India’s evolving SBO rules spotlight transparency in corporate ownership. Recent cases, like LinkedIn India and Samsung Noida, highlight expanded interpretations of control and influence, aligning with global standards to enhance governance and prevent financial misconduct.
Introduction
In a rapidly evolving corporate environment, transparency and governance have become more critical than ever. In India, the Ministry of Corporate Affairs (MCA) has been increasingly vigilant about enforcing transparency through the provisions of the Companies Act, 2013, particularly with regard to Significant Beneficial Ownership (SBO). Legal rulings against prominent companies such as Samsung Display Noida Pvt Ltd[1] and LinkedIn India[2] have brought significant attention to this issue, signaling a potential shift in how SBO disclosures might be interpreted and enforced in the future. This particular article attempts to examine these cases, compares India’s approach with international practices, and assesses whether the MCA is poised to broaden the scope of the SBO rules.
The Legal Framework: SBO and Its Importance
The concept of Significant Beneficial Ownership (SBO) is enshrined in Section 90 of the Companies Act, 2013, and its associated rules under the Companies (Significant Beneficial Owners) Rules, 2018. These provisions were introduced with the primary aim of promoting transparency and accountability within the corporate sector, particularly in terms of identifying the individuals who ultimately control or influence companies. The rules focus on ensuring that the true owners and controllers of companies are known to the authorities, reducing the likelihood of corporate malfeasance, such as money laundering, tax evasion, or other forms of financial misconduct.
Under the provisions of the Companies Act, SBO refers to an individual who holds directly or indirectly more than 10% of shares or exercises significant control or influence over the company's affairs.[3] However, it is important to note that the definition of significant control is not limited solely to ownership percentages. The SBO rules extend to include any person who holds the power to significantly influence a company's financial and operational policies. This could include individuals who, through family ties, corporate governance, or management positions, have the power to sway critical decisions that whether or not they hold a substantial shareholding.
At its core, the SBO framework seeks to provide clarity in identifying those who are ultimately beneficial owners. This becomes especially important in cases where the ownership is spread across various entities, creating complex, layered structures that might obscure the real controlling parties. The government’s move to mandate this disclosure addresses the need to prevent illicit activities, such as money laundering or the hiding of illicit assets, through complex corporate structures.
The importance of SBO rules cannot be overstated, as they have been designed to counteract the opacity that characterizes many corporate entities. By requiring direct and indirect owners to disclose their holdings, the law attempts to ensure that individuals who control these entities cannot hide behind legal fictions or multiple layers of ownership.
Additionally, the SBO rules contribute significantly to corporate governance and regulatory compliance. They ensure that the public and investors have access to accurate information about who is behind the decision-making in a company, allowing for more informed business decisions and mitigating the risks of corporate fraud and financial irregularities. Ultimately, these provisions aim to create a cleaner, more transparent business environment in India, bolstering investor confidence and promoting fair competition.
LinkedIn India[4]: The Case of Microsoft’s Influence
In May 2024, the Registrar of Companies (RoC) for the National Capital Territory of Delhi imposed penalties on LinkedIn India for failing to disclose Microsoft Corporation as its beneficial owner. LinkedIn India argued that no individual held more than 10% of its shares directly, thus exempting it from the SBO disclosure requirements. However, the RoC rejected this defense, noting that the rules extend beyond shareholding to include individuals who exert significant control over the company.
The key point in this case was that Microsoft, as the parent company of LinkedIn, exercised considerable control over LinkedIn India through its corporate structure. The RoC applied the Objective Test (shareholding over 10%) and the Subjective Test (significant influence or control). The subjective test, which considers indirect control, became the critical factor in the ruling. The RoC concluded that Satya Nadella, CEO of Microsoft, and Ryan Roslansky, CEO of LinkedIn Corporation, met the criteria of SBOs due to their substantial influence over LinkedIn India’s operations, despite not holding significant direct shareholding.
This interpretation of the law expanded the understanding of SBOs to include senior executives of parent companies, especially in cases where they can influence decisions indirectly. The ruling also emphasized the importance of looking at control and influence, rather than shareholding percentages alone.
Samsung Display Noida Pvt Ltd[5]: A Case of Indirect Control
Similar to the LinkedIn India case, Samsung Display Noida Pvt Ltd (Samsung Noida) faced penalties from the RoC for non-compliance with SBO disclosure requirements. Samsung Noida, a wholly-owned subsidiary of Samsung Display Corporation Ltd (SDC), failed to disclose its ownership structure, particularly the role of Samsung Electronics Corporation (SEC Korea), the parent company of SDC, in exercising significant influence.[6]
The RoC noted that while Samsung Noida did not have an individual shareholder meeting the SBO threshold, the Lee family, which controls SEC Korea, holds substantial indirect control over Samsung Noida through its influence over SEC Korea’s governance. The RoC argued that Mr. Lee Kun Hee’s family had effectively appointed his son, Mr. Lee Jae-Yong, as the executive chairman, despite not holding a majority of shares. This arrangement suggested a form of "proxy control," where decision-making power is vested in an individual who may not hold the majority of shares but who can control significant corporate decisions.
