The government’s drive to end shell companies, which started in the month of February with the constitution of the Task Force on Shell Companies, is getting into an accelerated mode. Today, most of the government agencies have united and joined hands to achieve this national agenda.
Such agencies include the ministry of corporate affairs, Serious Fraud Investigation Office, Securities and Exchange Board of India, Income Tax Department, Enforcement Directorate, Central Board of Investigation, etc. In fact, it appears the ‘whole of government’ approach has been adopted.
The actions taken until now include removal of names of companies from the Registrar of Companies, levy of taxes and penalties, and filing of prosecution complaints in criminal courts wherever applicable. In fact, the ministry of corporate affairs is in the process of preparing a database of shell firms that would further help in curbing illegal business activities in this area.
Recently, the securities market regulator has put 331 listed entities in the restricted trade category on the basis that they are shell companies as identified by the ministry of corporate affairs. To identify and prove a company to be a shell company is a challenge.
While the term ‘shell company’ is not defined under the companies law, shell companies are often characterised by such organisations that have nominal paid-up capital, high reserves and surplus because of receipt of high share premium, investment in unlisted companies, no dividend income or high cash in hand, among others. Such companies are involved with no active operations, but some such as:
* Being involved in dubious transactions;
* Involved in diversion of loan funds along with creating fake invoices;
* Involved in round-tripping (a means of tax evasion and black money generation); or
* Involved in or even used for converting black money into white.
To stay away from being shell companies, companies may apply for getting dormant status in case not currently carrying on any business or operation after complying with the provisions under Section 455 of the Companies Act, 2013.
Under Section 455, a company may be formed and registered for a future project, or to hold an asset or intellectual property, and apply for obtaining the status of a dormant company. Such a company should not have any significant accounting transaction and is an inactive company.
The terms ‘inactive company’ and ‘significant accounting transaction’ are also defined in this section. Supporting provisions are in place that provide the detailed procedure for a company to apply to the ‘registrar’ for obtaining the status of a dormant company. Such an application may be made in accordance with the provisions of Section 455 after passing a special resolution to this effect in the general meeting of the company, or after issuing a notice to all the shareholders of the company for this purpose and obtaining the consent of at least three-fourths of the shareholders (in terms of value).
Such regular drives by various regulatory authorities indicate the move towards attaining the objective of the broader agenda of curbing black money. These are strong and welcome moves, and therefore the challenges are anticipated.
Corporate menace must come to an end. We must keep in mind that the government is watching us. We all must join hands with the government to make India move fast towards becoming a developed economy, and towards that, we must use the technology and the laws of the land.
By Shyam Agrawal, President, the Institute of Company Secretaries of India (ICSI)