1. Government names and shames 55,000 shell company directors; a 10-point guide to why it matters

Government names and shames 55,000 shell company directors; a 10-point guide to why it matters

The government has made public names of over 55,000 directors linked to shell firms to ensure they do not get associated with similar roles again in a move to escalate its crackdown on shell companies and their operators.

By: | Published: September 20, 2017 1:11 PM
The government has already identified over 1.06 lakh directors for their association with shell firms and such names will be published soon. (Image: Reuters)

The government has made public names of over 55,000 directors linked to shell firms to ensure they do not get associated with similar roles again in a move to escalate its crackdown on shell companies and their operators. The government has already identified over 1.06 lakh directors for their association with shell firms and such names will be published soon. These directors are either yet to commence any business or have failed to submit their financial statements or annual returns for three straight years. Here is a 10-points cheat sheet to the development in the issue.

  1. More than 2 lakh shell companies have already been struck off the register of the companies with various ROCs (Registrar of Companies). Further, money laundering activities under the umbrella of these companies are also under the scanner.
  2. As per the public notices issued by different ROCs, the names have been made public so far for more than 24,000 such shell companies from the Chennai region, as also of over 12,000 each from Ahmedabad and Ernakulam.
  3. Similar lists of thousands of directors have been made public by the ROCs in Cuttack, Goa and Shillong, among others. However, ROCs in Delhi, Mumbai and Chandigarh are yet to publish such lists.
  4. Several of these names could also be linked to various political and corporate groups, but it could not be ascertained immediately as most of the lists only contain the names of directors and their DINs (Director Identification Numbers) and not any specific personal details. However, addresses were also mentioned for some.
  5. The names of these firms have been struck off under Section 248 of the Companies Act, which provides that the ROC may take action against them if a company has failed to commence its business within one year of its incorporation; or it has not carried out any business for two financial years or has failed to file its financial statements for three years.
  6. The action against directors of such firms can be taken under Section 164(2), which provides that such persons will not be eligible to be re-appointed as a director of that company or appointed in any other company for five years from the date of default by the company concerned.
  7. In most cases, the directors whose names have been made public will not be eligible for any directorship till October 2021 as the action has been initiated with effect from November 2016.
  8. Signalling that more regulatory action is expected, the ministry is already analysing further data of 2.09 lakh defaulter companies to also identify persons with significant beneficial interests.
  9. “Profiles of directors such as their background, antecedents and their role in the operations/functioning of these companies are also being compiled in collaboration with the enforcement agencies,” the ministry had said on 12 September.
  10. The ministry, which is implementing the companies law, has also identified professionals, chartered accountants, company secretaries and cost accountants associated with the defaulting companies. “The fight against black money shall be incomplete without breaking the network of shell companies.

There are nearly 11 lakh companies with active status after deregistration of over 2.09 lakh firms. The government is also monitoring the situation emerging out of cancellation of registration of the companies and is holding regular meetings with officials of the ministry and various related organisations. The ministry expects to be ready by month-end with full relevant details of all defaulting directors of such firms.

Earlier this month, the government had said more than 1.06 lakh directors will be disqualified for their association with shell companies. The move came close on the heels of the corporate affairs ministry cancelling the registration of 2.09 lakh companies that have not been carrying out business activities for a long period. Besides, banks have been asked to restrict operations of these companies’ bank accounts by their directors or their authorised representatives.

In August 2017, India’s capital markets regulator SEBI shocked investors with its order to suspend trading in 331 suspected shell companies’ shares, putting them on a strict watch under its Graded Surveillance Measure (GSM) framework. The regulator asked the stock exchanges to place all the 331 companies in the stage VI (six) of Graded Surveillance Measure, restricting the trade in these securities to once in a month with additional deposit. Following demonetisation, the government claims to have identified as many as 37,000 shell companies.

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