'Technical and complex': Firms rush to file SBO details as deadline nears

The rules were notified in line with the recommendations of the Financial Action Task Force to combat money laundering and financing of terrorism
More than 65,000 companies have made their filings for significant beneficial ownership (SBO) since the introduction of the law two years ago, government sources said.


To plug gaps, the ministry of corporate affairs (MCA) will soon issue clarifications to establish the ultimate owner in cases involving vehicles such as a discretionary trust.


Notified by the MCA in 2018, the SBO rules went through major revisions in 2019. The deadline for making the filing has been extended four times since, with the latest being March 31.


“We have almost reached saturation. It is one of the most complicated laws introduced anywhere in the world. It is highly technical and complex but we have achieved a flawless system,” a senior government official said.


The rules were notified in line with the recommendations of the Financial Action Task Force to combat money laundering and financing of terrorism.


Experts have pointed several challenges that the law faces such as foreign shareholders not willing to disclose details of ultimate shareholder on fear of action by Indian authorities, in case of non-compliances or other issues. The MCA is examining the loopholes in the law and will consider if the deadline needs to be pushed again beyond March 2020.


“Rules are complex and have left many issues unanswered. Frequent amendments, technical issues in the form, and date extension have added to the confusion,” said Ankit Singhi, partner, Corporate Professionals.


One of the areas the government is planning to address is that of discretionary trust and establishing the ultimate owner in terms of a natural person. There are instances where a promoter’s families have transferred ownership of business to a discretionary trust, which makes it highly difficult to establish the SBO.


“If the managing trustee of such a trust is a corporate body, then we have to find the natural person...Bulk of issues have been resolved...We will clarify this one soon,” the official added.


In a discretionary trust, the share of beneficiaries is not determined. Therefore, the rule says that all trustees will be SBO, which experts say is not right since they don't have ownership rights over trust property.


There is also a hesitation to make such disclosures as the details of SBO are available for public inspection, experts say.


According to the current rules, the ultimate owner needs to report every change in its shareholding after the initial disclosure. “What if shareholding is changed due to increase in capital without any act on part of SBO? Further, in a group web structure, undertaking disclosure on every change is almost impossible,” Singhi said.


Company law experts have raised issues such as whether in case there are more than one SBO, the holding of such owner be aggregated or identified separately.


The SBO rules aim to strike at multilayers and offshoring of funds done by companies through a chain of corporate vehicles.


There are two ways to establish the SBO. One is a significant beneficial owner at 10 per cent shareholding at the reporting company level and majority holding through the ownership chain. But the more complex mechanism is the SBO who can exercise significant influence or control in any manner other than through direct holding alone.


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