The Register of Members, and Significant Beneficial Owners

Section 88(2). Every such register shall include an index of the names included in it.

Section 88(3): dematerialised holdings. The register and index of beneficial owners maintained by a depository under section 11 of the Depositories Act 1996 shall be deemed to be the corresponding register and index for the purposes of this Act. So for shares held electronically the depository's record is the register, and the company does not keep a duplicate.

Section 88(4): the foreign register. A company may, if so authorised by its articles, keep in any country outside India a part of the register, called a "foreign register", containing the names and particulars of members, debenture holders, other security holders or beneficial owners residing outside India.

Section 88(5): the penalty. Failure to maintain the registers, or to maintain them in accordance with sub-sections (1) or (2), makes the company liable to a penalty of three lakh rupees and every officer in default liable to fifty thousand rupees.

Beneficial interest: section 89

Section 89(1): the nominee declares. Where a person's name is entered in the register of members as the holder of shares but he does not hold the beneficial interest in them, he shall make a declaration to the company, within the prescribed time and form, specifying the name and other particulars of the person who holds the beneficial interest.

Section 89(2): the beneficial owner declares. Every person who holds or acquires a beneficial interest in a share shall make a declaration to the company specifying the nature of his interest, the particulars of the person in whose name the shares stand registered, and such other particulars as may be prescribed.

So both ends of the arrangement must speak, and each must identify the other.

Section 89(3): changes. Where any change occurs in the beneficial interest, both persons shall, within thirty days of the change, make a declaration to the company.

Section 89(5): the penalty on the person. Failure to declare under sub-sections (1), (2) or (3) makes the person liable to a penalty of fifty thousand rupees, and for a continuing failure a further two hundred rupees for each day after the first, subject to a maximum of five lakh rupees.

Section 89(6): what the company does. On receiving a declaration the company shall make a note of it in the register concerned and shall file a return with the Registrar within thirty days of receipt, in the prescribed form and on the prescribed fees.

Section 89(7): the penalty on the company. Failure to file that return makes the company and every officer in default liable to one thousand rupees for each day the failure continues, subject to a maximum of five lakh rupees for the company and two lakh rupees for an officer in default.

Section 89(8) is the sanction that matters most, and it is regularly examined:

No right in relation to any share in respect of which a declaration is required to be made under this section but not made by the beneficial owner, shall be enforceable by him or by any person claiming through him.

A beneficial owner who stays hidden cannot enforce any right in the share, and neither can anybody claiming through him. He does not lose the share; he loses the ability to do anything with it.

Section 89(9) protects the company. Nothing in the section prejudices the company's obligation to pay dividend to its members, and on such payment that obligation stands discharged. So the company pays the registered holder and is safe.

Section 89(10) defines beneficial interest, and the definition is wide:

beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to (i) exercise or cause to be exercised any or all of the rights attached to such share; or (ii) receive or participate in any dividend or other distribution in respect of such share.

Two limbs: the votes, or the money. Either alone is enough, and the entitlement may arise through any contract, arrangement or otherwise, so an informal understanding counts.

Section 89(11). The Central Government may by notification exempt any class of persons from any requirement of the section except sub-section (10), in the public interest, conditionally or unconditionally. Note that the definition itself cannot be exempted away.

Significant beneficial owners: section 90

Section 90(1): who must declare. Every individual who, acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests of not less than twenty-five per cent, or such other percentage as may be prescribed, in shares of a company, or the right to exercise or the actual exercising of significant influence or control as defined in section 2(27) over the company, shall make a declaration to the company specifying the nature of his interest and other particulars, in the prescribed manner and within the prescribed period of acquisition and of any change.

Four things to fix.

It is an individual, a human being. The section is designed to reach past companies and trusts to a person.

"Acting alone or together, or through one or more persons or trust" and "persons resident outside India" are there so that a chain of intermediaries is not a defence.

