[Pranav Sharma and Kritika Goyal are students at National Law Institute University, Bhopal]
Introduction
The Registrar of Companies (ROC) of Delhi and Haryana in a recent ruling , imposed fine on LinkedIn, owned by Microsoft, for allegedly breaching significant beneficial ownership (SBO) regulations under the Companies Act, 2013 (Act). The fines were levied on LinkedIn Technology Information Pvt. Ltd, LinkedIn Technology Unlimited Co (a registered shareholder), LinkedIn Ireland Unlimited Co (the ultimate beneficial owner), Satya Nadella (Chairman and CEO of Microsoft), Ryan Roslansky (CEO of LinkedIn Corp), and eight others. The ROC of Delhi and Haryana in its order emphasised that LinkedIn has failed to comply with the provisions pertaining to the SBO provided under sections 89 and 90 of the Act and because of this reason the fine was imposed on the said company.
The purpose of this article is to discuss a recent ruling by the ROC of Haryana and Delhi in India that imposed fine on LinkedIn for allegedly breaching SBO regulations. The authors argues that the ROC's interpretation of the rules is too broad and can have negative consequences for multinational corporations with Indian subsidiaries.
Significant Beneficial Ownership: Decoding the Rules
Corporate entities like companies, trusts, foundations, partnerships, and similar structures engage in diverse commercial activities, which are generally legitimate. Despite the essential and legal role that corporate vehicles play in the global economy, they can be misused for illegal activities under certain conditions like tax evasion, money laundering and fraudulent activities.
A substantial decrease in such misuse could be achieved if comprehensive information about the legal and beneficial owners, the origin of assets, who truly owns and runs these businesses, where their money comes from and the operations of these corporate entities were easily accessible to authorities. This information would aid law enforcement and other relevant agencies in identifying individuals responsible for suspicious activities and obtaining pertinent information to advance investigations.
In order to discourage and prevent the misuse of corporate vehicles, the Financial Action Task Force (FATF) an intergovernmental body created to combat money laundering and terror financing, released recommendations on matters pertaining to “transparency and beneficial ownership of legal persons and arrangements.” These recommendations mandate that countries ensure the availability of precise and expedient data on the beneficial ownership of corporate entities, accessible to competent authorities. India joined the FATF on June 25, 2010, and subsequently, in line with FATF Recommendations 24 and 25 and the suggestions of the Companies Law Committee in its February 2016 report, the Ministry of Corporate Affairs (MCA) introduced the concept of SBO under the Act. This was aimed at addressing concerns globally about the potential misuse of corporate entities for tax evasion, money laundering, corruption, and terrorist activities.
The regulation concerning 'significant beneficial ownership' is outlined in Section 90 of the Companies Act, 2013 along with the Companies (Significant Beneficial Owners) Rules, 2018. Section 90 of the Act, in conjunction with the SBO Rules, establishes criteria for identifying the 'significant beneficial owner' of a reporting Indian company.
Under Section 90 of the Act and its associated rules that is The Companies (Significant Beneficial Owners) Rules, 2018, there are two criteria used to ascertain significant beneficial ownership:
Objective Test: The SBO Rules, formulated by the MCA under Section 90 and Section 469(1) of the Act, constitute delegated legislation. According to Section 90(1) of the Act, the threshold for 'significant beneficial ownership' is set at 25%, while Rule 2(1)(h) of the SBO Rules lowers this threshold to 10%.
Subjective Test: This involves assessing whether an individual has the power to influence or control a company's decisions beyond just owning shares. This influence or control can be exercised directly or indirectly through various means like appointing directors, influencing management decisions, or through agreements. The word “control” is defined under Section 2(27) of the Act. Under Rule 2(1)(i) of the SBO Rules, "significant influence" is the ability to significantly impact a company's financial or operational decisions, without having full control.
Both the individual identified as an SBO and the company have responsibilities. The SBO must inform the company about their interest and details in a specified format. The company, in turn, must maintain a register of significant beneficial owners accessible to its members and must report this information to the Registrar of Companies, along with any changes.
