Xerxes Antia and Sheel Ghia
The Ministry of Corporate Affairs (MCA) plays a pivotal role in ensuring corporate governance and transparency in India. In recent times, it has been stepping up efforts to ensure accountability with key focus being compliance with provisions related to Significant Beneficial Ownership (“SBO”) under the Companies Act, 2013. In 2024, MCA has intensified its scrutiny of companies' compliance with the provisions of the Companies Act, 2013 (“Companies Act”) relating to beneficial ownership and SBO. The recent enforcement actions against LinkedIn India highlight this broader trend of scrutiny by the MCA.
Understanding Significant Beneficial Ownership
The concept of beneficial ownership and Significant Beneficial Ownership or SBO is provided in Sections 89 and 90 of the Companies Act.
Section 89 of the Companies Act mandates the disclosure of beneficial interest in shares where the beneficial interest in the shares is held by anyone other than the registered owner of such shares.
For example, if Company X had issued 100 shares with Shareholder A holding 99 shares and Shareholder B holding 1 share as a nominee of Shareholder A. In that case Shareholder A’s beneficial interest in the single share held by Shareholder B, will have to be reported to the MCA
Beneficial owners of shares must declare the nature and extent of their beneficial interest, ensuring transparency in ownership structures.
Section 90 goes a step further, and promotes corporate transparency by uncovering the ultimate beneficiaries (i.e. the SBOs) who have significant control over a company. An SBO is an individual who, alone or with others, indirectly or combined with direct holdings, holds at least 10% of shares, voting rights, or dividends in a company or exerts significant influence or control. It’s worth noting that there can be more than one SBO in a company.
Case Study: LinkedIn India's Compliance Issues
Recently, penalties were imposed on Linkedin Technology Information Private Limited (“LinkedIn India”) for non-compliance with the provisions of Sections 89 and 90 of the Companies Act. LinkedIn India incorrectly reported the date of beneficial interest creation in a Form that was processed through an automatic approval process by the MCA (i.e. the contents of the Form were not scrutinised by the MCA but are presumed to be correct by the MCA), resulting in inaccuracies that attracted penalties. This case underscores a critical point: even forms that are auto-approved are not immune to scrutiny (at a later date) and penalties if found to contain incorrect details.
The MCA has appointed various offices of the Registrar of Companies (“ROC”) to adjudicate penalties for certain breaches of the Companies Act. The applicable ROC having jurisdiction (which is the Registrar of Companies, National Capital Territory of Delhi and Haryana) issued a show cause notice (“SCN”) to LinkedIn India for the incorrect reporting of beneficial interest, in which the ROC also raised a query on why LinkedIn India had failed to make any filings disclosing any SBO for LinkedIn India. The ROC had raised this query in the SCN as the ROC was able to see the ultimate beneficial owner reporting for Microsoft Corporation, USA, i.e., the ultimate holding company of LinkedIn India, however, a corresponding disclosure on any SBO for LinkedIn India had not been made. In its response to the ROC, LinkedIn India provided an explanation for not having an SBO. It stated that its ultimate holding company (Microsoft Corporation, USA) is a listed entity on an overseas stock exchange, with no individual holding a majority stake in the ultimate holding company.
The ROC then evaluated beneficial ownership in LinkedIn India through three ways-
Evaluation of facts by ROC
A. Shareholding structure: LinkedIn India’s response to the SCN query as to why it did not disclose any SBO mainly revolved around the fact that there is no individual who holds a majority stake in its ultimate holding company (Microsoft Corporation, USA). However, the applicable provisions under the Companies Act and the related rules on SBO provide for other modes to evaluate whether there is any SBO, viz, by way of ‘control’ or ‘significant influence’, which were ignored by LinkedIn India. The ROC also pointed out the lack of efforts made by LinkedIn India to identify the SBO, as well as a failure by LinkedIn India to send prescribed notices seeking information on SBOs to its shareholders or any person that it might suspect of being an SBO.
