Shell companies

Shell companies

In August, the Securities and Exchange Board of India (Sebi) directed stock exchanges to initiate action against 331 suspected shell companies and bar...

In August, the Securities and Exchange Board of India (Sebi) directed stock exchanges to initiate action against 331 suspected shell companies and bar them from trading. Further, MCA cancelled the registration of around 2,09,032 defaulting companies and the Ministry of Finance directed banks to restrict operations of bank accounts of such companies by the directors of such companies or their authorized representatives.

Following this, MCA has identified 1,06,578 directors for disqualification under Section 164(2)(a) of the Companies Act, 2013, as on 12 September 2017, reports Livemint. There is no clear definition of what shell company is in the Companies Act, or any other Act. On Independence Day, Prime Minister Narendra Modi mentioned India's battle against black money and said that more than 1.75 lakh shell companies have been de-registered so far. Theoretically, shell companies are companies without active business operations or significant assets.

They can be set up by business people for both legitimate and illegitimate purposes. Illegitimate purposes for registering a shell company include hiding particulars of ownership from the law enforcement, laundering unaccounted money and avoiding tax. With the shell company as a front, all transactions are shown on paper as legitimate business transactions, thereby turning black money into white. In this process, the business person also avoids paying tax on the laundered money. India, however, does not have a concrete definition of shell companies, writes

Shell companies are not defined in any law or act. However, US has defined the shell companies under their Securities Act. They have taken up the basic definition, hence making it the commonly used one. The US Securities Act defines shell companies as: "Securities Act Rule 405 and Exchange Act Rule 12b-2 define a Shell Company as a company, other than an asset-backed issuer, with no or nominal operations; and either: no or nominal assets; assets consisting of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets."

This means that a shell company will have minimum business activities. This could be a plausible definition as even theoretically, the business persons who own shell companies, will be more interested in the rise and fall of their main company. However, not all shell companies are illegal. Some companies could have been started to promote start-ups by raising funds, adds Moneycontrol.

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