Separate the rights tests from the ownership-chain tests
Section 90 of the Companies Act, 2013 and the Companies (Significant Beneficial Owners) Rules, 2018, as amended, require a reporting company to identify natural individuals who meet the legal tests, obtain declarations, maintain a register and report the required particulars. A company, partnership or trust in the chain is an intermediate entity rather than the individual SBO.
Rule 2(1)(h)(i)–(iii) tests at least 10% of shares, at least 10% of voting rights in shares, or a right to at least 10% of the total distributable dividend or other distribution in a financial year. Test each separately using qualifying indirect holdings alone or together with direct holdings. Explanation I requires an indirect right or entitlement for these tests. Explanation II treats both shares registered in the individual’s own name and the beneficial interest in a share declared by that individual under section 89(2) as direct. For example, four individuals holding 25% each directly do not meet an indirect rights test on those facts. An individual with 6% direct and an attributable 5% indirect has 11%, subject to verification of the rights.
Rule 2(1)(h)(iv) separately refers to a right to exercise, or actual exercise of, significant influence or control other than through direct holdings alone. There is no numerical threshold written into that limb. Read it together with Explanation I and assess the rights and actual arrangements, particularly where no indirect entitlement can be traced. A title, family relationship or functional reporting line does not alone establish personal control. Section 2(27) defines control; Rule 2(1)(i) defines significant influence as participation in financial and operating policy decisions without control or joint control. Document governance rights, agreements and actual conduct.
| Intermediate member | How to trace an indirect right under Explanation III |
|---|---|
| Body corporate other than an LLP | Test majority stake in the member or its ultimate holding company. Majority stake means more than 50% of equity share capital, voting rights, or rights to distributable dividend or another distribution. Exactly 50% is not enough by itself. The statutory attribution differs from multiplying economic percentages down a chain. |
| HUF through its Karta | Trace the rights to the Karta; then test the relevant attributable rights and other holdings. |
| Registered partnership or LLP | Trace to the individual partner, to an individual with a majority stake in a body corporate partner, or to an individual with a majority stake in that body corporate’s ultimate holding company. |
| Trust through trustee | Trace to an individual trustee of a discretionary or charitable trust, an individual beneficiary of a specific trust, or an individual author or settlor of a revocable trust, as applicable. |
| Pooled investment vehicle or controlled entity | Where the jurisdiction meets the FATF and IOSCO-regulator requirements, apply the specified general partner, investment manager or CEO test. The CEO category applies where the investment manager is a body corporate or partnership entity. Otherwise, Explanation IV directs use of the applicable entity attribution tests. |
Explanation V requires evidence of common intent or purpose concerning rights, control or significant influence over the reporting company pursuant to a formal or informal agreement or understanding. Do not aggregate relatives solely because they are related. Explanation VI treats GDRs, compulsorily convertible preference shares and compulsorily convertible debentures as shares for this rule. Check instrument terms and the correct denominator, and do not treat shares, votes and distributions as interchangeable.
BEN forms and separate deadlines
| Form | Duty and clock |
|---|---|
| BEN-4 | Subject to Rule 8, Rule 2A(2) requires a notice to a non-individual member with at least 10% of shares, voting rights, or rights to the relevant distribution. Section 90(5) also covers other persons the company knows or reasonably believes fall within its specified inquiry categories. Under section 90(6), the reply is due within 30 days of the date of notice. |
| BEN-1 | The individual declares to the reporting company within 30 days of becoming an SBO or a change in significant beneficial ownership under Rule 3(2). The 2019 commencement window was a separate historical rule. |
| BEN-2 | The company reports the declaration to the Registrar within 30 days of receipt under Rule 4. Use the applicable filing purpose and current MCA instructions. |
| BEN-3 | Maintain the statutory register and allow inspection by members under section 90(3) and Rule 5. Keep it current as declarations and changes are received. |
Where the BEN-4 response is absent or unsatisfactory, section 90(7) and Rule 7 require the company to apply to the NCLT within 15 days after the period in the notice expires. The requested restrictions may include transfers, dividends or other distributions, and voting. They are not automatically imposed by the notice. Under section 90(8), the Tribunal may make the order after hearing the parties concerned. Section 90(9) provides a route to seek relaxation or lifting and addresses transfer to the IEPF Authority if no application under that subsection is filed within one year of the restrictions order.
Rule 8 exclusions apply to the relevant holding
Check the precise category rather than treating the reporting company as wholly outside the rules. Rule 8 covers shares held by the IEPF Authority constituted under section 125(5); a holding reporting company, whose details must be reported in BEN-2; the Central or a State Government or local authority; the specified reporting companies or bodies corporate or entities controlled by the Central or State Government; SEBI-registered investment vehicles described in the rule; and investment vehicles regulated by RBI, IRDAI or PFRDA. A holding reporting company need not first produce its own SBO BEN-2 acknowledgement as a statutory precondition to this exclusion. Check and report the holding company's details as prescribed and test non-excluded holdings separately.