B. Reporting channels of the directors: The ROC has also evaluated the SBO of LinkedIn India by examining the reporting channels of its directors. It did this by scrutinizing the backgrounds and interconnected roles of the directors in Microsoft Corporation, USA and LinkedIn Corporation. By tracing the appointments and professional affiliations of directors such as Keith R. Dolliver, Benjamin O. Orndorff, and Henry Fong, who hold key positions in both Microsoft and LinkedIn entities globally, the ROC sought to establish a pattern of control and influence. The investigation by the ROC revealed that these directors, while officially associated with LinkedIn India, maintain substantial ties to their parent corporations, suggesting that their appointments serve the strategic interests of Microsoft Corporation, USA. The ROC used this information to argue that these directors are effectively nominees of Microsoft Corporation, USA (and that Microsoft Corporation, USA had appointed a majority of the directors in LinkedIn India), thereby identifying an SBO through indirect control and significant influence exerted via these reporting channels.
C. Test of control and significant influence: Lastly, the ROC tried evaluating if LinkedIn India had an SBO through the test of financial control by examining how Microsoft Corporation, USA's financial officers, manage and control LinkedIn India's financial transactions. This assessment hinged on resolutions passed in various LinkedIn India’s board meetings, authorising Microsoft Corporation, USA financial officers to oversee LinkedIn India's bank accounts and financial operations. As per the ROC, these resolutions highlighted that Microsoft's financial directives take precedence over LinkedIn India’s board decisions. The ROC also observed that LinkedIn India’s financial statements also indicated extensive related party transactions that were managed by Microsoft Corporation, USA's treasury, emphasizing its pervasive financial control over LinkedIn India. By establishing that Microsoft's financial officers, under the supervision of CEO Satya Nadella, have the "right to exercise" significant influence over the subject company, the ROC aimed to determine an SBO through this indirect yet substantial financial control.
On the basis of the above, the ROC determined that Mr. Satya Nadella, CEO and Chairman of Microsoft Corporation, USA and Mr. Ryan Roslansky, CEO of LinkedIn Corporation, would qualify as the SBO(s) of LinkedIn India.
Penalties imposed
As a consequence of the failure to make the appropriate filings and disclosures mandated under Sections 89 and 90 of the Companies Act, the ROC then imposed various monetary penalties. These penalties included a penalty of INR 200,000 (approx. USD 2,400) each on Mr. Satya Nadella as Chairman and CEO, Microsoft Corporation, USA and Mr. Ryan Roslansky, CEO of LinkedIn Corporation, for non-disclosure of significant beneficial interest.
The ROC also penalized LinkedIn India and its directors with monetary penalties aggregating to INR 1,750,000 (approx. USD 21,000) for:
1. not taking necessary steps to identify the SBO; and
2. Not sending notice in Form BEN-4 to its members and to any person it has reasonable cause to believe is the SBO seeking information about the SBO.
The ROC also penalized each of its shareholders a penalty of INR 280,400 (approx. USD 3400) for delay in reporting its beneficial interest in the shares held by the nominee shareholder.
What is interesting to note, is that the quantum of each monetary penalty imposed by the ROC, is the maximum monetary penalty that could have been imposed under the Companies Act in relation to the breach in question. These penalties are a stark reminder that even minor inaccuracies in regulatory filings can lead the MCA to investigate into substantial non-compliances.
Takeaways
1. Documents/information sought by the ROC
What should be noted is that the ROC had requested a significant number of documents and information from LinkedIn India, which included internal or non-public documentation/information pertaining to LinkedIn India, LinkedIn Corporation, Mr. Ryan Roslansky, CEO of LinkedIn Corporation, as well as other concerned parties. It is safe to assume that the ROC is exercising its full authority to request as many documents as possible. The extensive and detailed nature of these requests implies that critical and confidential information could be required to be disclosed to the ROC. It’s worth noting that in certain instances, it appears that the ROC has passed its order on the basis of the information/documents submitted to it as well as documents/information in the public domain that it managed to obtain, i.e. the lack of information/documents did not stop the ROC from reaching a conclusion and issuing an order.