Analyzing the ROC Order’s
The ROC of Delhi and Haryana found LinkedIn India to have violated sections 89 and 90 of the Act. The said determination of beneficial ownership was based on the analysis and application of control or significant influence test. The ROC of respective states assessed the beneficial ownership of LinkedIn India through three approaches:
1. Examining the relationship between holding and subsidiary companies.
2. Analyzing the reporting channels followed by the directors.
3. Applying the test of financial control. A conclusion was drawn that the two directors serving both LinkedIn India and LinkedIn Corporation are ultimately under the authority of the CEO of LinkedIn Corporation. Following Microsoft Corporation's acquisition of LinkedIn Corporation, it was reasoned that the CEO of LinkedIn Corporation would report to and be controlled by the CEO of Microsoft Corporation, establishing LinkedIn Corporation as the holding company of LinkedIn India.
The ROC of Delhi and Haryana noted that Microsoft Corporation's bylaws indicate the CEO's authority to oversee the company and delegate duties to other officers. Since most directors of LinkedIn India are employees of either LinkedIn Corporation or Microsoft Corporation, their chain of command ultimately leads to the CEO, whether of Microsoft Corporation or LinkedIn Corporation. This chain of control implies that Microsoft Corporation could potentially exert financial influence over LinkedIn India. As a result, the ROC identified Mr. Satya Nadella and Mr. Ryan Roslansky as 'significant beneficial owners'.
What Went Wrong
The ROCs are mandated to ensure companies' compliance with statutory requirements under the Act, without extending the provisions of the Act or its rules. However, the Delhi and Haryana ROC's order seems to broaden the scope of the rule by penalizing LinkedIn India. This expansion implies that the control exerted by a parent entity over its Indian subsidiary shouldn't be confused with the influence a CEO of the parent entity might have, particularly when the CEO is solely an employee without any shareholding.
Ownership plays a crucial role in identifying significant beneficial owners, and labeling professional executives as SBOs is an incorrect interpretation of the law. The SBO framework aims to identify individual owners, whereas professional CEOs serve in a managerial capacity. The CEO's role is distinct from that of an owner. CEOs of global parent companies, as in this case, are merely employees, not owners. They operate under their boards' control and supervision and cannot be deemed as the ultimate controllers or influencers of their Companies.
The company directors are bound by fiduciary duties outlined in the Act which signify that directors must abstain from decision-making in cases of potential conflicts of interest or personal gain. The matters requiring board approval are rigorously scrutinized and decided upon following the process specified in approving any matter. Ignoring the board approval process at the Indian subsidiary level and assuming all decisions are made solely at the parent company level or by the CEO might not be accurate or practical, especially for large multinational corporations with numerous subsidiaries worldwide.
Conclusion
The existing SBO Framework effectively identifies individual owners, but the ROC's position in the LinkedIn order blurs the distinction between managers and SBOs. There is room for discussion about whether the ROC order undermines the SBO framework by allowing actual individual owners to disclose details of professional managers as SBOs instead. There is a need for clarity in the framework to avoid the debates surrounding the topic.
To establish a robust regulatory framework, it's crucial to narrow the regulatory scope from 'significant beneficial owner' to 'ultimate beneficial owner 'keeping in mind the FATF recommendations and legislative intent, Alternatively, if the ROC's perspective is to be fully enforced, all companies in India would need to reassess their current processes – including board appointments, delegation of authority, and documentation to demonstrate independent decision-making from the group, among others. This could lead to widespread corporate adjustments, affecting not only MNCs with Indian subsidiaries but also Indian conglomerates, some of which have numerous group companies.
In essence, the order serves as a wake-up call, underscoring the growing importance and regulatory push to enhance corporate governance standards. It underscores the importance of accurate filings regarding beneficial ownership and significant beneficial ownership. Furthermore, the order reflects a thorough examination of corporate structures and relationships to ensure compliance with the Companies Act, 2013.
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