[Gargi Agnihotri and Richa Rout are 4th year student at National Law University Odisha]
Significant beneficial ownership (“SBO”) is akin to searching for a needle in a haystack. It is a situation wherein a person holds the legal ownership title whereas someone else enjoys the benefit of owning a fund, company, etc. Such a practice has often been inculcated by celebrities and other influential individuals as this gives them a leeway to protect assets from being computed by having it’s inclusion in taxable earnings or net worth thereby enhancing an individual's financial gains. A beneficial owner tries every means to remain unidentified which allows them to dodge criminal liability for destructive crimes like financial terrorism, money laundering, and tax evasion. Owing to the multitude of criminal activities the Financial Action Task Force (“FATF”) by conducting cross-jurisdictional assessment has set up guidelines. Moreover, the Indian legislature has taken measures as a result of the Panama Paper Scandal to battle against the malevolence of funneling money into the pockets of the wealthy.
The recent ruling of the Registrar of Companies (“RoC”) penalizing LinkedIn and its chief executive officer (“CEO”) for non-compliance with the regulations of SBO has raised a slew of controversies about the extent of the disclosure of SBO requirements and its application to various legal entities and structures in India. This article critically evaluates the RoC ruling, its effect on the SBO declaration, and the potential ramifications for businesses.
The legal foundation of SBO rules: A conceptual framework
The Companies Law Committee's 2016 report proposed defining SBOs, requiring companies to collect beneficial ownership information from members, and keeping a register of beneficial owners in response to the FATF 2012 recommendations on reporting transparency and beneficial ownership of legal persons. As a result, Section 90 of the Companies Act of 2017 defined SBOs as people with indirect ownership of at least 10% in the reporting business or who exercise' significant influence' in addition to shareholding. The Companies (Significant Beneficial Ownership) Rules, 2018 (“Rules”), further defined 'significant influence' as the ability to engage in a company's financial and operating policy choices, either directly or indirectly. Apart from the provisions mentioned in the respective statutes, a twin test is applied by the law to analyze the SBO, namely, the subjective and objective tests. The RoC under the subjective test, assesses whether an individual other than having direct control has the right to exert or exerts its significant influence in any manner. Whereas the objective test ascertains whether an individual holds at least 10% of the shares.
Notably, the idea of 'control' goes beyond only shareholding. The FATF's 2023 Guidance on Beneficial Ownership for Legal Persons emphasizes other forms of control, such as unequal voting rights, the ability to designate senior management, control via debt instruments, and informal channels such as personal ties. These features have been somewhat integrated into Indian corporate law through the idea of 'significant influence.' However, recognizing SBOs without direct interests is a real difficulty. To address this, the RoC has taken a broad approach, analyzing multinational corporations' overall ownership and management structures to identify natural persons in positions of influence. This strategy seeks to prohibit the exploitation of legal persons for criminal objectives and to adopt transparency measures.
Deciphering the LinkedIn SBO Order
Background
Recently, Satya Nadella, the chief of Microsoft, Ryan Roslanksy, and seven others have been fined a total amount of 28 Lakhs. The penalty on the company was imposed by the RoC for violating SBO norms under the Companies Act, 2013 (“CA 2013”) related to LinkedIn Technology Information.
In LinkedIn India's financial records, there is a discrepancy between the declared date of beneficial interest and the real date, which was discovered by the RoC. A violation of Section 89 of the CA 2013, which requires an accurate declaration of beneficial interest in shares, was found by the RoC as a result of this disparity. Specifically, LinkedIn India had filed an MGT 6 form indicating LinkedIn Technology Unlimited Company as the registered holder and LinkedIn Ireland Unlimited Company as the beneficial owner, with the beneficial interest established on January 11, 2024. However, the RoC discovered through LinkedIn India's annual financial statements that the beneficial interest had arisen earlier than the declared date.
Linkedin’s Arguments
The beneficial interest had arisen earlier than the one indicated in the filing, according to the RoC's examination of LinkedIn India's annual financial statements.
The complaints of LinkedIn India were rejected by RoC, including the claim that LinkedIn Ireland had always had beneficial ownership and that the filing's incorrect date was an unintentional oversight. As a result, the RoC determined that LinkedIn Ireland and LinkedIn Technology violated Section 89 of the CA 2013, which requires proper disclosure of beneficial interest in shares. One of LinkedIn India's primary arguments was that, according to public documents, neither the corporation nor its ultimate parent company, Microsoft Corporation, USA, had a single individual owning a majority share.
