Summary: Identifying SBOs, especially if the member of a reporting company in India is a pooled investment vehicle of an overseas jurisdiction, continues to be a big challenge. The Indian SBO Rules provide for two different sets of tests for identifying an SBO, basis the PIV’s location. If a PIV is from a FATF compliant jurisdiction, the test is much simpler, vis-a- vis PIVs from non-compliant jurisdictions, which require more detailed scrutiny. This blog analyses several interpretative challenges that continue to bother both PIVs and reporting companies, requiring MCA clarification.
Introduction
India’s corporate transparency regime has evolved rapidly over the past decade, with the introduction of the Significant Beneficial Ownership (“SBO”) framework under Section 90 of the Companies Act, 2013 (“Act”), coupled with the sectoral regulation of investment vehicles under the Securities and Exchange Board of India (“SEBI”), and the global anti-money laundering architecture driven by the Financial Action Task Force (“FATF”). India now operates within a tightly woven matrix of disclosure, beneficial ownership identification and jurisdictional risk assessment.
The interplay becomes particularly complex when investments are routed through pooled investment vehicles (“PIV”) especially those with cross-border elements, necessitating an examination of the statutory definition and regulatory status of PIVs under the Indian securities law, the application of the SBO framework to such vehicles under Section 90 and the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”), the implications of FATF-compliant and non-compliant jurisdictions, and the grey areas and potential loopholes that persist in structuring and compliances.
The Concept of “Pooled Investment Vehicle” Under Indian Law
Section 2(da) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”), defines a PIV as a fund established in India in the form of a trust or otherwise, such as a mutual fund, alternative investment fund, collective investment scheme, or a business trust, as defined under Section 2(13A) of the Income-tax Act, 1961, registered with the SEBI, or any other fund that raises or collects monies from investors and invests such funds in accordance with the SEBI regulations. Key elements of this definition include establishment in India, formation as a trust or otherwise, SEBI registration, and engagement in pooling capital from investors for investment, as per the SEBI regulations.
The inclusion of AIFs, mutual funds, collective investment schemes and business trusts, reflects the regulatory intent to subject professionally managed, regulated vehicles to a distinct compliance and disclosure ecosystem, which becomes central when analysing the SBO regime.
Section 90 of the Companies Act and SBO Rules: Core Regulatory Architecture
Section 90 of the Act, read with the SBO Rules, mandates identification and declaration of SBO in Indian companies, defining an SBO as an individual who, acting alone or together, or through one or more persons or trusts, holds at least 10% of shares, voting rights or dividend rights, or the right to exercise significant influence or control. The framework is “look-through” in nature, piercing layers of corporate or trust structures to identify the ultimate natural person exercising ownership or control. Further, the SBO Rules carve out specific treatment for PIVs.
Treatment of Pooled Investment Vehicles under SBO Rules
If a reporting company’s member is a PIV, and the PIV is based in a jurisdiction that is both an FATF member and has a securities regulator that is an IOSCO member and a signatory to the IOSCO Multilateral Memorandum of Understanding, then the SBO is identified as follows: for partnerships, it is a general partner; an investment manager, or CEO, where the investment manager is a body corporate. If the PIV is based in a jurisdiction that does not satisfy FATF/ IOSCO conditions, the standard look-through test applies, requiring identification of natural persons meeting the 10% threshold or exercising control. This bifurcation reflects a policy balance between deference to robust foreign regulatory regimes and enhanced scrutiny where regulatory equivalence is absent.
The FATF Dimension: Jurisdictional Risk and Transparency
The FATF framework classifies jurisdictions based on compliance with anti-money laundering and counter-terrorist financing standards, with countries categorised as FATF-compliant, grey-listed jurisdictions (under increased monitoring), or black-listed high-risk jurisdictions. India’s SBO Rules implicitly rely on FATF membership as a proxy for regulatory reliability, with a PIV from a FATF member jurisdiction benefiting from a simplified disclosure route, whilst vehicles from non-compliant jurisdictions face much deeper scrutiny.
This alignment between corporate law and AML standards is deliberate, as beneficial ownership transparency is a core FATF recommendation (Recommendation 24), and India’s SBO regime operationalises this commitment domestically.
The Interplay: Where the Regimes Converge
The overlap of SCRA defined PIVs, Section 90 beneficial ownership disclosure, and the FATF jurisdictional assessment forms a tiered compliance structure. Whilst the architecture appears clear, there are several grey areas in practice.
Grey Areas
Layering Through FATF-Compliant Intermediary Jurisdictions
Consider the following structure: ultimate investors located in a FATF non-compliant jurisdiction, investment routed through a PIV incorporated in that jurisdiction, the PIV investing into an intermediate holding entity in a FATF-compliant jurisdiction, and the compliant entity investing into an Indian company. A key question is whether the FATF test applies at the level of the immediate investing vehicle, or whether regulators must assess the ultimate source jurisdiction.