Two alternative triggers: twenty-five per cent or such other percentage as prescribed of beneficial interest, or significant influence or control under section 2(27). Control alone, with no shareholding at all, is enough.

The proviso lets the Central Government prescribe classes of persons not required to declare.

Section 90(2) and (3): the register. Every company shall maintain a register of the interests declared, including the name of the individual, his date of birth, address and details of ownership, and the register shall be open to inspection by any member on payment of the prescribed fees.

Section 90(4) and (4A): the return and the duty to look. Every company shall file a return of significant beneficial owners and changes with the Registrar. And by sub-section (4A), every company shall take necessary steps to identify an individual who is a significant beneficial owner and require him to comply. That is an active duty: the company cannot sit and wait for a declaration.

Section 90(5): the notice. The company shall give notice to any person, whether or not a member, whom it knows or has reasonable cause to believe:

• (a) to be a significant beneficial owner;
• (b) to have knowledge of the identity of a significant beneficial owner, or of another person likely to have such knowledge; or
• (c) to have been a significant beneficial owner at any time during the three years immediately preceding the date of the notice,

and who is not registered as a significant beneficial owner.

Clause (b) is the useful one: the company may serve the person who knows who it is, not merely the owner himself.

Section 90(6): the answer. The information shall be given within a period not exceeding thirty days of the date of the notice.

Section 90(7): to the Tribunal. Where the person fails to give the information within the time specified, or where the information given is not satisfactory, the company shall apply to the Tribunal within fifteen days of the expiry of the period specified in the notice, for an order directing that the shares be subject to restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other matters as may be prescribed.

Note that the application is mandatory, "shall apply", and the window is fifteen days.

Section 90(8): the order. The Tribunal may, after giving an opportunity of being heard, make such an order within sixty days of receipt of the application, or such other period as may be prescribed.

Section 90(9): getting the restrictions lifted, and the sting if nobody tries. The company or the person aggrieved may apply for relaxation or lifting of the restrictions within one year of the order.

The proviso: if no such application is filed within one year, the shares shall be transferred, without any restrictions, to the authority constituted under section 125(5), that is, the authority administering the Investor Education and Protection Fund, in the prescribed manner.

That is the real deterrent. A hidden owner who simply ignores the process for a year does not merely lose the use of his shares. He loses the shares.

Closing the register: section 91

Section 91(1). A company may close the register of members, of debenture holders or of other security holders for any period or periods not exceeding in the aggregate forty-five days in each year, but not exceeding thirty days at any one time, subject to previous notice of at least seven days, or such lesser period as SEBI may specify for listed companies or companies intending to list, in the prescribed manner.

Three numbers: forty-five days a year in aggregate, thirty days at any one time, seven days' previous notice.

Section 91(2): the penalty. Closure without the notice, or on shorter notice, or beyond either limit, makes the company and every officer in default liable to a penalty of five thousand rupees for every day the register is kept closed, subject to a maximum of one lakh rupees.

Where the registers live, and who may see them: section 94

Section 94(1). The registers under section 88 and copies of the annual return filed under section 92 shall be kept at the registered office.

The first proviso allows them to be kept at any other place in India in which more than one-tenth of the total number of members entered in the register of members reside, if approved by a special resolution passed at a general meeting.

The second proviso: the period for which the registers, returns and records must be kept is as may be prescribed.

Section 94(2): inspection. The registers and their indices, except when closed under the Act, and copies of all returns, shall be open for inspection during business hours:

• by any member, debenture holder, other security holder or beneficial owner, without payment of any fees; and
• by any other person on payment of such fees as may be prescribed.

Section 94(3): extracts and copies. Any such person may (a) take extracts from any register, index or return without payment of any fee, or (b) require a copy of any such register or entries or return on payment of such fees as may be prescribed.

Note the free extract. Taking an extract yourself costs nothing; asking the company to make you a copy costs the prescribed fee.

