Nominee Shareholder as per the Companies Act, 2013 in India

A nominee shareholder is an individual or legal entity whose name appears in the register of members of a company, holding shares on behalf of the actual owner. The concept of nominee shareholders is significant for various purposes, including fulfilling statutory requirements and facilitating indirect share ownership.

Key Aspects of Nominee Shareholders

1. Entry in the Register of Members:
   • A nominee shareholder’s name is entered in the register of members as the holder of shares.
   • They hold the shares on behalf of the actual owner, who remains the beneficial owner.
2. Declaration Requirement:
   • The nominee shareholder must make a declaration stating that they hold the shares on behalf of the actual owner.
   • This ensures transparency and proper documentation of the true ownership of shares.
3. Types of Nominee Shareholders:
   • A nominee can be a natural person (an individual).
   • A nominee can also be a legal person (such as a company or an entity).

Main Purposes of Nominee Shareholders

1. Minimum Shareholders Requirement:
   • To meet the minimum number of shareholders required by the Companies Act, 2013.
   • For example, a public company must have at least seven shareholders, and a private company must have at least two shareholders.
2. Indirect Ownership:
   • To provide an opportunity for entities such as Hindu Undivided Families (HUFs), partnership firms, etc., which cannot directly hold shares in a company.
   • Nominee shareholders enable these entities to indirectly own shares through an individual or another legal entity acting as a nominee.
3. Subsidiary Companies:
   • When a company purchases 100% shares of another company, making it a wholly-owned subsidiary.
   • Nominee shareholders can be used to hold the shares on behalf of the parent company to fulfill statutory requirements and for administrative convenience.

Example Scenario

Imagine a private company, XYZ Pvt. Ltd., requires a minimum of two shareholders to comply with the Companies Act, 2013. Mr. A is the actual owner of all shares, but he needs at least one more shareholder to meet the statutory requirement.

1. Nominee Shareholder for Minimum Requirement:
   • Mr. A requests his friend Mr. B to act as a nominee shareholder.
   • Mr. B’s name is entered in the register of members as holding shares on behalf of Mr. A.
   • Mr. B makes a declaration that he is holding the shares as a nominee for Mr. A.
2. HUF or Partnership Firm Ownership:
   • An HUF wishes to invest in XYZ Pvt. Ltd., but it cannot directly hold shares.
   • The Karta (manager) of the HUF, Mr. C, acts as a nominee shareholder.
   • Mr. C holds the shares in his name on behalf of the HUF and declares the beneficial ownership.
3. Wholly-Owned Subsidiary:
   • ABC Ltd. purchases 100% of the shares of XYZ Pvt. Ltd. to make it a wholly-owned subsidiary.
   • ABC Ltd. can appoint a nominee shareholder, say Ms. D, to hold the shares on its behalf.
   • Ms. D’s name is entered in the register of members, and she declares the beneficial ownership of ABC Ltd.

By appointing nominee shareholders, companies can ensure compliance with legal requirements, facilitate indirect ownership, and manage subsidiary relationships effectively.

Explain the Rights Available to Nominee Shareholder

Rights Available to Nominee Shareholders

Nominee shareholders, while holding shares on behalf of the actual owners, have certain rights. These rights stem from their position as registered members of the company. However, their rights are subject to the terms agreed upon with the beneficial owner and the declarations made. Here are the main rights available to nominee shareholders:

1. Voting Rights:
   • Nominee shareholders have the right to vote at general meetings of the company.
   • They can exercise this right unless otherwise instructed by the beneficial owner or as per any agreement between them.
2. Dividend Entitlement:
   • Nominee shareholders are entitled to receive dividends declared by the company.
   • The actual distribution of dividends to the beneficial owner depends on the agreement between the nominee and the beneficial owner.
3. Right to Attend Meetings:
   • They have the right to receive notices of general meetings and to attend these meetings.
   • They can participate in discussions and vote on resolutions.
4. Right to Receive Information:
   • As registered members, nominee shareholders can receive copies of the company’s annual reports, financial statements, and other information provided to shareholders.
   • This ensures they stay informed about the company’s activities and performance.
5. Right to Transfer Shares:
   • Nominee shareholders can transfer the shares they hold, subject to the beneficial owner’s instructions and the company’s Articles of Association.
   • The actual beneficial ownership does not change unless the beneficial owner decides to transfer the shares.
6. Right to Apply for Rights Issue and Bonus Shares:
   • They can apply for shares in a rights issue or receive bonus shares.
   • Such shares are held by the nominee on behalf of the beneficial owner unless otherwise specified.
7. Right to Participate in Corporate Actions:
   • Nominee shareholders can participate in corporate actions like stock splits, mergers, and acquisitions.
   • Their participation is guided by the instructions from the beneficial owner.
8. Right to Inspect Records:
   • Nominee shareholders can inspect statutory registers and records of the company, as provided under the Companies Act, 2013.

