Rules 1 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 2 of the Significant Beneficial Owners Rules defines the individual a company must look for under section 90. It sets four tests, a set of explanations on direct and indirect holdings, and definitions of control, majority stake, partnership entity and reporting company. This article states rules 1 and 2 as amended up to G.S.R. 404(E) dated 15 July 2024 per the MCA e-book; later amendments should be checked. Rule 2 was substituted by the Amendment Rules of 8 February 2019; the earlier definitions (a "registered owner" and a differently worded test) are not the rule today.
A significant beneficial owner is an individual who, acting alone or together, or through one or more persons or trust, holds not less than ten per cent of the shares or of the voting rights, or has the right to receive or participate in not less than ten per cent of the distributable dividend, through indirect holdings (alone or with direct holdings), or has the right to exercise, or actually exercises, significant influence or control other than through direct holdings alone. The Explanations say how holdings through companies, HUFs, partnerships, trusts and pooled investment vehicles count. See section 90 for the Act, and our BEN-2 and SBO service for filings.
Rule 1: title and commencement
The rules were notified on 14 June 2018 under section 90 read with section 469(1) of the Companies Act, 2013 and may be called the Companies (Significant Beneficial Owners) Rules, 2018. They came into force on the date of their publication in the Official Gazette.
Rule 2(1): the definitions
| Clause | Term | Meaning as printed |
|---|---|---|
| (a) | Act | The Companies Act, 2013. |
| (b) | Control | Control as defined in section 2(27) of the Act. |
| (c) | Form | The form specified in the Annexure to the rules. |
| (d) | Majority stake | (i) holding more than one-half of the equity share capital in the body corporate; or (ii) holding more than one-half of the voting rights in it; or (iii) having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by it. |
| (e) | Partnership entity | A partnership firm registered under the Indian Partnership Act, 1932 or a limited liability partnership registered under the Limited Liability Partnership Act, 2008. |
| (f) | Reporting company | A company as defined in section 2(20) of the Act, required to comply with section 90. |
| (g) | Section | A section of the Act. |
| (h) | Significant beneficial owner | See below. |
| (1) (printed last) | Significant influence | The power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but not control or joint control of those policies. |
Rule 2(2) says words used but not defined that are defined in the Act or the Companies (Specification of Definitions Details) Rules, 2014 carry those meanings. The "significant influence" definition is printed at the end of the list with the number (1); we have kept it separate as printed.
The test: rule 2(1)(h)
In relation to a reporting company, a significant beneficial owner means an individual referred to in section 90(1), who acting alone or together, or through one or more persons or trust, possesses one or more of these rights or entitlements:
- holds indirectly, or together with any direct holdings, not less than ten per cent of the shares;
- holds indirectly, or together with any direct holdings, not less than ten per cent of the voting rights in the shares;
- has the right to receive or participate in not less than ten per cent of the total distributable dividend, or any other distribution, in a financial year, through indirect holdings alone or together with any direct holdings; or
- has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone.
Explanation I: if an individual does not hold any right or entitlement indirectly under tests 1, 2 or 3, he is not a significant beneficial owner. Direct holdings alone, however large, do not make a person an SBO under this rule; the individual is on the register of members in that case. This follows from the explanation's wording and from the first three tests, each of which is about indirect holdings, alone or together with direct holdings.
Explanation II: direct holding. An individual holds directly if (i) the shares are held in his name, or (ii) he holds or acquires a beneficial interest in the shares under section 89(2) and has made a declaration to the reporting company. See our post on section 89.
Explanation III: indirect holding through each type of member
| Member of the reporting company | The individual holds indirectly if he |
|---|---|
| Body corporate, in India or abroad, other than an LLP | (a) holds a majority stake in that member; or (b) holds a majority stake in the ultimate holding company of that member. |
| HUF (through karta) | Is the karta of the HUF. |
| Partnership entity (through itself or a partner) | (a) is a partner; or (b) holds a majority stake in the body corporate which is a partner; or (c) holds a majority stake in the ultimate holding company of the body corporate which is a partner. |
| Trust (through trustee) | (a) is a trustee of a discretionary trust or a charitable trust; (b) is a beneficiary of a specific trust; or (c) is the author or settlor of a revocable trust. |
| Pooled investment vehicle, or an entity controlled by it, based in a member State of the Financial Action Task Force on Money Laundering, where the securities market regulator of that State is a member of the International Organization of Securities Commissions | In relation to the vehicle, (A) is a general partner; (B) is an investment manager; or (C) is a Chief Executive Officer where the investment manager is a body corporate or a partnership entity. |
Explanation IV: where the member is a pooled investment vehicle, or an entity it controls, based in a jurisdiction that does not meet the Financial Action Task Force and IOSCO condition just described, the earlier rows of Explanation III (company, HUF, partnership or trust, as the case may be) apply instead.
Explanation V: if individuals, acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or control or significant influence, over a reporting company, under an agreement or understanding, formal or informal, they are deemed to be "acting together".
Explanation VI: global depository receipts, compulsorily convertible preference shares and compulsorily convertible debentures are treated as "shares" for the clause.
How the tests work in practice
The rule does the same job for each chain of ownership: it asks which individual stands at the top. A member that is a company points to whoever holds a majority stake in it or in its ultimate holding company. A HUF points to its karta. A partnership entity points to partners and to those who hold majority stakes in corporate partners. A trust points to trustees, beneficiaries or settlors according to the type of trust. A pooled vehicle points to its general partner, investment manager or CEO.
Two points follow from the text. The ten per cent figure applies to shares, voting rights and distributable dividend, and the test is "not less than ten per cent", so exactly ten per cent qualifies. And the "majority stake" test used inside Explanation III is a different, higher threshold (more than one-half); it decides whether an individual is treated as holding a member's rights indirectly, while the ten per cent tests then measure the holding in the reporting company.
Example
Asha Menon holds a majority stake in Menon Holdings Private Limited, which holds not less than ten per cent of the shares of Lakeview Foods Limited (the reporting company). Under Explanation III(i), Asha holds a majority stake in a member that is a body corporate, so she holds a right indirectly in Lakeview Foods. The holding through the member meets the ten per cent threshold in test 1, so she is a significant beneficial owner. By contrast, a person who holds shares of Lakeview Foods only in her own name, with nothing held indirectly, does not meet the definition because of Explanation I; her shares are a direct holding.
Need help with SBO identification and filings?
Mapping each member's chain up to the individual behind it is the heart of SBO compliance. We help reporting companies trace holdings, collect declarations and file returns; see our BEN-2 and significant beneficial owner service.
Key takeaways
- An SBO is an individual with at least ten per cent of shares, voting rights or distributable dividend through indirect holdings, or significant influence or control other than through direct holdings alone.
- Holdings through companies turn on a majority stake in the member or its ultimate holding company.
- HUFs, partnerships, trusts and pooled vehicles each have their own look-through rule.
- People acting with a common intent are deemed to act together.
- GDRs, compulsorily convertible preference shares and compulsorily convertible debentures count as shares.
Read next
- Rules 2A to 6: BEN-1, BEN-2, the register and BEN-4
- Rules 7 and 8: application to the Tribunal and exempt entities
- Significant beneficial owner rules for companies as amended
- Section 89: declaration of beneficial interest in shares
Disclaimer: Based on the Companies Act, 2013 rules named above as consolidated in the MCA e-book (consulted on 3 October 2026), with the later notifications the article names. Later amendments, fees, forms and the Companies Act, 2013 provisions referred to should be checked. This article is general information, not legal advice; check the official text before acting.