The registers as evidence: section 95

The register of members, the register of debenture holders, the register of other security holders, the annual return and the indices maintained under sections 88 and 92 shall be prima facie evidence of any matter directed or authorised to be inserted in them by or under this Act.

Prima facie, not conclusive, which is why section 59 exists to rectify a register that is wrong. Read the two together: the register is believed until somebody shows it should not be.

A worked example

Amaravati Logistics Limited has one crore equity shares.

The registers. It keeps a register of members showing equity and preference holdings separately for members in and outside India, a register of debenture holders, and a register of other security holders, each with an index: section 88(1) and (2). Its dematerialised shares are covered by the depository's register, which section 88(3) deems to be the corresponding register.

A nominee holding. Twelve lakh shares stand in the name of Mr Rathi, who holds them for Ms Bhagat. Under section 89(1) Mr Rathi must declare that he is not the beneficial owner and identify Ms Bhagat; under section 89(2) Ms Bhagat must declare the nature of her interest and identify Mr Rathi. If the arrangement changes, both must declare within thirty days: section 89(3).

The company notes the declaration in the register and files a return with the Registrar within thirty days: section 89(6).

Ms Bhagat does not declare. By section 89(8) no right in relation to those shares is enforceable by her or by anyone claiming through her. She also faces fifty thousand rupees, plus two hundred rupees a day, capped at five lakh rupees: section 89(5). Meanwhile the company may still pay the dividend to Mr Rathi, the registered member, and by section 89(9) that discharges its obligation.

Now go up the chain. Ms Bhagat's twelve per cent is held alongside another eighteen per cent held through a Singapore trust, and both are ultimately controlled by Mr Vora, who is not on any register. He holds, through persons and a trust, thirty per cent of the beneficial interest.

That is not less than twenty-five per cent, so under section 90(1) Mr Vora is a significant beneficial owner and must declare. He would equally be one, at any percentage, if he had the right to exercise or actually exercised significant influence or control under section 2(27).

The company must go looking. Under section 90(4A) it must take necessary steps to identify him. Under section 90(5) it gives notice to Mr Vora, and it may also give notice to Ms Bhagat under clause (b), as a person likely to know his identity, and to anyone who was a significant beneficial owner within the last three years under clause (c).

He does not answer. The information had to come within thirty days: section 90(6). On his failure, the company shall apply to the Tribunal within fifteen days of the expiry of that period: section 90(7).

The Tribunal acts. After hearing the parties it may, within sixty days of the application, order that the shares be subject to restrictions on transfer of interest and suspension of all rights attached to them: section 90(8).

And if nobody moves for a year. Under the proviso to section 90(9), if no application for relaxation or lifting is made within one year of the order, the shares shall be transferred, without any restrictions, to the authority constituted under section 125(5). Mr Vora loses them altogether.

Book closure. Before its annual general meeting the company closes the register of members for twenty-one days, having given seven days' previous notice. That is within both limits in section 91(1): not more than thirty days at one time and not more than forty-five days in the year. Had it closed for thirty-five days at once, the penalty is five thousand rupees a day, capped at one lakh rupees.

Inspection. Because more than one-tenth of its members live in Nagpur, the company passes a special resolution and keeps the registers there instead of at the registered office: proviso to section 94(1). A member may inspect free and take extracts free; a journalist may inspect on the prescribed fee and may require a copy on the prescribed fee: section 94(2) and (3).

A dispute. A person claims he was a member and was wrongly removed. The register is prima facie evidence under section 95, so it is believed unless he displaces it, and his remedy is rectification under section 59.

Distinctions that carry marks

What this does NOT mean

It does not mean a hidden beneficial owner loses his shares under section 89. He loses the enforceability of every right in them: section 89(8). It is under section 90 that the shares can actually be transferred away, and only after a Tribunal order and a year's inaction.