Example Scenario

Consider a company, ABC Pvt. Ltd., where Mr. X is the beneficial owner of shares, and Ms. Y is the nominee shareholder.

• Voting Rights: Ms. Y attends the annual general meeting of ABC Pvt. Ltd. and votes on resolutions. She votes as per Mr. X’s instructions.
• Dividend Entitlement: ABC Pvt. Ltd. declares a dividend of ₹10 per share. Ms. Y receives the dividend payment but passes it on to Mr. X, as per their agreement.
• Right to Attend Meetings: Ms. Y receives the notice for the extraordinary general meeting and attends it, representing Mr. X’s interests.
• Right to Receive Information: Ms. Y receives the annual report and financial statements of ABC Pvt. Ltd. and shares this information with Mr. X.
• Right to Transfer Shares: Mr. X instructs Ms. Y to transfer the shares to another nominee. Ms. Y processes the transfer as per Mr. X’s instructions.
• Right to Apply for Rights Issue: ABC Pvt. Ltd. announces a rights issue. Ms. Y subscribes to additional shares on behalf of Mr. X.
• Right to Participate in Corporate Actions: ABC Pvt. Ltd. undergoes a merger. Ms. Y participates in the process, ensuring Mr. X’s interests are represented.

In summary, nominee shareholders hold all the rights of registered shareholders but exercise these rights in line with the instructions of the beneficial owner. This arrangement allows beneficial owners to comply with statutory requirements while retaining control over their shares.

Wholly Owned Subsidiary and Nominee Shareholders: Companies Act, 2013

When a company purchases 100% of the shares of another company, the acquired company becomes a wholly-owned subsidiary. The Companies Act, 2013, outlines provisions related to this arrangement.

Section 2(87) – Definition of Subsidiary and Holding Company

According to Section 2(87) of the Companies Act, 2013, a company is considered a subsidiary of another company (holding company) if the holding company:

1. Controls the composition of its Board of Directors, or
2. Exercises or controls more than half of the total share capital either by itself or together with one or more of its subsidiary companies.

In a situation where a holding company acquires 100% of the shares of a subsidiary, it must ensure compliance with certain statutory requirements. This includes appointing nominee shareholders.

Appointment of Nominee Shareholders

To maintain the legal status of the subsidiary and meet statutory requirements, the holding company may appoint nominee shareholders to hold the shares on its behalf. These nominee shareholders are entered in the subsidiary’s register of members, but they hold the shares for the benefit of the holding company.

Section 187 – Investments of Company to be Held in Its Own Name

Section 187 mandates that all investments made by a company should be held in its own name. However, the rule allows for shares to be held in the name of a nominee when necessary, such as for facilitating the creation of a wholly-owned subsidiary.

Example

If XYZ Ltd. acquires 100 shares of ABC Pvt. Ltd., making ABC Pvt. Ltd. a wholly-owned subsidiary, XYZ Ltd. can appoint individuals or legal entities as nominee shareholders to hold these shares. The nominees’ names will be entered in the register of members of ABC Pvt. Ltd., but the beneficial ownership and control remain with XYZ Ltd.

This practice ensures compliance with statutory requirements while allowing the holding company to maintain full control over its subsidiary.

Difference between a Registered Owner and a Beneficial Owner in table form:

This distinction is crucial in corporate governance and compliance to ensure transparency and proper documentation of share ownership and control.

Declarations under Section 89 of the Companies Act, 2013

Section 89: Declaration in respect of beneficial interest in any share

The Companies Act, 2013, along with the Companies (Management and Administration) Rules, 2014, outlines the process and requirements for declarations regarding beneficial interest in shares. Section 89 mandates certain declarations by the registered owner and the beneficial owner to ensure transparency in shareholding.

Declaration by the Registered Owner (Form MGT-4):

Declaration by the Beneficial Owner (Form MGT-5):

Company’s Obligation to File with the Registrar (Form MGT-6):

Consider a scenario involving XYZ Pvt. Ltd., where Mr. A is the registered owner of shares, but Ms. B is the actual beneficial owner.Form MGT-4 by Registered Owner:

Form MGT-5 by Beneficial Owner:

Company’s Action (Form MGT-6):

These declarations and filings are crucial for maintaining transparency and accuracy in the ownership of shares within a company. They help prevent any misuse of shares and ensure that the actual beneficiaries are known to the company and the regulatory authorities. Non-compliance with these requirements can lead to penalties and legal issues for both the company and the individuals involved.By adhering to the provisions of Section 89 and the associated rules, companies can ensure that their shareholding records are accurate, transparent, and compliant with statutory requirements.