A government committee has drafted the definition of ‘shell-company’ to plug a loophole in existing laws that empower enforcement agencies to initiate legal proceedings against such entities. The issue had come up after a large number of entities, against which action had been taken, contested their classification as shell companies.
The crackdown on shell companies started after the government found evidence establishing that such corporate vehicles had been used to defeat the purpose of demonetisation and they were also involved in black money and laundering operations.
While more than two lakh companies were earlier deregistered on various counts of non-compliance, in January this year, the government had planned to strike off 1.2 lakh more companies. About three lakh directors were also disqualified for their association with non-complaint and defaulting companies.
The Securities and Exchange Board of India(SEBI), the Financial Intelligence Unit and the Serious Fraud Investigation Office (SFIO) were also involved in the probe.
However, when many companies contested the action against them, the authorities found that “shell-company” as an entity had not been defined specifically. Therefore, it is learnt, the government set up a committee to study various aspects of the issue and come up with a definition that could be adopted for effective action.
In the process, the committee also examined the definition provided by the Paris headquartered inter-government economic body, Organisation for Economic Co-operation and Development (OECD), which has defined a ‘shell company’ as “a company that is formally registered, incorporated, or otherwise legally organised in an economy but which does not conduct any operations in that economy other than in a pass-through capacity. Shells tend to be conduits or holding companies and are generally included in the description of Special Purpose Entities”
The authorities encountered some issues with respect to the OECD definition, and hence explored other possible definitions. “They have arrived at one such definition, which is being tested on the basis of the data on such entities that is available with the Ministry of Corporate Affairs,” said an official. After determining that the definition is wide enough to cover all aspects of such entities, the Centre may soon adopt it for inclusion and implementation for legal purposes.
According to the OECD, shell companies are entities established not to pursue any legitimate business activity but solely to obscure the identity of their beneficial owners and controllers, and they face an increased risk of being misused for illicit purposes.
Earlier in November 2017, SEBI had constituted a committee to hear cases of the companies, and their directors, which had contested their classification as shell companies due to “technical errors” or “mis-interpretation”. The move came after several directors, facing disqualification, approached the court seeking relief.
This January, the Ministry of Corporate Affairs came up with “Condonation of Delay Scheme” giving an opportunity to the non-compliant companies to rectify their defaults. The scheme was valid till March 31, but was later extended till May 1.