2. Beyond Borders: The Role of International Filings
The ROC’s approach did not stop at checking domestic filings. In LinkedIn India's case, despite not identifying any SBO and hence not filing Form BEN-2, the ROC scrutinized Microsoft Corporation, USA’s SEC filings to cross-check against SBO declaration (or lack thereof). The SEC filings indicated that individuals such as Mr. Nadella and Mr. Roslansky, due to their high-ranking positions, could significantly influence LinkedIn India. This suggests that the MCA/ROC is not only looking at direct ownership but also at the potential influence exerted by key executives of overseas parents/holding entities.
By considering international filings, the MCA/ROC demonstrates its intent to ensure comprehensive compliance and transparency. This approach helps in identifying any discrepancies between what is reported by entities in India as well as by entities/persons overseas, ensuring that influential individuals do not bypass disclosure requirements through technicalities.
Broader Lens
The MCA has started to demonstrate a broader pattern of cracking down on SBO-related non-compliances. One recent case involved Leixir Resources, an Indian company, which was also penalized for failing to report an SBO. What’s interesting in this case is that the MCA identified the SBO as being the CEO of the investment advisor of a pooled investment vehicle. This detailed approach in identifying indirect control highlights the MCA’s thorough examination methods. Leixir Resources was fined INR 1,800,000 (approx. USD 21,600) for failing to disclose its SBO. More recently, Sunjin India Feeds Private Limited, an Indian company, on May 27, 2024, was fined INR 1,400,000 (approx. USD 16,800) for not making prescribed filings in relation to SBO with the MCA regarding significant beneficial ownership.
It is becoming increasingly clear that the MCA is cracking down on SBO non-compliances and that complex or opaque overseas ownership structures may not act as a shelter. By focusing on indirect control and influence, the MCA is making it clear that simply hiding behind corporate structures or technicalities will not suffice to evade compliance.
Additional thoughts
1. Many companies may claim to have no individual(s) directly or indirectly having ‘significant’ beneficial ownership. These companies are often majorly owned (usually through multiple layers of intermediate entities) by publicly pooled funds, listed entities or multiple individual owners (each holding less than the prescribed threshold of the ultimate intermediate holding entity). On numerous occasions, lawyers and other advisors have had variations of the following conversations with clients.
Company's Claim: "The SBO concept doesn’t really apply to us. After all, our ultimate beneficial owners are corporate entities or funds. We aren’t owned by individuals."
Advisor Response: Regulatory View: "Hold on! If a corporate entity or fund owns you, then someone in the entity or the fund is calling the shots, right? Let's meet the mastermind! They should be identified as the SBO."
2. At times, the question of whether a company has an SBO is not straightforward. The forms to be used for SBO filings with the MCA don’t contemplate or permit a ‘NIL’ reporting to be made, and it looks like the MCA believes that all companies would have at least one SBO. There can, however, be instances where there would be no SBO for a company (which we have actually seen). If the board of a company shares the control of the entity between themselves with no single individual or group of individuals either controlling such board or the company (through shareholding or otherwise) or receiving any benefits from such company, then such a company won’t have an SBO. Further clarity is required from the MCA on this. Until such time, companies would always carry the risk of not disclosing an SBO.
Conclusion
These developments serve as a crucial reminder for companies to ensure thorough and accurate declarations of SBO and beneficial ownership. Incorrect or incomplete reporting, even if the forms are auto-approved, can lead to significant penalties. Companies must also consider international disclosures, such as SEC filings, in their compliance strategies to avoid discrepancies that might attract regulatory scrutiny.
Recommendations
To mitigate the risks of non-compliance, companies should:
Ensure Accurate Reporting: Regularly review and verify SBO or SBO related information provided by their shareholders. Accurate reporting is fundamental to avoid penalties and maintain good standing with regulatory authorities.
Align Domestic and International Disclosures: Cross-check domestic filings with international disclosures, such as SEC filings, to ensure consistency. This practice helps in identifying and rectifying any discrepancies that might arise.
Consult Compliance Experts: Engage legal and compliance professionals to stay updated on regulatory changes and ensure adherence to all requirements. Expert advice is invaluable in navigating the complexities of the regulatory environment.