It does not mean the company must chase every shareholder. Section 90(4A) requires it to identify a significant beneficial owner, and section 90(5) lets it serve notice on people it knows or has reasonable cause to believe are within the three clauses.

It does not mean twenty-five per cent is the only route into section 90. Significant influence or control under section 2(27) is an independent trigger.

It does not mean the register proves title conclusively. Section 95 makes it prima facie evidence, and section 59 allows rectification.

Quick revision

• 88(1): registers of members (equity and preference separately, in and outside India), debenture holders and other security holders; (2) each with an index; (3) a depository's register is deemed the corresponding register; (4) a foreign register if the articles allow; (5) penalty three lakh rupees on the company, fifty thousand on each officer in default.
• 89(1) and (2): both the registered holder and the beneficial owner declare, each identifying the other. (3) changes within thirty days. (5) penalty fifty thousand rupees, plus two hundred a day, max five lakh. (6) company notes it and files a return in thirty days. (7) company and officers one thousand a day, max five lakh and two lakh. (8) no right enforceable by an undeclared beneficial owner or anyone claiming through him. (9) payment of dividend to the member discharges the company. (10) beneficial interest is the right to exercise the rights or to receive the dividend, directly or indirectly, by contract, arrangement or otherwise.
• 90(1): an individual holding not less than twenty-five per cent beneficial interest, or with the right to exercise or actually exercising significant influence or control under section 2(27), must declare. (2) and (3) register, open to any member on fees. (4) return to the Registrar. (4A) the company must take steps to identify him. (5) notice to suspected owners, to those who may know, and to owners of the last three years. (6) answer within thirty days. (7) company shall apply to the Tribunal within fifteen days. (8) Tribunal may restrict transfer and suspend all rights within sixty days. (9) apply to lift within one year, else the shares go to the section 125(5) authority.
• 91: close the register up to forty-five days a year, thirty at a time, on seven days' notice; breach costs five thousand a day, max one lakh.
• 94: registers and annual return copies at the registered office, or elsewhere in India where more than one-tenth of members reside, on a special resolution. Inspection free for members, debenture holders, other security holders and beneficial owners; others on fees. Extracts free; copies on fees.
• 95: the registers, the annual return and the indices are prima facie evidence.

Test yourself

1. Which registers must every company keep under section 88? A register of members, indicating separately each class of equity and preference shares held by each member residing in or outside India; a register of debenture holders; and a register of any other security holders, each including an index.

2. Who must declare under section 89, and what happens if the beneficial owner does not? Both the registered holder who does not hold the beneficial interest, and the person who holds or acquires the beneficial interest, must declare, each identifying the other. If the beneficial owner does not, no right in relation to the share is enforceable by him or by any person claiming through him: section 89(8), besides the penalties in section 89(5).

3. Who is a significant beneficial owner? An individual who, acting alone or together or through one or more persons or a trust, including persons resident outside India, holds beneficial interests of not less than twenty-five per cent, or such other percentage as may be prescribed, in the shares of a company, or who has the right to exercise, or actually exercises, significant influence or control as defined in section 2(27): section 90(1).

4. To whom may a company give notice under section 90(5)? To any person, whether or not a member, whom it knows or has reasonable cause to believe to be a significant beneficial owner, to have knowledge of the identity of one or of another person likely to know, or to have been one at any time in the three years immediately preceding the notice, and who is not registered as such.

5. What happens if the person does not answer, and what if nobody applies to lift the restrictions? The company shall apply to the Tribunal within fifteen days of the expiry of the period in the notice, and the Tribunal may within sixty days, after a hearing, restrict transfer and suspend all rights attached to the shares. If no application to relax or lift is made within one year of that order, the shares shall be transferred without any restrictions to the authority constituted under section 125(5).

6. For how long may a company close its register of members? For periods not exceeding forty-five days in the aggregate in each year and not exceeding thirty days at any one time, on at least seven days' previous notice, or such lesser period as SEBI specifies for listed companies: section 91(1).