With just 6 lakh of India’s 15 lakh registered companies even filing annual returns, it is obvious the country has a very large number of shell companies, with all the attendant problems they bring with them, from tax evasion to money laundering. It would obviously be incorrect to say that all those not filing returns are shell companies, but in the post-demonetisation period, there was enough evidence to show several of the companies were involved in money laundering—the taxman found the companies were depositing cash far in excess of their revenues in the year. A small sample of these firms, a government press release said, had deposited Rs 1,238 crore between November and December last year and this was not in keeping with their earnings profile. And just last month, the prime minister announced that a total of 37,000 shell companies had been identified. Indeed, over 1.6 lakh firms are believed to have been deregistered already, and this is said to include close to 38,000 shell companies. This is not the first time that such a crackdown has taken place and, between FY14 and FY16, the tax department recovered Rs 13,300 crore from more than 1,155 entities.
As part of the demonetisation exercise, a panel was set up to examine fund flows from various entities and to match them with their income profile over the last few years. While a detailed investigation is still in the works, based on some preliminary work, the corporate affairs ministry identified 331 companies and forwarded these names to Sebi for further action. While many of them had already been suspended, the stock market regulator put trading restrictions on 162 of these firms—till such time that the stock exchanges were able to investigate them to establish whether they were bona fide firms or shell companies, trading in them would be restricted to once a month.
No one can fault Sebi for wanting to crack down on shell companies, but the principle of natural justice demands that these companies be given a hearing before being punished. While it could be argued this was the corporate affairs ministry’s job, the fact that Sebi asked the stock exchanges to investigate them suggests a complete investigation has not taken place. Not surprisingly, apart from the fall in the market on Tuesday due to the sudden action, some of these firms have come out to say they are not shell companies. J Kumar
Infraprojects, one of the firms on which trading restrictions were put, has come out with a statement saying it is not a shell company and, in fact, is doing work for the Mumbai and Delhi metros and also the JNPT Port. Parsvnath Developers, similarly, is a well-known real estate company. Ace investor Rakesh Jhunjhunwala, similarly, holds over 1% of the equity in Prakash Industries, another firm on this infamous list. While several laws, it is true, allow the authorities to take action even while the investigation is on, sooner rather than later, the government needs to do away with such statutes. When Sebi removes the restrictions on some of these companies, as it will probably have to do in light of their statements, it is the stock market regulator that loses face—as does the entire system that declares these companies guilty without even a chance to defend themselves.