MCA tightens scrutiny of beneficial ownership norms for foreign-owned companies

By: Admin
May 28, 2024
Categories: MCA|News
4 Min Read

The Ministry of Corporate Affairs has tightened its scrutiny of beneficial ownership standards for companies owned and controlled by foreign investors, which legal experts said could have consequences for compliance practices.

The Registrar of Companies (RoC) recently issued notices to several foreign owned and controlled companies, including LinkedIn, for alleged violation of beneficial ownership disclosure norms, said two people with knowledge of the matter.

The companies that received the notices had all declared in their annual filings that they did not have any significant beneficial owner (SBO). Most of the notices were issued by RoCs in Haryana, Karnataka and Mumbai. Some of the entities under scrutiny are fully owned by foreign private equity funds, the people said.

Last week, RoC Delhi imposed a Rs 27 lakh penalty on Microsoft-owned professional networking platform LinkedIn and its key functionaries including chief executive officer Satya Nadella for violating SBO norms. Before that, the RoC had imposed a penalty of Rs 18 lakh on Gurgaon-based company Leixir Resources and its foreign directors for not declaring SBO as required in the rules.

An email sent to the ministry remained unanswered.

“A common theme across the recent SBO non-compliance notices is a rigorous enquiry into the reporting channels of the investor directors on the board and the fund structure of investors on the cap table. The RoC exercise seems to be targeted at slicing through the fund structure to trace the persons driving the fund’s decisions in relation to the Indian portfolio entity,” an expert said. “While such notices are not expected to impact investor sentiment in the long term, this will require companies and investors to re-assess their filings and strategies in this regard.”

India has been tightening its regulatory scrutiny of beneficial ownership. The Securities and Exchange Board of India (Sebi), the market regulator, has tightened several rules related to beneficial ownership in foreign portfolio investors (FPI) over the past year.

“Reporting companies are mandatorily required to give a notice to all their corporate shareholders above certain thresholds. Hence, the foreign funds and managers need to be aware of their obligations under Indian laws and respond to these notices with adequate details.” another expert said. “This would also enable them to structure their direct or indirect shareholding as well as decision making capabilities in the reporting companies.”

One person said the RoC actions are also aimed at reducing regulatory arbitrage between foreign investments in listed and unlisted companies in India. Foreign investments in listed companies in India can be done only through the FPI route. In order to get an FPI licence, a fund must comply with Sebi rules and provide SBO information upfront prior to registration.

However, investments in unlisted companies are made through the foreign direct investment route where there is no such upfront scrutiny.

“Many foreign owned and controlled companies have been declaring nil SBO even though they are 99 percent owned by a single entity – their argument being if the end-beneficiary is a corporate or publicly pooled fund, there is no SBO,” the person said. “In contrast, the rules say if the end-entity is a corporate or fund, then whoever is in control of the end-entity – like its CEO – should be the SBO.”

Legal experts said the ministry’s recent actions could have far-reaching effects on compliance.

“The overzealous approach adopted by RoC (in the LinkedIn case) poses wider ramifications for large MNCs operating in India and goes against the business-friendly environment that the government is trying to cultivate over the past few years,” said another expert said, adding that filings, no matter how innocuous they seem, should be undertaken with “utmost diligence.”

To comply with the higher standards of transparency, foreign private equity funds in particular may have to tweak their agreements.

“The confusion might reshape how funds and managers interact, highlighting the need for clearer agreements demarcating roles, disclaiming control or influence, or clearly recording reasons that under law will ensure such persons are not treated as SBOs,” another tax expert said.

Source from: https://www.moneycontrol.com/news/business/mca-tightens-scrutiny-of-beneficial-ownership-norms-for-foreign-owned-companies-12732696.html