Is India close to passing a law to identify true ownership of corporates


  • 27 July, 2016
  • Neeti Biyani

While Pascal Saint-Amans, head of tax at the Organisation for Economic Cooperation and Development (OECD), has once again emphasised the need for beneficial ownership and corporate transparency, India has introduced legislation on beneficial ownership in the Companies (Amendment) Bill, 2016 which is currently being reviewed by the Parliamentary Standing Committee on Finance.

Beneficial ownership is a policy measure that would require all legal entities to make details about their true human owner(s) available to their countries’ authorities. Saint-Amans commented that improved availability of and access to information on beneficial owners of all legal entities, including trusts, would ensure that international efforts to curb tax dodging and corruption succeed.

The proposal in the Companies (Amendment) Bill would require companies in India to file information regarding their beneficial owners to the Registrar of Companies, Ministry of Corporate Affairs. Through the Registrar of Companies, the public would be able to access this information. However, at present, the Bill proposes to identify a beneficial owner(s) as a person or a trust that holds 25 percent shares in a company, or the right to exercise ‘significant influence or control’.

It is crucial to go beyond ownership of shares of a company to identify the beneficial owner, as one of the most common ways in which true ownership is obscured is by appointing nominees, proxies or agents who are shareholders on paper, but do not actually benefit from the proceeds of the company. There is also a need to lower the threshold of 25 percent, as it is vulnerable to abuse.

An individual wishing to remain anonymous would only need to appoint three people to represent themselves as the beneficial owners of a company, while diluting his / her own ownership to 20 percent or lesser, thereby ensuring anonymity. A registry for beneficial ownership of trusts and foundations could also be considered by the Parliamentary Standing Committee.

Anonymously owned companies are yet to be recognised as one of the most serious financial secrecy issues in the world. An anonymous company is an entity used to disguise the identity of their true human owner — the person(s) who ultimately control or profit from the company, or its ‘beneficial owners’. Anonymous companies often have very few or no employees at all, most don’t conduct any real business but are legally eligible to make financial transactions, buy a million-dollar penthouse or own other companies. Therefore, it is close to impossible to trace the transactions carried out by these companies to the people who actually own or benefit from them.

Financial secrecy that can be afforded by powerful multi-national corporations and rich individuals ends up hurting the poor by eroding tax revenues for countries. Anonymous companies are also behind crime and corruption – the likes of terrorist financing, human traffickers, drug cartels and mobsters. The OECD too, has claimed that almost every economic crime involves the misuse of corporate vehicles.

In 2009, Barack Obama had referred to a building in Cayman Islands, Ugland House, citing that it was home to 12,000 businesses – which he claimed was either the largest building in the world or the biggest tax scam on record. The figure is closer to 20,000 businesses registered at the same address in the small offshore secrecy jurisdiction that is Cayman Islands.

However, an address in Wilmington, Delaware, USA – 1209 North Orange Street – is the official address for 285,000 companies. In fact, Delaware has over a million business entities registered in the state, including 64 percent of the companies that comprise the Fortune 500 list. Labeled as USA’s onshore tax haven, the state of Delaware offers the most amount of ease in creating a company – one would need to provide more information to obtain a library card in Delaware than to register a company. Delaware’s lack of disclosure requirements means that companies can be created and businesses can be run absolutely anonymously, helping owners avoid detection as well as taxes from the country’s authorities.

The Panama Papers – a leak of financial documents from a Panama-based law firm, Mossack Fonseca earlier in 2016 – have once again pointed towards the issue of anonymous companies as being implicit in financial crime and illicit financial flows, or black money. With developing countries losing over $1 trillion to illicit financial flows a year, and $7.6 trillion of the world’s assets being held in offshore secrecy jurisdictions, it becomes crucial to close legal loopholes that allow anonymous companies to exist.

Public registers of beneficial ownership are not only going to result in financial transparency and apprehending criminals. This policy measure is also good for business. 91 percent senior executives across the world are of the opinion that it is necessary for them to know the beneficial owner of companies that they do business with – businesses and consumers can thus protect themselves from being victims of crime, and such a policy measure will level the playing field.

Several businesspersons have called for company ownership transparency, including Mo Ibrahim (Celtel), Richard Branson (Virgin Group), Arianna Huffington (The Huffington Post), Paul Polman (Unilever) and Bob Collymore. The UK is the first country which now requires all companies to file a record of their true ownership, a practice that started last week. The UK’s beneficial ownership registries are publicly accessible.

Several other countries, including France, the Netherlands, Nigeria and Afghanistan have committed to public beneficial ownership registries. Onshore or offshore – unaccounted for wealth, assets and income hurt every country’s economy. India would be setting a precedent of sorts, if it legislates in favour of public beneficial ownership registries in the upcoming monsoon session of Parliament, in order to clamp down on the shadow economy.