More businesses face regulatory heat on beneficial ownership

If the orders issued since beginning of the year are taken into account, the figure goes up to 27. In all but three cases, penalties were imposed and in these three cases, the submissions made by the companies were accepted, showed the regulatory orders available from the ministry of corporate affairs.  

The trend shows that RoCs are digging deep on various regulatory filings of the companies not only in India but also those made to overseas regulatory agencies that are publicly available. Experts advise companies to make sure they identify persons who have significant beneficial ownership in them, prompt them to make disclosures and file those with the RoCs to avoid getting penalised.

Orders in case of 12 companies in June and July 

In June and July alone, orders were issued in the case of 12 companies. These include HeroX Pvt. Ltd,  YSK Developers Pvt. Ltd, Khvatec India Pvt. Ltd, Aries Hotels Pvt. Ltd, Finar Ltd, Samsung SDI Pvt. Ltd and Samsung Display Noida Pvt. Ltd. Queries emailed to the companies on 16 July seeking comments for the story remained unanswered at the time of publishing.

Regulatory provisions require those holding at least 10% of beneficial interest in the shares of companies individually or with others, or exercise significant influence or control over the company in terms of appointment of directors or in management decisions, have to declare the same and the companies have to report the same to the RoCs. 

Experts said that RoCs now don’t limit themselves to the disclosures made by companies, but analyse their websites, regulatory filings and information from other sources to come to a conclusion as to who could be a potential significant beneficial owner. 

“This is gaining more importance as a regulatory and compliance area. Businesses in India with a parent entity abroad will have to look very carefully into this aspect. Companies face the risk of getting penalised if they do not send communications to those who could be significant beneficial owners but are not named as such, to verify their status. Directors who are at default in ensuring compliance will also get penalised,” said Noorul Hassan, partner at law firm Lakshmikumaran & Sridharan Attorneys. The rollout of version three of the MCA21 portal and use of AI tools also aid RoCs in analysing parent-subsidiary relationships and figure out who could be a significant beneficial owner, he said.

Transparency in corporate ownership is increasingly becoming a regulatory focus globally with national authorities trying to put in effective checks and balances against illicit fund flow and money laundering. India has been consistently updating its laws to enhance transparency in corporate ownership and to tighten the regulatory framework against money laundering. 

Finance Ministry said on 28 June that Financial Action Task Force (FATF), a global agency that develops policies to combat money laundering and terrorism financing, placed India in its ‘regular follow-up category’ after an evaluation during 2023-24, which was an “outstanding outcome” and a distinction shared by only four G20 countries. The mutual evaluation report of India adopted in the FATF plenary held in June marked “a significant milestone in the country’s efforts to combat money laundering and terrorist financing,” the finance ministry said then.

Companies need to send out communications to identify those who are able to exercise control over it, for example, in director appointments or in management or policy decisions, and if they are able to establish their significant beneficial ownership status, it should be reported to the RoCs, explained Noorul Hassan of Lakshmikumaran & Sridharan Attorneys. He said that at the moment, it is not clear how the information about significant beneficial ownership may be used by other regulatory agencies including the tax authorities.

Experts also pointed out that greater transparency in corporate ownership will help in enhancing public trust in companies, lead to better compliance and more investor confidence in businesses.