Rights and Obligations of a Beneficial owner

29 May 2020 • Kirti Arora


Rights and Obligations of a Beneficial owner

29 May 2020 • Kirti Arora

Beneficial Ownership in shares is a well-accepted concept domestically as well as internationally, which means to have a beneficial interest in property, goods or securities/shares without being registered as an owner in the records. The law permits a shareholder to transfer the beneficial interest in a share to another person (including corporate entities) different from the registered owner.

In Australia, all companies other than listed companies are required to record whether a member holds its shares beneficially, or not, in its register of members. Beneficial interest is termed as “relevant interest” and a person holding relevant interest in the securities of the Company is considered as beneficial owner.

In Germany, the norms for disclosure of beneficial ownership is governed by German Anti-Money Laundering Act (which is based on EU Anti-Money Laundering Directive). The German government maintains the record of beneficial owners in electronically managed transparency register. Beneficial owners are liable to intimate the Company about the beneficial ownership.

You may also like to read our article on taxation aspects of beneficial ownership.

Beneficial Ownership in India

The concept of beneficial ownership in India is common due to the following reasons:

  • For incorporation of wholly owned subsidiaries, and / or
  • To meet the statutory requirement of minimum number of shareholders i.e. two in case of Private Companies and seven in case of Public Companies

It is a commonly observed practice in case of incorporation of wholly owned subsidiary companies wherein a person or persons subscribes the shares of Proposed Company, as a nominee of investor Company to fulfil the criteria of minimum number of members. Upon incorporation of the Company, nominee shareholder(s) becomes the Registered Owner(s) and the investor Company becomes Beneficial Owner of such shares.


Before moving ahead, let’s look into the meaning of three important terms:

  1. Beneficial Owner: A person who holds the beneficial interest in shares but whose name is not registered in the Register of Members of the Company as the owner of the shares and is deemed as the actual/legal owner of the shares in the eye of law.

  2. Registered Owner: A person whose name is registered in the register of member of the Company as the owner of the shares but who does not hold the beneficial interest arising out of such shares and also known as the nominee shareholder.

  3. Beneficial Interest: In general sense, it is a right to receive benefits arising out of shares held by another person. The term beneficial interest was not earlier defined under the Company Law, however the emergence of the Companies (Amendment) Act, 2017 had introduced its definition which is as follows:

    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 of the rights attached to such share; or
    • receive or participate in any dividend or other distribution in respect of such share.

Disclosure requirement of beneficial interest

The provisions of Section 89 of the Companies Act, 2013 (hereinafter to be referred as “the Act”) deals with the disclosure requirement of beneficial interest in shares of the Company. The Act mandates disclosure of interest by the registered owner and the beneficial owner to the company and the company in turn is to file a return to the MCA within the prescribed timelines.

Further, whenever there is a change in the beneficial interest in shares, necessary disclosures are required to be made by the parties. You may like to go through our article on change in beneficial ownership via transfer of beneficial ownership.

Right to receive Dividend and other benefits

The Company shall pay the dividend only to registered owner of shares (not to any other person). A declaration under Section 89 of the Act, only serves as a constructive notice to get the information about the actual or legal ownership of shares. The Company is not required to pass on any benefit arising out of such shares to the beneficial owner. Hence, prima facie, the right to receive dividend is of the registered owner of the shares.

Likewise, the Company shall offer the shares under right issue or bonus issue to the registered owner only. However, the registered owner can order/direct the Company to pay the dividend directly to the beneficial owner or can renounce the right shares in favour of the beneficial owner.

Further, it is pertinent to note that being the beneficial owner of shares, all benefits and rights attached to such shares ultimately rests with the beneficial owner (however it is pertinent to note that the beneficial owner doesn’t get any rights if the requisite disclosures under Section 89 of the Act are not made with the Company). This is the nature of relationship between the beneficial owner and the registered owner. In spite of this underlying principle and even though, the company has received all the necessary disclosures w.r.t declaration of beneficial ownership, the company addresses all it’s communications w.r.t those shares with the registered owner only. It is duty bound under the Companies Act to pay the dividend and offer the shares under rights issue, bonus issue, etc. to the registered owner unless the registered owner has specifically communicated otherwise. It recognizes the voting rights of the registered owner only. Disclosures made under section 89 are not directions to the company. It is entirely between the registered owner and the beneficial owner how they give effect to their understanding.


There has been a recent thrust in many countries including India, United Kingdom, Germany, France, Spain and Italy to incorporate stricter regimes or other mechanism for disclosure of beneficial ownership of companies. The purpose is to bring more transparency in Corporate and to put a stop to money laundering activities, terrorism financing, corruption, black money tax evasion and other illicit activities. It is important to have a mechanism in place to identify the persons hiding behind the complex corporate structure.

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