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Benami transactions: Why new provisions to unravel shadow holdings in companies may misfire

Certain provisions have been notified on 13 June 2018 that seek to unravel benami or shadow holdings in companies. Persons who have the benefits of ownership, even if not the legal owners on record, of at least 10 percent shares in a company are now required to disclose this fact. Similarly, persons who have significant influence or control over a company too are required to disclose. These new provisions are contained in Section 90 in the Companies Act, 2013, and Rules made thereunder. These disclosures are to be made within 90 days.

The provisions are quite detailed. Holdings or control through complex structures of companies, partnership firms, trusts, etc. are sought to be unravelled by providing formulas. The ultimate natural persons behind such structures and entities are to be identified. Of course, many of such persons may not be benami holders. Many may have legitimate reasons to use such structures. But even in their cases, intention seems to be to identify them.

In the ordinary course, a person in whose name shares are held as per records also owns the real and beneficial interest. Further, such personal himself usually exercises the votes on such shares and controls the companies. However, at times, he may be merely the legal owner on paper. The real owner may be another person who is entitled to the benefits of the shares and exercises control. Through formal or informal arrangements, he owns such beneficial ownership and exercises control over the company. In other cases, the shares in a company may be owned by an entity such as a company, trust, limited liability partnership, etc. The ownership structure of such entities would have to be examined who is the individual behind it. The new provisions attempt to identify such ultimate individuals and require them to make disclosures of themselves.

 Benami transactions: Why new provisions to unravel shadow holdings in companies may misfire

Representational image. Reuters

The identity of the real/ultimate owners may be of interest to several authorities – tax, money laundering, consumer, criminal, etc. Laws relating to money laundering already have for certain purposes a concept of UBO – Ultimate Beneficial Owner – and provide for a method of determining and disclosing such UBOs. Certain provisions in Securities Laws too require disclosure of such ultimate beneficial owners.

However, while the intentions seem to be clear, the drafting is poor at several places. For example, the term “significant influence” is not defined. Hence, it will be difficult to determine who has ‘significant influence’ in a company. The term “control” is defined in such a way that unless a person has a very large holding in a company, he may not be said to have “control”. It is possible then many ‘real’/benami holders may escape being detected.

Then, there is a requirement that holding of persons “acting together” will be clubbed. However, it is not clarified what “acting together” means. Persons may have joined hands to run a business together through a company but that does not necessarily mean anyone is “acting together” or is benami of the other.

There is confusion as to who is required to disclose. Are persons who are both legal and beneficial owners also required to make disclosure? If yes, this would be absurd because the legal ownership is already on record. This would mean that lakhs of owners and companies will have to make disclosures of something that is already known. Unfortunately, the Act says one thing and the Rules another.

The method to determine who is the ‘real’ (ie. the beneficial owner) is also vague. For example, it has been stated that if a person has a rights over benefits in shares through any contract, arrangement  or otherwise, he is the beneficial owner. However, what is “arrangement” and what is covered by “otherwise” is not clear.

Such poor drafting at various places can result in the provisions misfiring in at least two major ways. One is that lakhs of persons who are not benami holders would still be required to make disclosure. This can actually be dangerous since they may be viewed with suspicion and may face investigation. On other hand, benami holders who are real owners and who exercise their ownership and control through fronts may escape detection.

To which type of companies do these new provisions apply? The scope is very wide, but little unclear too. They apply to almost all companies, small and big, public and private. Exception is provided for certain SEBI regulated entities though it is not wholly clear whether listed companies are also excluded.

The disclosures have to be made by such persons to the company. The Company will in turn forward such disclosures to the Registrar of Companies. Thereafter, any changes or new holdings acquired will have to be disclosed.

It may happen that a person may not make the disclosure but the Company has reasons to know who is such real owner. In such a case, the Company has ask such person to make disclosures. If the person still does not comply, the Company has to apply to the National Company Law Tribunal for investigation and directions for restrictions on such shares/persons.

Non disclosure results in fines. False disclosures can result in prosecution and a severe jail term.

Those who make disclosures risk being deemed to be benami holders inviting the stringent provisions of the Benami Transactions Prohibition Act. They risk confiscation of their properties and prosecution.

It is an undeniable reality that numerous ‘shell companies’ or companies with benami holdings/control exist. This was also prominently brought out post-demonetisation. However, the efforts to tackle such an evil through the new provisions are not well thought out. This can result in severe concerns, needless efforts, and at end may result in no real benefit.


(The writer is a Chartered Accountant. He tweets @JayantThakur)



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Updated Date: Jun 27, 2018 09:48:06 IST