Companies Act Section 89

Companies Act, Section 89: Declaration in Respect of Beneficial Interest in Shares

Section 89 of the Companies Act establishes the legal framework for the disclosure of beneficial interests in shares. 

This provision ensures transparency by requiring individuals and entities to declare the actual beneficial ownership of shares, even when such ownership is indirect or through a nominee. 

The primary objective of this section is to prevent hidden ownership structures that could facilitate fraudulent activities and to align corporate governance with international standards. Below is a comprehensive breakdown of the section's provisions.

Subsection (1): Declaration by Registered Shareholder

Applicability

This provision applies to any individual or entity whose name appears in the register of members of a company as the official holder of shares but who does not actually hold the beneficial interest in those shares.

Requirement

Such a registered shareholder must, within the prescribed time frame and format, submit a formal declaration to the company specifying that the shares are held on behalf of another person who has the actual beneficial interest.

Details to Declare

The declaration should provide:

The name and particulars of the actual beneficial owner.

The nature of the relationship between the registered shareholder and the beneficial owner.

Any other prescribed particulars as mandated by regulatory authorities.

Subsection (2): Declaration by the Beneficial Owner

Applicability

Any individual or entity that acquires or holds a beneficial interest in shares of a company, even if the shares are registered under another person’s name, must also make a declaration.

Requirement

This declaration must disclose:

The precise nature of the beneficial interest.

The name of the registered shareholder under whose name the shares are recorded in the company’s register.

Other relevant details as required by the applicable regulations.

Subsection (3): Declaration of Changes in Beneficial Interest

Situations Covered

If there is any change in the beneficial interest of shares, both the registered shareholder and the beneficial owner must report the change.

Declaration Timeline

A declaration must be made to the company within 30 days from the date on which the change in beneficial interest occurs.

Details to Include

The updated particulars of the beneficial interest.

The date and nature of the change.

Any supporting documentation as required under the prescribed rules.

Subsection (4): Rulemaking by the Central Government

The Central Government has the authority to prescribe rules that regulate the manner in which beneficial interests in shares must be disclosed. These rules ensure uniformity and clarity in compliance.

Subsection (5): Penalties for Non-Compliance with Declarations

Failure to Declare

If any individual or entity fails to make the necessary declarations under Subsections (1), (2), or (3), they will be subject to penalties as follows:

A penalty of ?50,000.

In the case of continued non-compliance, an additional penalty of ?200 per day for each day of default, up to a maximum of ?5,00,000.

Subsection (6): Obligations of the Company

Action Upon Receiving a Declaration

Once the company receives a declaration under this section, it is required to:

1. Make an entry of the declaration in the appropriate register.

2. File a return with the Registrar of Companies (ROC) within 30 days from the receipt of the declaration.

Fees

The return must be submitted along with the prescribed fees or any additional late fees, if applicable.

Subsection (7): Penalties for Non-Compliance by the Company

Failure to File Returns

If a company fails to file the required return under Subsection (6) within the specified timeframe, penalties will be imposed as follows:

The company will be liable to a penalty of ?1,000 per day, up to a maximum of ?5,00,000.

Each officer in default will also be liable for a penalty of ?1,000 per day, up to a maximum of ?2,00,000.

Subsection (8): Restriction on Enforceability of Rights

Consequences of Non-Declaration

If a beneficial owner fails to make the necessary declaration as required under this section, they will be barred from enforcing any rights related to the shares in question. 

This restriction applies not only to the non-declaring beneficial owner but also to any person claiming rights through them.

Subsection (9): No Impact on Dividend Obligations

This section does not affect the company's obligation to distribute dividends under the Act. Once the company pays dividends to the registered shareholder, its obligation is deemed to be fulfilled.

Subsection (10): Definition of Beneficial Interest

Scope of Beneficial Interest

For the purposes of this section and Section 90, a “beneficial interest in a share” includes any direct or indirect entitlement arising from a contract, arrangement, or otherwise that allows a person to:

Exercise or cause the exercise of any rights attached to the share, or

Receive or participate in dividends or other distributions related to the share.

Subsection (11): Exemptions by the Central Government

Exemptions in Public Interest

The Central Government has the authority to exempt certain categories of individuals or entities from compliance with this section (except for Subsection 10). Such exemptions may be granted:

Unconditionally, or

Subject to specific conditions as detailed in the notification.

Key Objectives of Section 89

Enhancing Transparency

Ensures that the real ownership of shares is disclosed.

Prevents concealment of ownership through proxies or nominees.

Preventing Misuse

Helps combat financial crimes such as money laundering, tax evasion, and corporate fraud.

Reduces the risk of shell companies and hidden ownership structures being used for illicit activities.

Accountability & Compliance

Imposes strict reporting obligations on shareholders and beneficial owners.

Encourages compliance through financial penalties for non-disclosure.

Alignment with Global Standards

Brings Indian corporate governance practices in line with international frameworks related to beneficial ownership disclosure.

Ensures adherence to FATF (Financial Action Task Force) guidelines on corporate transparency.