Microsoft had acquired LinkedIn in 2016.
Mint explains what led to the order being issued, and what the companies and executives need to do to mitigate the situation.
Why the penalty?
The Registrar of Companies (RoC), operating under the aegis of MCA, has alleged that LinkedIn Technology Information Pvt. Ltd—the Indian arm of US-based LinkedIn Corp—had LinkedIn Technology Unlimited Co., listed as a registered holder and LinkedIn Ireland Unlimited Company as a beneficial owner of one share, in filings made in January this year.
This had created the beneficiary interest at that time.
This, the RoC said in its order levying the penalties, contrasted with previous filings which showed that the beneficial interest had been created much earlier. This violation of significant beneficial ownership rules under the Companies Act, 2013, triggered the charge from the RoC for Delhi and Haryana.
What do the rules state?
The significant beneficial ownership rules were added to the Companies Act in 2018 for determining the real owners of Indian companies that are not registered as shareholders.
Section 90 of the Companies Act, 2013, lays down the primary intent of the law—which is to identify natural persons having ultimate beneficial ownership in a company. Also, indirect ownership is mandatory for becoming a significant beneficial owner or SBO.
The rules provide certain tests for significant beneficial ownership on the basis of the holding of share capital, voting rights and dividend rights.
To qualify as an SBO, an individual—either indirectly or together with direct holdings—must hold 10% or more shares or voting rights or dividend rights in a company. Or, the person has the right to exercise, or actually exercises, significant influence or control over the operation and management of the company, other than direct holding in it.
Companies having SBOs must maintain a register of such owners and file them with RoC, along with the changes made to them
Are the companies and executives liable to be penalized?
In LinkedIn’s case, the ROC invoked the test of “control” and “significant influence” to name the global executives as significant beneficial owners.
Legal experts say that a section of the law defines control clearly stating that it should include the right to appoint the majority of the directors or control the management, or policy decisions of the company.
Significant influence, on the other hand, is defined as the power to participate, directly or indirectly, in the financial and operating policy decisions of the company.
The RoC has alleged that while Microsoft Corp is named as the ultimate parent of LinkedIn’s India entity, LinkedIn Corp, USA, has not been named in its holding structure. Also, Roslansky is a significant beneficial owner of the Indian entity under the Companies Act on account of his ability to exercise control over its board of directors.
Since Roslansky reports to Nadella, he is also a significant beneficial owner under Indian law, the RoC has stated. Nadella and Roslansky therefore have been ordered to pay ₹2 lakh each, while LinkedIn Technology Information Pvt. Ltd has been ordered to pay ₹7 lakh, Mint had reported on Friday.
Linkedin Technology Information Pvt. Ltd has to ensure that all the parties pay the penalty. The RoC has ordered both the companies that are registered as shareholder of LinkedIn’s India arm as well as its beneficial owner to pay ₹2.8 lakh each.
What are the companies and executives doing to mitigate the situation?
While the company can appeal against the order within 60 days before the regional director under the ministry of corporate affairs, the issue rests on the matter of ensuring compliance with the country’s rules and laws.
Linkedin, in a statement, has said that it complies with the laws of the countries it operates in. “We are reviewing the order to determine next steps,” the company said. It has also said that the beneficial ownership of the share had always vested with Linkedln Ireland Unlimited Co., and had been disclosed to a High Court, the RoC, and other statutory authorities as part of a transaction in 2014.
The existence of this beneficial ownership has been noted in the annual returns filed since financial year 2014-2015, it added.
Is this the first time a global corporation’s top executive has been penalized?
While it may not be the first time that these laws have been invoked, legal experts suggest that the decision may be too harsh. For one, the concept of significant influence is still not well evolved in India.
Some experts also believe that foreign jurisprudence on this subject has been completely ignored.
To slap a huge penalty on the basis of ambiguous law will not go well with India’s image of ‘ease in doing business’ and following the established rule of law, a legal expert who did not want to be named, said.
Under foreign jurisprudence in similar situations, global leaders would not have qualified as SBO, he explained.
Second, this may well open up a Pandora’s Box since many large corporations operating in India may face a similar situation.
Legal experts have also called for the correct interpretation of control and significant influence used for determining SBO to be codified in law.