Government panel struggles to define ‘shell company’

The shady financial transactions, ownerships and assets of thousands of companies have been studied in a bid to come up with acceptable criteria to declare an entity a shell company as per the law.

The multi-agency committee set to finalise the definition of a “shell company” for the purposes of enforcing penal laws for various violations is yet to arrive at a consensus to diverse opinions on yardsticks for identification of such entities.

After a large number of entities, classified as a shell company, challenged the decision, the government had set up the committee to come up with a definition. The committee drafted a definition that had to be tested on various yardsticks to determine its legal feasibility.

Maze of transactions

The shady financial transactions, ownerships and assets of thousands of companies have been studied in a bid to come up with acceptable criteria to declare an entity a shell company as per the law.

The committee also examined the definition given by the Organisation for Economic Co-operation and Development (OECD). The OECD defines a shell firm 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”.

“A consensus among the committee members on the definition is yet to be arrived at. Also, the agencies involved in the exercise are getting caught up in investigations into important cases, including those against Nirav Modi and Mehul Choksi. Examining the financial records in such cases itself is a time- consuming process and requires constant supervision and huge manpower,” said a financial investigation agency official.

The issue had come up after the government cracked down on dummy companies that were used for round-tripping of funds and money laundering.