RoC’s Decision
The RoC determined that specific individuals were SBOs due to their control over LinkedIn India after reviewing the company's beneficial ownership structure, including holding and subsidiary relationships, website reporting, and how financial control was exercised. In particular, the RoC determined that Mr. Ryan Roslansky of Microsoft Corporation, USA, and Mr. Satya Nadella of LinkedIn Corporation, USA, were SBOs.
Several conditions must be completed to determine who is an SBO under the CA 2013. These characteristics include owning a large number of shares, exercising voting rights, receiving dividends, or wielding significant influence or control. In addition, the corporation must disclose the information of these SBOs in a return that must be submitted to the RoC. The RoC found that Mr. Nadella and Mr. Roslansky were SBOs because of their controllability of the company as shown by their positions in the parent and ultimate holding companies despite LinkedIn India's arguments to the contrary.
Regulatory Overreach: An Examination of the LinkedIn SBO Order's Far-Reaching Implications
RoC overlooking the objective criteria
An in-depth review of the Rules reveals that a CEO of a Pooled Investment Vehicle (“PIV”) or an entity controlled by a PIV, or if the investment manager is a corporate body of a reporting company, is required to disclose their involvement. However, the RoC has seemingly misapplied this rule in the LinkedIn Order, erroneously identifying LinkedIn USA and Microsoft Corporation as SBOs despite them not being PIVs. For individuals to be considered as SBOs, they must meet the criteria under clause (h) of sub-clauses (i), (ii), or (iii) of Rule 2(1) of the SBO rules. Since Satya Nadella and Ryan Rolansky, neither hold 10% or more shareholding rights in LinkedIn India nor possess equivalent voting rights or dividend entitlements, they do not qualify as SBOs.
Even when considering indirect rights under Rule 2(1)(h) applicable to LinkedIn India, the requirement for a majority stake in the holding company or other rights by the ultimate holding company remains unmet, as the RoC acknowledged they did not hold any shares. The RoC's emphasis on the subjective test, rather than the objective one, is unjustified. The LinkedIn Order's interpretation of Section (h)(iv) and the subjective test's distinct application are still uncertain.
Inconsistencies vis-a-vis SBO rules and Section 90 and its implications
Section 90(1) of the CA 2013, which contains powers of control or considerable influence, was misapplied since Nadella and Rolansky could not designate a majority of directors or govern management in LinkedIn India. Focusing on perceived influence rather than actual authority is problematic. Misinterpreting these provisions could wrongly label CEOs of multinational corporations as SBOs based on visibility rather than legal rights, creating practical issues like inconsistent thresholds (10% for SBO Rules vs. 25% under Section 90), ambiguity in concerted actions, and inconsistencies between private trusts and PIVs.
AO's Presumptive Approach to Identifying SBOs
The focus of Adjudicating Authority (“AO”) while investigating the matter was on Ryan Roslansky’s 2022 trip to India, where the latter discussed his macro-level plans suggesting his influence on India’s operations. The inference was taken from the YouTube recordings and media articles. LinkedIn defended by asserting that its R&D operations in India are governed by Board-approved contracts, with no direct involvement from Roslansky. They also clarified that the comments made were global and not specifically related to LinkedIn India.
Although LinkedIn verified the transactions were with authorized counterparties, the AO raised concerns about the involvement of persons outside of LinkedIn India’s board. Regardless of these explanations, the AO inferred from LinkedIn's website and press announcements that Roslansky and Microsoft CEO Satya Nadella are SBOs of LinkedIn India. Without proof of real control or influence, this conclusion was made. Instead of looking for data showing that Roslansky or Nadella had direct involvement in LinkedIn India’s operations or decision-making authority, the AO's method depended on indirect evidence like public domain material.
Conclusion
The order for penalty of violation under section 89 and section 90 of the CA 2013 in the matter of LinkedIn Technology Information Private Limited can set a problematic precedent with profound implications for multinational business structures with complex management. The concern raised is regarding the interpretation of “significant influence”. To mitigate this issue, regulatory bodies should establish clear and specific criteria for determining SBOs in complex corporate frameworks, ensuring consistent application of rules across diverse business models. Furthermore, decisions should be grounded in direct evidence of control, not merely public visibility or presumed influence, to foster a fair and transparent regulatory environment.
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