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CS Deepti Jambigi Joshi – [2024] 163 taxmann.com 397 (Article)

‘Shareholders are de jure owners, and directors are de facto owners in a company’. This is an old saying explaining the position of shareholders and directors in a company. But off late, with more and more complex corporate structures being introduced in the capital markets for owning shares in a company, regulatory focus has been moving towards identification of ‘beneficial owner’ of a company. In this article, we shall discuss the difference between shareholding, i.e., owning shares in a company as compared to owning beneficial rights in a company and methods of identification of beneficial owner under the Companies Act, 2013.

1. Concept of Beneficial Ownership

The concept and mechanism for identification of ‘beneficial owner’ has been prevalent in the banking sector under Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”) and it was implemented as a part of KYC check by banks. However, the method of identification owner is quite different under the Companies Act.

The Companies Act, 2013 (“the Act”) deals with two types of beneficial ownership:

Beneficial owner – who may or may not be an individual, which is regulated under section 89 of the Act.
Significant beneficial owner – who must mandatorily be an individual, which is regulated under section 90 of the Act.

The concept of ‘beneficial interest’ is defined in Section 89(10) of the Act, which is applicable for both kinds of beneficial ownership as mentioned above. It is defined as follows:-

“For the purposes of this section and section 90, beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

(i) exercise or cause to be exercised any or all of the rights attached to such share; or

(ii) receive or participate in any dividend or other distribution in respect of such share”

From this definition, the following can be said to be the characteristic features of beneficial interest:

It is a right or entitlement of a person (individual or non-individual) in a share.
It may be direct or indirect.
It may be through any contract or arrangement or through any other mode.
It may be of that person alone or of that person together with any other person.
It may mean the right or entitlement to (1) exercise or (2) cause to be exercised, any or all of the rights attached to such share
It may mean the right or entitlement to receive or participate in any dividend or other distribution in respect of such share

2. Rights of a shareholder/member

The term ‘shareholder’ is not defined in the Act. However, the term ‘member’ is defined in section 2(55) of the Act which essentially means that a shareholder/member is the one whose name is entered in the register of members. By virtue of being entered in the register of members, a shareholder can have various rights like:-

Right to receive notices of general meetings of the Company
Right to vote at a general meeting/postal ballot
Right to receive dividend, when declared by the Company
Right to receive entitlement to subscribe in case of rights issue of securities by the Company
Right to receive bonus shares declared by the Company
Right to participate while distribution of assets of the Company at the time of liquidation And so on