SBO Declarations: A Significant Compliance Challenge – Part 2

Following an order in the matter of Leixir Resources Private Limited (discussed in our article here), the NCT of Delhi and Haryana has issued yet another order dealing with the aspect of significant beneficial owner1 (“SBO“) and has discussed ‘significant influence’ and ‘control’ required to establish the status of SBOs under the Companies Act, 2013 (“Act“) and the Companies (Significant Beneficial Owners) Rules, 2018 (“Rules“).

In the present matter, LinkedIn Technology Unlimited Company (“LinkedIn Technology“) and LinkedIn Ireland Unlimited Company (“LinkedIn Ireland“) were reported to be the registered holder and beneficial owner, respectively, in respect of 1 (one) share in LinkedIn Technology Information Private Limited (“LinkedIn India“). Microsoft Corporation, USA (“Microsoft“) is the ultimate holding company of LinkedIn India and Mr. Satya Nadella (“Mr. Nadella“) is the CEO and Chairman of Microsoft. LinkedIn Corporation, USA (“LinkedIn Corporation“), which was not a part of the upstream layers of LinkedIn India, was still reported as a holding company in its financial statements. Mr. Ryan Roslansky is the CEO of LinkedIn Corporation.

LinkedIn India had reported the date of acquiring beneficial ownership by LinkedIn Ireland as January 14, 2024, however the financial statements of LinkedIn India showed that the beneficial ownership was created much earlier. Therefore, a show case notice for adjudication dated February 15, 2024 was issued by the Registrar of Companies (“RoC“) to LinkedIn India. LinkedIn India argued that the beneficial ownership always vested with LinkedIn Ireland and it had reported the beneficial ownership in its previous annual returns. However, the RoC observed that the beneficial ownership was required to be declared by the registered owner and the beneficial owner at the time of its creation and LinkedIn India incorrectly declared the date of creation of such beneficial interest and therefore, the RoC imposed a penalty under Section 89 of the Act on LinkedIn India, LinkedIn Ireland and LinkedIn Technology.

The RoC had also raised issues in relation to failure of LinkedIn India to declare its SBOs. LinkedIn India argued that did not have any SBOs since there is no individual holding a majority stake in Microsoft Corporation, USA (“Microsoft Corporation“), which was the ultimate holding company of LinkedIn India. However, the RoC stated that an SBO should also be identified through the test of ‘control’ or ‘significant influence’ and emphasized that indirect ‘right to exercise control’ or ‘significant influence’ is equivalent to exercise of control and significant influence, and that there is no requirement under the Act and Rules that ‘control’ or ‘significant influence’ can only be exercised through a written contract or under a law.

The Act requires that all individuals are required to make a declaration to the reporting company, within 30 (thirty) days of acquiring any interest, specifying the nature of his or her interest and other particulars as provided in the Rules, if such individual, while acting alone or together or through one or more persons or trust, holds beneficial interest of not less than 10% (ten percent) of the shares of a company or the right to exercise (or actually exercising) ‘significant influence’ or ‘control’ over an Indian company2.

The RoC assessed the beneficial ownership in LinkedIn India through 3 (three) methods: (i) holding subsidiary relationship; (ii) the reporting channels of the directors; and (iii) the test of financial control. Based on these evaluations, the RoC determined that Mr. Nadella, CEO and Chairman of the ultimate holding company i.e. Microsoft Corporation and Mr. Roslansky, CEO of LikedIn Corporation, are the beneficial owners of LinkedIn India. The RoC’s reasoning was that LinkedIn Corporation was listed as the holding company in the financial statements of LinkedIn India and had control over the composition of LinkedIn India’s board of directors, despite not being present in the upstream layers. Consequently, Mr. Roslansky, as CEO of LinkedIn Corporation, is considered an SBO of LinkedIn India. Additionally, since Mr. Roslansky reports to Mr. Nadella, Mr. Nadella is also regarded as an SBO in LinkedIn India.

The RoC also observed the composition of board of directors of LinkedIn India and noted that most of its directors were employees of either LinkedIn Corporation or Microsoft and their reporting channels led up to Mr. Nadella and/or Mr. Roslansky. This hierarchy of reporting grants Mr. Nadella and Mr. Roslansky the ‘right to exercise control’ over the majority of LinkedIn India’s directors.

Consequently, the RoC imposed monetary penalties on LinkedIn India, LinkedIn Ireland, LinkedIn Technology, Mr. Nadella, Mr. Roslansky and the directors of LinkedIn India for failure to comply with the provisions of the Act, in relation to significant beneficial ownership.

Similar to the order in the matter of Leixir Resources Private Limited, this order also emphasizes the necessity of accurate filings concerning beneficial ownership and SBOs. It also demonstrates a need to undertake a thorough analysis of corporate structure and relationship, to ensure adherence to the Act.

1Rule 2 (h) of the Rules defines “significant beneficial owner” in relation to a reporting company as an individual referred to in sub-section (1) of Section 90 of the Act, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely: (i) holds indirectly, or together with any direct holdings, not less than ten percent, of the shares; (ii) holds indirectly, or together with any direct holdings, not less than ten percent, of the voting rights in the shares; (iii) has right to receive or participate in not less than ten per cent, of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings; (iv) has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone:

2Section 90 of the Act.