The RoC applied both the objective and subjective tests to determine the significant influence exercised by the Lee family, ultimately classifying Mr. Lee Jae-Yong and other members of the family as SBOs. This ruling, like the LinkedIn case, highlights the increasingly broad interpretation of SBO rules, extending to family-controlled entities and indirect forms of influence.
The Role of Subjective Control: A New Approach to SBOs
Both the LinkedIn India and Samsung Noida rulings underscore a critical shift in the interpretation of SBO rules. Traditionally, the term “significant beneficial ownership” was tied primarily to ownership percentages. However, these recent cases reveal a more expansive view that includes indirect control, highlighting the influence of senior executives and even family members within a corporate structure.
This approach aligns with global trends in corporate governance, where ownership structures and management control are often more nuanced. The increasing complexity of global corporations necessitates a regulatory approach that goes beyond simple shareholding, and the Subjective Test now plays a significant role in determining SBOs. This test ensures that individuals who can significantly influence company decisions, such as CEOs or family members with control over a parent company are held accountable, even if they do not directly hold the requisite percentage of shares.
Comparing India’s Approach with International Practices
India’s regulatory framework for SBO disclosures shares similarities with the practices in other countries, particularly the United States. The Corporate Transparency Act (CTA)[7] in the U.S., which came into effect in 2024, requires U.S. companies to disclose beneficial owners who hold at least 25% of the shares, or who have substantial control over the company. The U.S. definition of substantial control is notably broader than India’s, encompassing not only shareholders but also senior executives, such as CEOs and CFOs, and any individuals with authority to appoint a majority of directors.
In comparison as discussed earlier, India’s threshold for SBO disclosure is lower, set at 10% shareholding, and includes individuals who have the power to influence or control the company’s financial and operational decisions. India’s broader interpretation of “control” and “influence” appears to be moving closer to the U.S. model, where non-shareholding control is also scrutinized.
However, India’s approach still faces challenges, particularly in cases where the definition of influence can be subjective. The recent penalties against LinkedIn India and Samsung Noida reflect an evolving stance by the RoC, which is now more inclined to interpret the law broadly, taking into account not just shareholding, but also indirect forms of control that may not be immediately apparent from a company’s formal ownership structure.
Implications for Indian Corporations
The expanding definition of SBOs in India will likely result in more comprehensive disclosures in the future and so companies may need to re-evaluate their ownership structures and management hierarchies to ensure compliance with the evolving regulatory landscape. For multinational corporations, this may mean greater transparency regarding their global ownership and control structures, especially when operations are conducted through subsidiaries.
While this regulatory shift aims to improve transparency, it also places a significant compliance burden on businesses, especially those with complex ownership structures or multinational parent companies. For companies that have not yet fully disclosed their SBOs, the recent penalties serve as a reminder that regulators are scrutinizing corporate governance practices more closely than ever.
Conclusion: A More Transparent Future for Corporate India
The penalties imposed on LinkedIn India and Samsung Noida indicate a shift toward more stringent enforcement of SBO disclosure rules in India. By expanding the definition of “significant influence” and applying both objective and subjective tests, the MCA aims to ensure that corporate structures are more transparent, thereby reducing the risk of financial crimes and promoting good governance.
As India continues to align its regulatory framework with global practices, it will likely see increased corporate transparency, which, despite its challenges, will ultimately strengthen the integrity of its corporate sector. These recent rulings mark an important step towards ensuring that India’s corporate economy grows on a foundation of accountability and transparency, which is essential for fostering trust and long-term stability in the marketplace.
The increasing scrutiny of SBOs and the growing trend of expanding definitions of control and influence will undoubtedly reshape the future of corporate governance in India. For companies and their executives, understanding the evolving regulatory landscape will be key to avoiding penalties and ensuring compliance. The ongoing refinement of these rules demonstrates India's commitment to improving corporate transparency, which is critical for maintaining the integrity of its rapidly growing economy.
[1] MCA Order No. 03/07/SBO/UP/2024/Samsung Display/ Dated: 12.06.2024 getdocument
[2] Order For Penalty for Violation Under Section 89 And Section 90 Of the Companies Act, 2013 In the Matter Of LinkedIn Technology Information Private Limited (Cin: U72900dl2009ptc197503) getdocument
[3] The Companies Act, 2013, s. 90.
[4] LinkedIn-signed-20240522.pdf
[5] MCA Order No. 03/07/SBO/UP/2024/Samsung Display/ Dated: 12.06.2024.
[6] Samsung Display Noida Case and the Expanding Scope of SBO Identification.
