Beneficial Owner

Reviewed by Bhavana | Updated on Aug 27, 2020

Who is a Beneficial Owner?

A beneficial owner is an individual who gets to enjoy ownership benefits even though the title to some form of the property is in the name of another individual. It also refers to any individual or group of individuals who have the power to vote or control the transaction decisions, either directly or indirectly, with regards to specific security, such as shares belonging to a company.

Beneficial ownership differentiates itself from legal ownership. In most of the cases, the legal, as well as the beneficial owners, are the same. However, there are some situations where the beneficial owner of a property may wish to remain anonymous, legitimate, and sometimes not-so legitimate.

Origin of Beneficial Ownership

The principle of beneficial ownership of shares has its origin in Section 90 of the Companies Act, 2013. Section 90 seeks to render that one or more qualified persons may be appointed by the Central Government to investigate and report on beneficial ownership in respect of any shares or class of shares.

The Companies (Significant Beneficial Owner) Rules 2018 ("the SBO Rules") notified, by the Ministry of Corporate Affairs ("MCA") on 13 June 2018, that companies with such ownership must declare their beneficial ownership until 13 September 2018. SBO Rules aim to define the sole beneficial owner of shares in a variety of corporate structures.

Beneficial Owner Decoded with an Example

If a custodian bank holds shares of a mutual fund, or if a broker holds securities in street name, the true owner is the beneficial owner, although the bank or broker retains the title for safety and convenience.

Beneficial ownership may also apply to circumstances in which a person or company retains ownership rights even if a stock is registered with another organization, such as a brokerage house. In this case, the investor is the beneficial owner while the brokerage firm is actually shown as the holder of the security.