Under a literal reading of the SBO Rules, the analysis focuses on the jurisdiction where the PIV is based, implying that if the immediate investing entity is in a FATF-compliant jurisdiction, simplified identification may apply even if ultimate investors originate from high-risk jurisdictions, thereby creating potential regulatory arbitrage. Whilst enforcement agencies may invoke anti-money laundering laws such as the PMLA, the mechanism under the Act itself may not automatically pierce beyond the compliant intermediary. In the absence of any FAQs from the Ministry of Corporate Affairs (“MCA”), the legal position remains fluid, regarding the level at which FATF-compliance needs to be seen. Multiple views are possible; however, the prudent approach would be to assess compliance both where the funds are pooled and at the investing entity level.
Use of Multi-Layered Fund-of-Funds Structures
Global fund structures often involve master funds offshore, feeder funds in multiple jurisdictions, special purpose vehicles, and downstream investment entities. In such cases, determining whether the investing entity is a PIV under Indian law can be fact-specific, not all foreign funds neatly correspond to SEBI-recognised categories, and where an SPV invests into India, questions arise as to whether it is treated as a PIV or as a corporate member. If the investing entity is technically an SPV rather than the fund itself, the exemption logic may not apply, triggering full SBO tracing, such that structuring choices influence disclosure outcomes.
Ambiguity in “Based in Jurisdiction”
The SBO Rules refer to PIVs “based in” FATF member jurisdictions, however, the meaning of “based in” remains unclear — whether it means place of incorporation, place of effective management, regulatory domicile, or location of investment manager. Funds often have split structures, such as Cayman-incorporated vehicles managed from London or Singapore — when the incorporation jurisdiction is FATF-compliant but operational control lies elsewhere, it creates interpretational risks in the absence of a statutory definition clarifying which test prevails.
Threshold Dilution Through Widely Held Fund Structures
The 10% SBO threshold can be practically diluted in diversified funds where institutional investors may individually hold below 10% due to which the control may not vest in any one investor, and further the decision-making is contractually vested in the GP or manager. In such cases, the GP or manager is identified as SBO, however, the economic exposure may rest with high-risk investors whose identity does not surface through filings. Domestic SEBI-registered AIFs have an exemption from such requirements of identification of SBOs as per Rule 8 of the SBO Rules. Such an arrangement, while aligning with fund governance realities, raises policy questions about transparency versus practical manageability.
Grey-Listed Jurisdictions: Transitional Uncertainty
FATF status is dynamic, with jurisdictions moving between fully compliant, grey list, and high-risk categories. If a jurisdiction is grey-listed after investment, it is unclear whether reporting companies must reassess SBO status or if there is an ongoing obligation to monitor FATF status, as the SBO Rules do not specify how to address such changes, thereby leaving compliance teams to adopt risk-based monitoring practices.
Conflict Between Sectoral Regulation and the Act
SEBI-regulated vehicles are already subject to KYC norms, PMLA compliance, and beneficial ownership identification at investor onboarding. The SBO regime overlays an additional disclosure layer at the investee company level, however, there is limited statutory integration between SEBI and MCA databases, and reporting may become duplicative or inconsistent, with a coordinated regulatory interface remaining aspirational rather than operational.
Practical Tips for Reporting Companies
For Indian companies receiving foreign fund investments, it is prudent to conduct independent FATF and IOSCO verification, document the basis for treating a vehicle as a PIV, maintain periodic jurisdictional risk review, and seek contractual representations regarding upstream investors. For fund managers, it is advisable to anticipate Indian SBO disclosure obligations at the structuring stage, align fund documentation with Indian reporting requirements, and monitor FATF developments impacting jurisdictional classification. For Boards and compliance officers, best practice involves treating SBO compliance as dynamic rather than static, maintaining board-level oversight over beneficial ownership reporting, and integrating AML risk assessments with corporate disclosure frameworks.
Conclusion: Transparency in a Multi-Jurisdictional Investment Ecosystem
The interaction between PIVs, SBO, and FATF jurisdictions reflects a nuanced approach within Indian law to facilitate ease of doing business for regulated global capital, compliance with international AML standards, and domestic corporate transparency objectives. Yet, as with all layered regulatory systems, structural gaps and interpretational grey areas persist, particularly in cross-border fund architectures involving intermediary entities and shifting jurisdictional risk classifications.
The central dilemma remains clear: maintaining India’s appeal to institutional pooled capital while preventing opacity from becoming a conduit for illicit flows. As enforcement agencies increasingly adopt a risk-based, substance-driven approach, market participants should move beyond formalistic compliance and embed transparency into structuring decisions from inception. With increasing cross-border regulatory oversight, proactive governance, rather than reactive disclosure, will define best practice. Also, some Indian promoters, in case of disputes with investors, have started weaponising non-filing/ inaccurate filing of SBO declarations by approaching the NCLT under Section 90(7) of the Act, to restrict transfer of shares and suspend dividend/ voting rights attached to such shares. Hence, filing of correct SBO declarations is critical for PIVs investing in Indian companies, particularly with Indian promoters having management control.