Coinciding with the demonetisation of currencies by the Government of India in 2016, the Benami Transactions (Prohibition) Act, 1988, was substantially amended and renamed as the Prohibition of Benami Property Transactions Act, 1988 (“Benami Act”). The Benami Act was brought into effect from November 01, 2016. It was a well-timed move to ensure that demonetisation doesn’t become a futile exercise.
As a rule, it is presumed that a person who is registered as a member of a company has both – legal and beneficial interests in the shares registered under his name. However, there are instances when the person, whose name appears in the register of members, may not have beneficial interest in the share. Section 89 of the Companies Act, 2013 (“the Act”), provides for declarations by the beneficial and the legal owner of shares.
In this article, the authors try to analyse whether such declaration of beneficial interest under Section 89 of the Act will provide any protection to the beneficial owner from the proceedings initiated under the Benami Act?
Scheme of the Benami Act
A benami transaction means a transaction in which a property is transferred in the name of a person, whereas the consideration for the same is paid by some other person and the property is held for the immediate or future benefit of the person who has paid the consideration. Section 2(9) of the Benami Act further defines ‘benami transaction’ and lays down exceptions when it will not be regarded as a benami transaction.
The term ‘benami property’ has been defined to mean any property, which is the subject matter of a benami transaction and also includes the proceeds from such property. Recently, the Competent Authority under Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 (SAFEMA), has been notified as the Adjudicating Authority under the Benami Act, with effect from July 01, 2021.
Though there are no well-established legal standards to determine whether a particular transaction is benami or not, several judicial pronouncements have laid down the following ingredients to determine the benami nature of transaction:
- Relationship of the parties
- Motive for transaction
- Source of the purchase price or consideration
- Conduct of the parties
- Surrounding circumstances
It may be noted that the burden of proving that a particular sale is benami lies on the person alleging the benami transaction.
Declarations under Section 89 of the Act
Section 89 of the Act broadly corresponds to Section 187C of the Companies Act, 1956 (“1956 Act”). Under Section 89(10) of the Act, the term ‘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:
- exercise or cause to be exercised any or all the rights attached to such share; or
- receive or participate in any dividend or other distribution in respect of such share.
Section 89 of the Act read with Rule 9 of the Companies (Management and Administration) Rules, 2014, provides the declaration forms required to be submitted to the company by the registered owner and the beneficial owner of the shares in case they are different. The rights in relation to any share in respect of which a declaration is required to be made under Section 89 of the Act, but not made by the beneficial owner, cannot be enforceable by him or by any person claiming through him.
Interplay between Section 89 of the Act and the Benami Act
The term ‘property’ under Section 2(26) of the Benami Act has been broadened to include movable assets. Given that shares under Section 44 of the Act are treated as movable property, shares held benami can be attached and confiscated under the Benami Act.
Therefore, a declaration of beneficial ownership acts as a pre-cursor for the Government to examine benami transactions. In fact, the legislative object of Section 187C of the 1956 Act was to ensure that all benami holdings of shares are reported.
The Benami Act lays down the following carve outs when the property so held will not be regarded as benami:
- Fiduciary Relationship: Section 2(9) of the Benami Act provides a carve-out in a situation where a property has been held by a person in a ‘fiduciary capacity’. Although the term ‘fiduciary capacity’ has not been defined under the Benami Act, there are judicial precedents, which have defined ‘fiduciary capacity’ to connote a relationship of trust and confidence between parties, something that is analogous to the relationship between a trustee and its beneficiaries.
- Property held by Karta in the case of Hindu Undivided Family (HUF).
- Property held in the name of spouse, children, brother,
- Also, there may be instances where there is a beneficial owner who may introduce another person to satisfy the criteria of minimum number of members required under the Act like in the case of wholly-owned subsidiaries.
In the case of Gordon Woodroffe Ltd. v. Trident Investment and Portfolio Services P. Ltd., the Board of the company had rejected the transfer of shares on account of declaration of beneficial ownership made under Section 187C of the 1956 Act. The company contended that the beneficial ownership amounted to violation of Benami Act. Rejecting the company’s contention, it was held that the intention of the parties is of paramount importance in determining benami transactions. Given that the legal owner and beneficial owner had a principal-agent relationship, the benami charge was dismissed.
In the case of Sanjeev Mahajan v. Aries Travels Pvt. Ltd., the Delhi High Court held that unless the beneficial owner ensures public declaration of his beneficial ownership in shares by filing of return with the RoC, no such beneficial ownership can be enforced in court.
Section 67 of the Benami Act provides that the Benami Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force. Therefore, it is important that Section 89 of the Act and Benami Act are harmoniously read with each other.
The declaration of beneficial ownership of shares under Section 89 of the Act does not provide any immunity to holders of such shares under the Benami Act. Mere filing of such declaration does not regularise a benami transaction. The holders of shares will still need to justify that those shares are covered by the carve outs provided under the Benami Act.
Also, there is no automatic presumption of benami holding in such declarations of beneficial ownership. On the contrary, filing of such declarations will provide an opportunity to the authority under the Benami Act to further investigate such beneficial holdings. There are no bright-line tests to determine when such separation of legal and beneficial ownership would amount to benami transaction. The beneficial and legal owners must provide justification for such holding in the declaration along with relevant documentation.
The fact that the Government of India is serious about cracking down on benami properties is evident from the fact that as of May 31, 2019, show cause notices have been issued in more than 2,100 cases involving benami properties valued at over Rs 9,600 crore. Further, the Ministry of Corporate Affairs recently amended Schedule III of the Act (which prescribes the format for financial statements of a company) to include details of proceedings initiated under the Benami Act, along with disclosure of beneficiaries, amount, nature of proceedings, etc., in the financial statements of the company. Similarly, under CARO 2020, the auditors of the company are required to report, whether any proceedings have been initiated under the Benami Act against the company and whether the company has appropriately disclosed the details of properties held Benami in its financial statements.
For all M&A lawyers representing the acquirer, it is crucial to look at those declarations under Section 89 of the Act and the disclosures in financial statements to ensure that the securities proposed to be acquired are not contaminated by the Benami Act. The only protection afforded is under Section 27 of the Benami Act to an acquirer, who can demonstrate to the Authority that he acquired those shares for adequate consideration, prior to the issue of notice under Section 24 of the Benami Act and he had no knowledge of the benami transaction.
 Jayadal Poddar v. Bibi Hazra (AIR 1974 SC 171), Krishnanand v. State of MP (AIR 1977 SC 796).
 Sitaram Agarwal v. Subrata Chandra (2008 7 SCC 716).
 Inserted vide Companies (Amendment) Act, 2017 with effect from June 13, 2018.
 Section 89(8) of the Companies Act, 2013.
 Marcel Martins v. M. Printer. (2012 5 SCC 342); Peeyush Agarwal v. Sanjeev Bhavnani (2014) 5 High Court Cases (Del) 198.
 1994 79 CompCas 764 CLB.
 (2020) 162 SCL 671 (Delhi).
 Identification of Benami Properties, Ministry of Finance, Press Release dated July 02, 2019, available at https://pib.gov.in/PressReleasePage.aspx?PRID=1576787