cases the name of the Director in his DSC was not matching with their name in the PAN data base, which requires obtaining of a new DSC or PAN database correction. In another case, the OTP (One-time Password) was not getting generated or eforms are getting expired due to version changes. As the said form requires professional certification, the contents of the same has to be verified and confirmed by a Professional (CA/CS/CMA). It is an uphill running task for a professional to verify the ownership of a prepaid mobile connection and certify the same.
The KYC drive was started from 10th of July, 2018 by giving a time period of hardly 40 days to complete the process. There are more than 4 Million DIN holders in India and updating all those details in very short span of time, needless to mention, was a humungous task. The Government should have an insight to read the compliance mind-set level of common man in India and made it more simple. The official website of MCA(www.mca.gov.in) was unresponsive during last 4 days and the same also hindered the smooth filing of the return on timely manner.
Unfortunately, we are doing everything as an afterthought, which is resulting in manifold efforts to streamline the system. As a result of improper planning and squeezed timelines more than 2.1 Million DIN holders got deactivated and thrown out of the system. To reactivate the same, they have to shell out Rs. 5000/- as fine, which is a huge amount in the time of falling rupees and hiking fuel prices. We hope, and pray, that the timelines be extended further to give room for those people to comply with the KYC norms and the fee for the same be reduced to a lower limit. After all people should not feel that starting a company in India is an easy way to get punished and harassed.
For Financial year 2019-20 onwards - Every Director who has been allotted DIN on or before the end of the financial year, and whose DIN status is ‘Approved’, would be mandatorily required to file form DIR-3 KYC before 30th April of the immediately next financial year. After expiry of the respective due dates, system will mark all non-compliant DINs against which DIR-3 KYC form has not been filed as ‘Deactivated’.
Norms for the disclosure of Beneficial Interest and Beneficial Ownership in Companies.
MCA vide its notification dated June, 13, 2018 has enforced section 90 of the Companies Act, 2013 and also issued Companies (Significant Beneficial Owners)Rules, 2018 in relation to Significant Beneficial Ownership(SBO). The intention behind this enactment is to identify the persons behind the curtains by asking them to disclose it voluntarily. As per that section, an individual or company or partnership firm or trust or person resident outside India which holds beneficial interest or beneficial ownership in a Company of not less than 25% of that company, through an Individual (who is the registered owner as per the Register of Members) , then the said individuals have to disclose that interest in Form BEN-1 to the company. The threshold limit for the individual for the said intimation is a minimum shareholding/Ownership of 10% in the beneficial owner(Company/Partnership/Trust).
On receipt of the Form BEN -1 the company have to file Form BEN 2 with the Registrar of Companies.
There is an ambiguity in the definition of Significant Beneficial Owner(SBO) as defined Rule 2(e) of the Companies (Significant Beneficial Owners) Rules, 2018. The definition and its explanation is giving an impression that if a Company (A LTD) is holding more than 25% shares of another company (B LTD) then the investing company shall be a “Beneficial Owner” even if the said investment is directly in the name of the investing company (A Ltd). The shareholders (shareholders of A Ltd) who are holding more than 10% shares in that “beneficial owner” company shall be treated as “ULTIMATE BENEFICIAL OWNER”. The said explanation is against the concept of registered ownership and separate legal entity of a company. If a company is investing in shares of another company, the same is to be treated as “Direct investment” and not as “Beneficial Ownership” The confusion is in the explanation part of the said definition.
Following are the explanation given in that Section
Explanation l. - For the purpose of this clause, the significant beneficial ownership, in case of persons other than individuals or natural persons, shall be determined as under-
(i) where the member is a company, the significant beneficial owner is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trusts, holds not less than ten per cent. share capital of the company or who exercises significant influence or control in the company through other means;
(ii) where the member is a partnership firm, the significant beneficial owner is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trusts, holds not less than ten per cent. of capital or has entitlement of not less than ten per cent. of profits of the partnership;
(iii) where no natural person is identified under (i) or (ii), the significant beneficial owner is the relevant natural person who holds the position of senior managing official;
(iv) where the member is a trust (through trustee), the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with not less than ten per cent. interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership;
The possible error crept into the definition of SBO
As per my observation there is a serious drafting error in the explanation part mentioned above. Instead of the word “member” the word “beneficial Owner” should have been used. As per that logic, if a company/Partnership/Firm is directly or indirectly holding shares in another company and its name is not entered in the Register of members of the investee company, then the ultimate beneficiaries of the investing company have to disclose their interest. Another valid point is that the present explanation does not cover “body Corporate” and thereby excluding Companies and entities incorporated outside India from the purview of the compliance.
There are different viewpoints on the matter and my view on this is not a conclusive one. If the definition is correct, then the companies in which another company/ firm/ trust had invested have to do this exercise.
Companies Amendment Act, 2017