Despite red flag by the law ministry on its possible misuse by shell companies to launder black money, the government has decided to do away with the prerequisite of a minimum contribution by shareholders in the paid-up capital while floating a new company.
The Cabinet last week approved changes in the Companies Act to do away with the minimum paid-up capital requirement on the corporate affairs ministry’s assertion that it would improve India’s ranking in the World Bank’s Ease of Doing Business index and hence bolster its ‘Make in India’ campaign.
The minimum paid-up capital is the amount of a company’s capital that has been contributed by shareholders. Currently, the minimum requirement that promoters contribute is Rs 1 lakh while starting a private company and Rs 5 lakh for public limited company.
The approval was given even as the law ministry asked the corporate affairs ministry to revise the existing limit upwards as the present threshold had failed to deter formation of shell companies mostly used for routing black money.
“The requirement of minimum paid-up capital of Rs 1 lakh and Rs 5 lakh for private and public companies was provided in the 2013 Act to check the practice of shell companies being incorporated without intention of commencing or doing any business. The requirement of the said minimum paid-up capital may not be deterrent/excessive for carrying on any business. Hence, it needs reconsideration,” said the department of legal affairs in its opinion dated November 14, to the corporate affairs ministry.
A fortnight later, the ministry finalised the note for Cabinet approval without paying heed to the legal opinion that could have been instrumental in stopping the proliferation of shell companies.
The ministry’s reply to the objection by the department of legal affairs was that “If this particular requirement (minimum paid-up capital) under the Companies Act 2013 is removed, this will greatly enhance perception about ease of doing business”.
It put the onus for curbing shell companies through “a strict compliance regime” rather than retaining the existing minimum requirement of share capital. It said: “The requirement is also not considered necessary in view of various stringent compliance requirements as well as recognition of the concept of ‘dormant company’ in the New Companies Act.”
The provision for a minimum paid-up capital was included in the old Act in 2000 to check the practice of shell companies being incorporated without the intention of commencing or doing any business.
However, the department of industrial policy and promotion (DIPP) specifically pushed for its removal as it has substantial weightage in the indicator for “Starting Business” in the World Bank Annual Report on “Doing Business” and the removal of this requirement would improve India’s ranking in such report.
Proliferation of shell companies has been an issue with the Securities and Exchange Board of India and Enforcement Directorate as they have been used for money laundering activities. Shell companies are used to disguise the true owner of money and were used in the coal scam to camouflage the shareholding of the company that got coal blocks.
Only on December 5, Sebi initiated action against 25 listed companies as it suspected them to be only existing on paper and could have been set up to route black money.
NO HURDLES TO EASY BUSINESS
* Law ministry red-flagged the move saying minimum paid-up capital was a check against proliferation of shell companies
* The DIPP pushed for its removal as it could improve India’s rankings in the World Bank’s annual ‘Doing Business’ Report