Beneficial Ownership as a Regulatory Concept

A beneficial owner is the real human being who finally owns, controls or benefits from a company, fund or trust, even if their name does not appear on its official papers. On paper, a company may be owned by another company, which is owned by a trust, which is owned by yet another company. Beneficial ownership rules ask: who is the actual person at the end of this chain? Laws in India and around the world require companies, banks and investors to find and report this person.

Why does it exist?

People who want to hide money, avoid tax, launder crime money or get around rules often hide behind "shell" companies and long chains of ownership. Think of a set of Russian dolls: you open one, and there is another inside, and another. Beneficial ownership rules force someone to open all the dolls and show who is in the last one. Without such rules:

• Criminals can move dirty money through companies that seem clean.
• Company promoters can secretly hold more shares than allowed, breaking stock market rules.
• Investors from restricted countries can enter through other countries without anyone knowing.

Where did it come from?

• Global push: The Financial Action Task Force (FATF), the global anti-money-laundering standard-setter, sets beneficial ownership standards in Recommendation 24 (for companies and other legal persons) and Recommendation 25 (for trusts and similar arrangements). FATF tightened Recommendation 24 in March 2022 and Recommendation 25 in February 2023. The revised standards require accurate, up-to-date ownership information that authorities can get quickly, and they ban new bearer shares (shares owned by whoever physically holds the paper).
• Leaks that raised alarm: Large leaks such as the Panama Papers (2016) and Pandora Papers (2021) showed how the rich used offshore companies to hide wealth. This increased pressure on countries to trace real owners.
• India's laws: India built beneficial ownership rules into several laws, explained below.
• Indian stock markets: In January 2023, a US short-seller's report made allegations against a large Indian business group, including claims about opaque offshore funds holding its shares. Following this, SEBI brought in a stricter "granular disclosure" framework for FPIs in August 2023.

How is the beneficial owner found?

The usual method is a look-through: you look through each layer of ownership until you reach real people. A person is treated as a beneficial owner if they cross a set ownership threshold (for example, more than 10% of shares) or if they control the entity in some other way (for example, the right to appoint most directors). If no person crosses the threshold, the senior managing official is usually named as the beneficial owner.

India's legal framework

• Prevention of Money Laundering Act (PMLA), 2002 and the PML (Maintenance of Records) Rules, 2005: Banks, brokers and other "reporting entities" must identify the beneficial owner of every client. In March 2023, the threshold for companies was cut from 25% to 10%, and for trusts to 10%. In September 2023, the threshold for partnership firms was cut from 15% to 10%.
• Companies Act, 2013, Section 90 and the Companies (Significant Beneficial Owners) Rules, 2018: Any person who holds at least 10% of a company's shares, voting rights or dividend rights, directly or indirectly, or who has significant control, must declare this to the company. The company must report it to the Registrar of Companies.
• SEBI (Foreign Portfolio Investors) Regulations, 2019: FPIs must give know-your-customer (KYC) details, including beneficial owners, to their Designated Depository Participant (a bank or custodian that registers FPIs on SEBI's behalf).

SEBI's additional disclosure framework for FPIs (August 2023)

• Who must disclose: FPIs that hold more than 50% of their Indian equity AUM (assets under management) in a single corporate group, or that (alone or with their investor group) hold more than ₹25,000 crore of Indian equity. This was raised to ₹50,000 crore in March 2025, because trading volumes had more than doubled since 2022-23.
• What they disclose: Details of every entity and person with any ownership, economic interest or control, on a full look-through basis, with no threshold.
• Exemptions: Government and government-related investors (such as sovereign wealth funds and central banks), public retail funds (widely held funds such as mutual funds and pension funds that meet set conditions), certain exchange traded funds, and entities listed on specified foreign exchanges. In 2024, SEBI also exempted funds whose concentrated holding is in a listed company with no identified promoter, subject to conditions.
• Took effect: 1 November 2023. An FPI that fails to disclose must reduce its holdings below the trigger or face consequences, including the possibility of losing registration.

What concerns do these rules address?

• Minimum public shareholding (MPS): Listed companies must have at least 25% of shares held by the public. Promoters could secretly hold "public" shares through friendly foreign funds and break this rule.
• Takeover rules: Hidden holdings could cross takeover thresholds without the required open offer to other shareholders.
• Press Note 3 (2020): Investment from countries sharing a land border with India (such as China) needs government approval. Ownership tracing helps check whether such investors are entering through FPI routes in other countries.

Commonly confused concepts

• Legal (registered) owner vs beneficial owner: The legal owner is the name on the share register, such as a fund or a company. The beneficial owner is the person who finally gets the benefits and control.
• Beneficial owner under PMLA vs Significant Beneficial Owner (SBO) under the Companies Act: PMLA rules are used by banks and intermediaries to know their clients. SBO rules make companies themselves record and report who controls them. Both now use a 10% threshold for companies.
• FPI vs FDI: Buying less than 10% of a listed company's shares is usually FPI; 10% or more is treated as FDI. Beneficial ownership rules apply to both, but the FPI granular framework is a SEBI rule for portfolio investors.
• FATF Recommendation 24 vs 25: R.24 covers legal persons (companies, foundations). R.25 covers legal arrangements (trusts and similar).

Issues, criticism and the way forward

• Transparency vs ease of investing: Supporters say full look-through disclosure protects small investors and market integrity. Foreign funds argue that tracing every investor through many layers is slow and costly, and that some foreign laws limit what they can share.
• Forced selling: A fund may be "concentrated" for genuine reasons, such as a strong belief in one company. To avoid the rule, it may sell shares, which can push prices down without any real reason.
• Privacy and proportionality: Asking for every owner with no threshold can collect large amounts of personal data, much of it about harmless investors.
• Risk of loopholes: Too many exemptions may again allow hidden holdings, which the rules were designed to stop.
• Way forward: Experts suggest a risk-based approach: strict tracing where the risk of misuse is high (for example, holdings in promoter-controlled companies close to MPS or takeover limits), and lighter rules for widely held, regulated or government investors. Better data sharing with foreign regulators can also help.

Concepts to Know

• Shell company: A company that exists mostly on paper, with little real business, often used to hold assets or move money.
• Money laundering: Making illegally earned money look legal by passing it through banks, companies or deals.
• Assets under management (AUM): The total market value of investments a fund manages for its investors.
• Promoter: The person or group that started or controls a company, usually holding a large share of it.
• Short-seller: An investor who profits when a share price falls. Some short-sellers publish research claiming a company is overvalued or has problems.
• Financial Action Task Force (FATF): An inter-government body, set up in 1989 by the G7, that sets global standards against money laundering and terror financing. India became a full member in 2010.
• Consultation paper: A document a regulator publishes to explain a proposal and invite public comments before making a final rule.