58,000 bank accounts involving 35,000 companies deposited and withdrew Rs 17,000 crore post demonetisation. Does it mean that black money turned into white? Not necessarily.
A bank account had a negative balance on November 8, 2016 — the day of demonetisation. After Prime Minister Narendra Modi announced a ban on high-value notes, not only did the account become active, but as much as Rs 2,484 crore was deposited in it in old notes of Rs 500 and Rs 1,000, before all of the money eventually withdrawn in new and valid notes. A company even had as many as 2,134 bank accounts in its name. Does it mean that the demonetisation drive allowed the conversation of black money into white?
Not necessarily. In fact, about 58,000 bank accounts involving 35,000 companies, which have deposited and withdrawn Rs 17,000 crore post demonetisation, are under the Finance Ministry’s scanner. The Ministry of Corporate Affairs (MCA) also struck off around 2.24 lakh companies which were inactive for two years or more, most of which are suspected to be shell companies.
Post-demonetisation, Prime Minister Narendra Modi had asked the authorities concerned — the Enforcement Directorate and the Income Tax Department — to launch a massive crackdown on shell companies, which give platforms for syphoning off money. The government recently said that more than 1.06 lakh directors would be disqualified for their association with shell companies.
What are shell companies?
India does not have a definition of shell companies. As the word ‘shell’ suggests, a company has only an outer layer of being called a corporate entity and does not have any active business operation. The shell companies are generally understood as firms set up with minimal capital and assets. Most of the shell companies are registered in tax havens, where there is nil or low tax. Interestingly, having a shell company is illegal in India.
Since shell companies are not illegal in India, it gets really difficult to track genuine transaction and transactions meant to syphon off money or money laundering. Shell companies come under the radar once they are found any one of these three laws: Benami Transaction (Prohibition) Amendment Act 2016, The Prevention of Money Laundering Act 2002, and The Companies Act, 2013.
How are shell companies used for money laundering?
Shell companies are being massively for money laundering, tax evasion and turning white money into black and back to while. Take a case: A company X is a registered company with SEBI. It needs to purchase shoes worth 10,000 crore, but it wants to show an inflated bill of Rs 20,000 core. How does the company do it? It sets up a shell company Y in a tax-haven country, say, Bahamas, and lets it first purchase the shoes for Rs 10,000 crore and later buys it for Rs 20,000 crore.
While Y is a bogus company set up by X, the cash that was actually spent was Rs 10,000 crore, while in the books it showed an expenditure of Rs 20,000 crore. Similar kind of embezzlement is done through a complex web of a series of shell companies.
How government is planning to curb black money through crackdown on shell companies:
Of the 15 lakh registered companies in India, only six lakh of them file their annual returns. In the past three decades, 1,155 shell companies have been used by various channels by more than 22,000 beneficiaries to conceal around Rs 13,300 crore.
- The Enforcement Directorate conducted nation-wide raids on April 1 in 16 states swooping down at marketplaces, business centres, residential premises and even houses put up on rent to hunt down allegedly dubious and suspicious firms which the agency believed were the “backbone” of black money in the country. The ED teams had visited at least 110 locations in cities like Kolkata, Mumbai, Ahmedabad, Panaji, Kochi, Bengaluru, Hyderabad, Delhi, Lucknow, Patna, Jaipur, Chandigarh, Jalandhar, Srinagar and Indore besides some in Haryana.
- The government even said that more than 1.06 lakh directors would be disqualified for their association with shell companies and the role of auditors have come under the scanner for alleged connivance in facilitating illegal transactions.
- The government in September had directed freezing bank accounts of more than 2.09 lakh companies whose names have been struck off from the records and said action would be taken against more such firms.
- The government will invoke the Benami Transactions (Prohibition) Amendment Act for harsh action against those involved.
(First published on November 6, 2017, on www.financialexpress.com)