Six worked examples
1. Seven percent directly and five percent through an HUF
Vikram holds 7% directly and is Karta of an HUF holding 5%; unrelated holders own the remaining 88%. His attributable shareholding is 12%. On these facts he declares in BEN-1 within 30 days of acquisition or change, and the company files BEN-2 within 30 days of receiving the declaration. The HUF's 5% does not meet the automatic 10% BEN-4 member trigger by itself, but the company must still identify the SBO.
2. Majority stake in the ultimate holding company
Alpha holds 15% of Zenon. Beta owns 60% of Alpha, and assume Beta is Alpha’s ultimate holding company. Rajesh has 55% of Beta and Suresh 45%. Rajesh's proportionate economic interest is 4.95%, but his majority stake in Beta attributes Alpha’s 15% rights for the SBO test. Suresh does not pass that majority test on equity alone; check other rights and any evidenced acting-together arrangement before deciding.
3. Three brothers with fragmented stakes
Sterling Investments owns 40% of the reporting company. Its owners hold 33.33%, 33.33% and 33.34%, totalling 100%, and none individually holds more than half of its equity. Family ties do not supply a missing ownership or control finding. If they actually have a shared agreement or understanding to exercise rights through the member over the reporting company, assess them as acting together and document attribution and the resulting declarations. The 40% non-individual holding separately triggers the Rule 2A(2) inquiry, absent an exclusion.
4. Preference instruments issued to a specific trust
CloudScale has 10,000 equity shares of ₹10 (₹1 lakh) held equally by two founders and issues 5,000 compulsorily convertible preference shares of ₹10 (₹50,000) to a specific trust with Viktor as sole beneficiary. Assume all issued instruments are in the share-test denominator and the equal-denomination terms support the stated counting basis. The trust then holds 5,000 of 15,000 instruments, or 33⅓%, before conversion. Attribute the relevant rights to Viktor; check voting and distribution tests separately and confirm the calculation with the actual terms and BEN-2 fields.
5. Indian holding reporting company
Assume Bharat Motors, an Indian holding reporting company, holds 100% of Bharat EV and has already reported Anand at its own level in relation to the 70% rights attributed through his family trust. The subsidiary reports Bharat Motors’ details in BEN-2 for the Rule 8(b) holding; a new BEN-1 from Anand is not required merely for the excluded 100% holding. Check any other rights or holdings independently. The parent's earlier filing is evidence, not the statutory trigger for the exclusion.
6. A widely held foreign parent and no BEN-4
Global Software India is wholly held by a foreign parent that does not qualify for a Rule 8 exclusion on the stated facts. The 100% member holding triggers BEN-4 even if no individual has majority stake in the parent. Examine the CEO's actual appointment, policy and control rights; do not deem that person an SBO by title alone. If section 90(11) applies and a continuing default lasts 20 days, the illustrative pre-cap calculation is ₹1,09,500 for the company and ₹28,800 per officer in default (19 days after the first). Apply any relevant statutory relief, and do not present the maxima as automatic penalties.
Penalties and practical questions
Section 90(10) provides ₹50,000 for a declaration default, plus ₹1,000 per continuing day after the first, capped at ₹2 lakh. Section 90(11) provides ₹1 lakh plus ₹500 per continuing day after the first for the company, capped at ₹5 lakh, and ₹25,000 plus ₹200 per continuing day after the first per officer in default, capped at ₹1 lakh. Section 90(12) addresses wilfully false or incorrect information or suppression of material information with reference to section 447. Determine actual liability and any applicable statutory reduction before applying these figures.
- Two individuals each hold 50% directly. Must they file? Direct holding alone does not trigger these ownership tests. Examine other rights or arrangements separately.
- Does section 89 substitute for section 90? No. Section 89 concerns the registered and beneficial interest distinction and its own MGT-4, MGT-5 and MGT-6 process. Section 90 asks about the significant beneficial owner and its separate triggers.
- Does a change from 60% to 75% require a new declaration? A change in reportable significant beneficial ownership starts the Rule 3(2) clock. The company starts its Rule 4 clock on receipt.
- What if a foreign shareholder does not reply? Record the notice and service and assess the section 90(7) application deadline. The company cannot treat silence as compliance.
- What about LLPs? Distinguish an LLP in the ownership chain from an LLP itself subject to the separate LLP (Significant Beneficial Owners) Rules, 2023. Check those rules and LLP forms separately, including their own exclusions.
- What should the file contain? Retain notices and responses, an ownership chart, support for rights and control, BEN-1 receipt dates, BEN-2 acknowledgements and the BEN-3 register. Reconcile annual return disclosures where applicable.