SECTION 187C

DECLARATION BY PERSONS NOT HOLDING BENEFICIAL INTEREST

Scope of the section relating to declaration by persons not holding beneficial interest in Shares Rules, 1975 framed thereunder - Some queries arising thereunder answered

Clarificiation 1

A question has been raised as to whether shares held in joint names, for the sake of convenience and easy transmission to survivors in the case of death of any of the holders, would attract the provisions of section 187C . On this, the view of the Department is that in the case of the registered joint holders of shares no trustee-beneficiary relationship arises inter se in the eye of law. The provisions of the section and the rules are also not applicable to shares owned by public charitable trusts held in the names of trustees; since there is no distinctive individual beneficial interest in the case of this kind of shareholding.

The rules are applicable to shares held by a guardian in his own name without reference to the minor's name in the register of members, but if the name of the minor as such appears, being represented by guardian, the provisions of section 187C will not be attracted.

As regards shares belonging to a Hindu undivided family held by the karta of the family, having regard to the position of the karta and to the peculiar character of the interest which accrues to the coparceners in the joint estate it is not possible to postulate separate legal and beneficial interests in respect of such shares as between the karta and the other members of the family. Hence, the rules under reference do not apply. However, where the person who is in the position of karta happens to have any special relation with any person who is a member of the Hindu family in respect of shares not comprised in the family estate, section 187C and the Rules thereunder will apply.

This Department has held the view that a partnership firm is not a person capable of being a member within the meaning of section 41, and since a partnership is not a legal entity by itself but only a compendious way of describing the partners constituting the firm, it is necessary that the names of all the members of the partnership firm should be entered in the register of members in order that the right of the partnership as a whole to the shares in question may prevail. The holding of shares by only one or more partners on behalf of other partners of a firm should not, therefore, ordinarily arise. However, where, in a given case, the name or names of only one or some of the partners is entered in the register of members, while the intention is that the partnership as a whole should have the right of membership in respect of the shares in question, it is obviously necessary for such partners who hold shares not only for themselves but for the benefits of all partners constituting the firm whose names are not entered in the register of members, to comply with the rules framed under section 187C.

An apprehension has been expressed that the rules will hinder trading in shares of companies listed on the stock exchange. On this the Department's view is that the rules apply to completed transfers where the names of the transferor and the transferee are known, and where the physical possession of shares passes, along with formal documents executed by both transferor and the transferee and presented to the company concerned in terms of section 108. It is well settled that until that stage, the person who deals in such shares on the stock exchange through a stock broker without executing the prescribed form of transfer deed, gets only the equity in respect of the consideration paid by him, which is enforceable in the event of the company's non-registration of the transfer of shares against the purported transferor of the shares, and until that stage, the property in the shares, a species of goods transferable only, in the manner contemplated by the law, does not pass. In view of this legal position, the apprehension expressed is not tenable. In this view of the matter, in the case of any shares traded on the stock exchange without the transfer deed prescribed under section 108 duly executed both by the transferor and the transferee, there is no legal transfer of shares for the purposes of giving rise to the relationship of the trustee and beneficiary as between the transferor and the unknown transferee.

The rules are applicable if shares stand in the name of a bank in the register of members of a company, while the rights pertaining to the shares are exercisable by some other person or persons whose names do not appear in the register, as there is thus a clear separation of the legal and beneficial interests in the shares. On the other hand, if the fact that the name entered in the register of members is that of the executor under a will or an administrator to whom letters of administration have been granted is clear from the entry, the rules will not be applicable; but if that fact is not thus clear, the disclosure required by the rules will have to be made.

The rules are not applicable to shares held by official designations only. e.g., court receiver, official liquidator, administrator general, Income-tax or Wealth-tax Commissioner, custodian of evacuee or enemy properties, etc., since no title to the shares vests in the officials who deal with the property under special judicial or statutory authority.

