When Dev Malhotra established an overseas company nearly a decade ago, the incorporation agent suggested a nominee shareholder.
The nominee’s name appeared on the foreign company’s register, while Dev funded the business, controlled its bank account, directed every major decision and expected to receive all economic benefits. A private declaration of trust and an undated share-transfer form were kept in the agent’s records.
Dev was told that the structure provided “privacy” and was common in offshore jurisdictions.
For several years, nobody questioned it. Annual fees were paid, basic filings were completed and the company remained operational.
The problem surfaced when an investor began due diligence. The investor requested the complete ownership chain, source-of-funds evidence, overseas-investment filings and confirmation of the ultimate beneficial owner.
The corporate register identified the nominee. Bank instructions identified Dev. Indian disclosures did not clearly identify either arrangement.
What had been presented as a simple privacy structure now looked like concealed beneficial ownership.
Is a Nominee Shareholder Always Illegal?
No. The presence of a nominee shareholder does not automatically make a structure unlawful.
A nominee may hold shares in their name for another person where the arrangement is permitted by the relevant jurisdiction, properly documented and fully disclosed to companies, regulators, banks and tax authorities wherever required.
Problems arise when the nominee arrangement is used to:
Hide the identity of the real owner
Avoid beneficial-ownership declarations
Circumvent foreign-investment restrictions
Conceal the source or destination of funds
Mislead banks, investors or counterparties
Hold assets for an undisclosed person
Evade tax, exchange-control or anti-money-laundering rules
Create false residency or control positions
The legal analysis must consider every connected jurisdiction. A structure may be permitted under the offshore company law but still create violations under Indian company law, FEMA, tax law or anti-benami provisions.
Registered Ownership Is Not Beneficial Ownership
A registered shareholder is the person whose name appears in the company’s official register. The beneficial owner is the person who ultimately enjoys the economic rights or exercises control.
In Dev’s case, the nominee appeared to be the legal shareholder, but Dev:
Provided the investment funds
Controlled voting decisions
Appointed service providers
Directed the bank account
Received the commercial benefits
Had the right to demand transfer of the shares
These facts indicated that the nominee was not the true economic owner.
Indian company law expressly recognises the distinction between a registered holder and a beneficial owner. Section 89 of the Companies Act requires prescribed declarations where the person named in the register does not hold the beneficial interest in the shares.
The related filing framework includes declarations by the registered and beneficial owners and a return by the company. The applicable forms, timelines and legal requirements must be examined for the specific entity and transaction.
Significant Beneficial Ownership Cannot Be Ignored
Where an offshore entity holds shares in an Indian company, the analysis does not necessarily stop at the name of that offshore entity.
The Companies (Significant Beneficial Owners) Rules require a reporting company to identify relevant individuals who hold prescribed indirect rights, voting power, economic entitlement, significant influence or control.
The rules generally examine whether an individual, acting alone, together with others or through entities or trusts, possesses the specified rights or entitlements. The framework can look through bodies corporate incorporated in India or abroad.
A qualifying significant beneficial owner may be required to submit Form BEN-1, following which the reporting company may have to file Form BEN-2 with the Registrar. MCA’s official BEN-2 instruction kit confirms that the filing arises under Section 90 and the Significant Beneficial Owners Rules.
Using multiple offshore entities or nominees does not remove the need to identify the individual who ultimately owns or controls the structure.
The FEMA and Overseas-Investment Problem
Dev had funded the offshore company while resident in India. That introduced a separate question: whether his overseas investment was made, reported and maintained in accordance with FEMA and the applicable overseas-investment framework.
The current overseas-investment regime is governed by the Foreign Exchange Management (Overseas Investment) Rules, Regulations and Directions. RBI’s framework regulates overseas direct investment, overseas portfolio investment, financial commitments and related reporting by Indian residents and entities.
A nominee arrangement cannot be used to make an Indian resident’s foreign investment disappear.
Investigators, banks or authorised dealer banks may compare:
The person who remitted the original funds
The shareholder shown in the offshore register
Overseas-investment filings
Annual performance or other prescribed reports
Dividend and sale proceeds
Loans, guarantees and financial commitments
Control rights and board instructions
Tax-return and foreign-asset disclosures
If these records tell different ownership stories, the structure may face delayed transactions, regulatory queries, compounding exposure or further investigation.
When the Arrangement May Become Benami
A nominee arrangement also requires examination under India’s prohibition on benami transactions.
Broadly, a benami concern can arise where property is held by one person, the consideration is provided by another and the property is held for the benefit of the person who provided the consideration, subject to statutory definitions and exceptions.
Shares and other ownership interests can constitute property for this purpose. However, not every nominee or fiduciary arrangement is automatically benami. The funding, intention, documentation, relationship between the parties and available legal exceptions must all be examined.
Describing an arrangement as a “nominee structure” does not protect it if its real purpose and operation satisfy the elements of a prohibited transaction.
Why the Structure Failed During Due Diligence
The investor did not reject Dev’s company merely because an offshore jurisdiction was involved. The problem was the absence of a consistent and verifiable ownership trail.
The due-diligence team found:
A nominee listed as the shareholder
Dev operating the business as the owner
Incomplete beneficial-ownership declarations
Unclear overseas-investment reporting
Different ownership information in banking records
No updated source-of-funds file
Undated documents capable of changing legal ownership
The investor could not determine whether the structure was legally compliant, whether Dev could deliver valid title to the shares or whether future regulators might challenge the arrangement.
What once appeared to provide confidentiality had reduced the company’s investability.
How Legacy Structures Should Be Reviewed
A legacy offshore structure should not be closed, transferred or rewritten without first evaluating the tax, FEMA, corporate and legal consequences.
A proper review should cover:
The complete ownership chain up to the natural person
Share registers, trust declarations and nominee agreements
Source and route of every capital contribution
Indian and overseas beneficial-ownership filings
FEMA and overseas-investment compliance
Tax residency and foreign-asset reporting
Bank KYC and ultimate-beneficial-owner records
Voting, dividend and control arrangements
Exit, transfer and restructuring consequences
Backdated documents or artificial explanations can significantly worsen the position. Remediation should be prospective, evidence-based and coordinated across all relevant jurisdictions.
The Larger Takeaway
Offshore structuring is not unlawful merely because it involves a foreign company or a nominee shareholder. The risk arises when the visible ownership differs from the real ownership and the difference has not been lawfully disclosed.
Modern banking, investment and regulatory checks focus on the natural person who ultimately owns, controls or benefits from an entity.
For Dev, the issue was not that the authorities suddenly changed the meaning of ownership. It was that his structure had always depended on secrecy where the law required transparency.
Shunyatax Global Insights
Legacy offshore structures should be reviewed before a funding round, banking change, sale, succession event or regulatory notice exposes inconsistencies.
Shunyatax Global can assist with beneficial-ownership reviews, FEMA and overseas-investment compliance, cross-border tax analysis, corporate restructuring and coordination with legal advisers in the relevant jurisdictions.
Contact Shunyatax Global
Phone: +91 94615 14198
Email: office@shunyatax.in
Website: www.shunyatax.in
Disclaimer: The character and circumstances used in this article are illustrative. The legality of a nominee arrangement depends on its purpose, documentation, beneficial ownership, funding trail and the laws of every relevant jurisdiction. This content is intended for general information and does not constitute legal, tax, FEMA or financial advice.