The term 'beneficial owner’ is frequently used in various areas of Indian legislation, one of which is the recently amended Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (the “NDI Rules”), which were released through Press Note 3 by the Ministry of Commerce and Industry (Press Information Bureau).
The amended NDI Rules state that, in order to curb opportunistic takeovers/acquisitions of Indian companies, a foreign entity which shares a land border with India or whose ‘beneficial owner’ is situated in or is a citizen of any country which shares a land border with India, can only invest in India under the government approval route (the "NDI Rules – 2020 Amendment”).
Also, in the event of transfer of ownership of any foreign direct investment in an Indian entity, directly or indirectly resulting in the beneficial ownership of such Indian entity falling within the above restriction/purview of a country sharing land borders with India, such subsequent change in beneficial ownership will also require prior government approval.
In India, foreign direct investment (“FDI”) is categorized into two classes in terms of its approval route: (i) the automatic route, in which the FDI does not require any prior approval from the Indian Government; and (ii) the government approval route. For any FDI which falls within the purview of the NDI Rules – 2020 Amendment, government approval would be required before any investment in India is made.
There is no definition of ‘beneficial owner’ in the NDI Rules nor in any other Foreign Exchange laws of India. Stakeholders have generally referred to definitions of ‘beneficial owner’ provided under: (i) the Companies Act, 2013 and Companies (Significant Beneficial Owners) Rules, 2018 (“CA 2013”), (ii) the Prevention of Money Laundering Act, 2002 read with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLA”), and (ii)the Reserve Bank of India Master Direction on Know Your Customer (“KYC Directions”).
The definition of ‘significant beneficial owner’ under the CA 2013 is an individual who: (i) directly or indirectly holds not less than 10% of the shares in a company; (ii) directly or indirectly holds not less than 10% of the voting rights in the shares of a company; (iii) directly or indirectly has the right to receive or participate in not less than 10% of the total distributable dividend or any other distribution from a company; or (iv) has right to exercise or actually exercises significant influence or control over a company, in any manner other than through direct holdings alone.
Pursuant to the recent amendments to the PMLA (notified on 7th March 2023) and to the KYC Directions (the 28th April 2023 update), the definition of ‘beneficial owner’ under the PMLA and KYC Directions have now been brought in line with the CA 2013 definition. All definitions now mention a threshold of 10%, which has brought clarity to the understanding of the term ‘beneficial owner’, even though there is still no specific definition for the NDI Rules.
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