MCA tightens scrutiny of beneficial ownership norms for foreign-owned companies

The Ministry of Corporate Affairs (MCA) has intensified its scrutiny of beneficial ownership standards for companies owned and controlled by foreign investors, a move that legal experts believe could impact compliance practices.

The Registrar of Companies (RoC) recently issued notices to several foreign-owned and controlled companies, including LinkedIn, for allegedly violating beneficial ownership disclosure norms, according to sources familiar with the matter.

These companies had declared in their annual filings that they did not have any significant beneficial owner (SBO). Most of the notices were issued by RoCs in Haryana, Karnataka, and Mumbai. Some of the entities under scrutiny are entirely owned by foreign private equity funds, the sources said.

Last week, RoC Delhi imposed a Rs 27 lakh penalty on Microsoft-owned professional networking platform LinkedIn and its key officials, including CEO Satya Nadella, for violating SBO norms. Previously, the RoC had fined Gurgaon-based Leixir Resources and its foreign directors Rs 18 lakh for not declaring an SBO as required by the rules.

An email sent to the ministry went unanswered.

“A common theme in the recent SBO non-compliance notices is a rigorous inquiry into the reporting channels of investor directors on the board and the fund structure of investors on the cap table. The RoC exercise seems focused on tracing the individuals driving the fund’s decisions regarding the Indian portfolio entity,” an expert said. “While such notices are unlikely to affect investor sentiment in the long term, companies and investors will need to reassess their filings and strategies accordingly.”

India has been tightening its regulatory scrutiny of beneficial ownership. Over the past year, the Securities and Exchange Board of India (Sebi), the market regulator, has also tightened several rules related to beneficial ownership in foreign portfolio investors (FPIs).

“Reporting companies are required to notify all their corporate shareholders above certain thresholds. Therefore, foreign funds and managers need to be aware of their obligations under Indian laws and respond to these notices with adequate details,” another expert noted. “This would also help them structure their direct or indirect shareholding as well as decision-making capabilities in the reporting companies.”

One source indicated that the RoC actions aim to reduce regulatory arbitrage between foreign investments in listed and unlisted companies in India. Foreign investments in listed companies must be made through the FPI route, which requires compliance with Sebi rules and upfront SBO information before registration.

However, investments in unlisted companies are made through the foreign direct investment route, which lacks such upfront scrutiny.

“Many foreign-owned and controlled companies have been declaring nil SBO despite being 99 percent owned by a single entity, arguing that if the end-beneficiary is a corporate or publicly pooled fund, there is no SBO,” the source said. “In contrast, the rules state that if the end-entity is a corporate or fund, then whoever controls the end-entity, such as its CEO, should be the SBO.”

Legal experts believe the ministry’s recent actions could have significant effects on compliance.

“The aggressive approach adopted by RoC in the LinkedIn case has broader implications for large MNCs operating in India and contradicts the business-friendly environment the government has been trying to promote in recent years,” said another expert, emphasizing that filings should be undertaken with “utmost diligence.”

To meet the higher standards of transparency, foreign private equity funds may need to adjust their agreements.

“The confusion might reshape how funds and managers interact, highlighting the need for clearer agreements that demarcate roles, disclaim control or influence, or clearly record reasons that under law will ensure such persons are not treated as SBOs,” a tax expert concluded.