* CIRCULAR NO.5/75[8/18/75-CL-V], DATED 31.3.1975

Clarification 2

A question has been raised whether provisions of section 187C are applicable to private trusts. Private trusts are governed by the Indian Trusts Act, 1882. That law contemplates the existence of two clear interests, namely, the legal interest which vests in the trustees and beneficial interest which vests in the beneficiaries. This dichotomy is envisaged by section 187C as well, which lays down that a person whose name is entered in the register of members of a company as the holder of a share in that company but dows not hold the beneficial interest in such shares shall make a declaration specifying the name and other particulars of the person who holds the beneficial interest in such shares. This dichotomy is kept up in the other sub-sections of this section as well. Where the legal interest vests in trustees, it is only to be expected that the names of trustees would find a place in the register of members of a company. It is, therefore, the duty of the trustees to make the declaration as the persons legally entitled and to specify the persons for whom they hold the shares. It is not possible to limit the application of section 187C on its own terms to the type of constructive trust arising under section 82 of the Indian Trusts Act and if that is the sense to be attributed to the word "benami" occurring in the Statement of Objects and Reasons and the Notes on Clauses preceding the Act, it is of little relevance at the present stage to control the clear language of the relevant statutory provisions. Hence, non-compliance with the requirements of section 187C, in cases of private trusts, will amount to an infringement of the law which will attract the consequences laid down in it.

* CIRCULAR NO.8/18/75-CL-V, DATED 7.6.1975

Clarification 3

Some references have been received from certain banking companies asking for clarification in regard to the application of the above rules to the banks with which the stock exchanges deposit shares of their members as security deposit. This Department has since carefully considered the matter in consultation with the Department of Legal Affairs and is of the view that the provisions of the above section and the rules made thereunder will not be applicable to such banks as they are keeping the shares lodged with them by the stock exchanges as security deposit in accordance with the notification issued under the Securities Contract (Regulation) Act.

* CIRCULAR NO.34/76[8/18/75-CL-V] , DATED 28.9.1976

Query : In sub-section (2) of section 187C, the words "beneficial interest" and "beneficial owner" have been used. It requires a person having beneficial interest in ownership to file a declaration with the company concerned. Under the rules, Form II has to be filed by persons having a beneficial interest. In the rule, the words used are "beneficial interest" and not "beneficial owner". In the form also, the words used are "beneficial interest". As a result, in a case where shares are given to the banks and pledged to secure loans, the banks insist on filing Form II and they also want the respective clients to certify as to the facts stated in the said form. This is on the basis that the bank has got beneficial interest as pledgee. Again, under sub-section (3), whenever there is a change in beneficial interest the respective persons have to file declaration in Form II. The difficulty in the customers certifying as to the facts in Form II as may be filed in by the bank is that they themselves file Form II because they are the beneficial owners of the shares and the shares are also registered in their names. If they certify as to the facts contained in form II filed by the banks indicating beneficial interests of the banks as pledgee that will be in contradiction to the facts already stated in Form II filed by them. The whole problem arises because of the synonymous use of the words "beneficial interest" and "beneficial owner" in the section while in the form and rules only "beneficial interest" is used. The Department may kindly clarify that merely because there is a beneficial interest in a pledgee there is no necessity of complying with the requirement of filing the form in respect of beneficial interest.

Answer : The Department has carefully considered the matter and is of the view that in the circumstances explained by the chamber, Form I should be filed by the bank when the shares pledged with them are transferred to its name, the beneficial interest of the shares continuing to remain with the customers pledging the shares with the banks. form II will, therefore, be filed by the customer as he is the beneficial owner of the shares.

* CIRCULAR NO.8/2(MISC.0/75-CL-V, DATED 31.3.1976.

Clarification 5

Attention is invited to the provisions of section 187C(4) which, inter alia, requires the filing of returns with the Registrar of Companies by the companies in the prescribed forms within 30 days'; of the declarations filed by concerned shareholders with them. This Department has received a number of representations from the companies, chambers, etc., pointing out various difficulties in complying with the provisions of section 187C and the filing of the returns in the forms prescribed thereunder in a short time of 30 days from the commencement of the rules. Although the Central Government has no power to extend the time limits fixed by the statute, it has been decided to ensure that no hardship is allowed to arise in the administration of the new law in bona fide cases of default. You are, therefore, requested to take a lenient view in cases of bona fide delay in the initial stages.

*LETTER NO.6/75[8/18/75-CL-V], DATED 21.4.1975.