ISSUE OF SHELL FIRMS
THE CONTEXT: On Independence Day last year, Prime Minister Modi mentioned India's battle against black money and said that more than 1.75 lakh shell companies have been de-registered so far. Also, in recent past, the Government has been very active in ensuring illegal shell firms are weeded out of the system.
This article discusses about shell companies and various initiatives taken the Government in the recent past to prevent their flourishing.
SHELL COMPANIESAND THEIR PURPOSE OF CREATION
What are shell companies? |
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Why are they created? |
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Shell company vs Dormant company |
What is a dormant company?
How is a shell company different from dormant company?
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MECHANISM OF WORKING OF SHELL COMPANIES
ISSUES WITH SHELL COMPANIES IN INDIA
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ACTIONS TAKEN BY GOVERNMENT IN RECENT PAST
- Centre has initiated action against more than 2.25 lakh shell companies as part of Operation Clean Money.
- Serious Fraud Investigation Organisation has created a database of Shell companies where it categories companies into 3 types- Confirmed List, Derived List and Suspect List. The Confirmed List has a total of 16,537 confirmed shell companies The Derived List has 16,739 companies . The Suspect List has 80,670 suspected shell companies and has been drawn up by SFIO using certain Red Flag Indicators.
- A ‘Task Force on Shell Companies’ under the Joint Chairmanship of Revenue Secretary and Secretary, Ministry of Corporate Affairs was constituted in February 2017.
- Memorandum of understanding (MOU) was signed between Ministry of Corporate Affairs (MCA) and Central Board of Direct Taxes (CBDT) for automatic and regular exchange of tax information.
- Appropriate powers given to RBI wrt freezing of accounts of defaulting companies and to SEBI for delisting companies if they suspect company’s fundamanentals.
- Actions taken by Ministry of Corporate Affairs to ensure compliance:
- In September 2017, Ministry of Corporate Affairs had introduced new Know Your Customer (KYC) norms affecting about 33 lakh directors of companies. Under it, directors were required to e-file forms providing details such as personal mobile number, e-mail address, Permanent Account Number (PAN) and Aadhaar number
- The Ministry of Corporate Affairs has notified the Companies (Incorporation) Amendment Rules, 2019, under which all companies registered before December 31, 2017, are required to file eForm ACTIVE (Active Company Tagging Identities and Verification)-INC22A on or before April 25, 2019. Failure to file e-Form ACTIVE will lead to a penalty of Rs 10,000 with companies in default being declared ACTIVE non-compliant.
RECOMMENDATIONS OF TASK FORCE
Recommendation | Possible Impact |
Re-introduction of the provision, whereby a company needs to declare commencement of business. | This would help in early detection and striking off of inactive companies. |
Non-maintenance of a registered office as one of the grounds for striking off the name of a company from the Registrar of Companies, under Section 248 of the Companies Act. | It will ensure that companies maintain a registered office to prevent the existence of paper companies. |
Disqualification of directors, who are holding directorship beyond the maximum limit prescribed under the act. | Ensure better Corporate Governance practices |
WHAT MORE SHOULD BE DONE?
Having a separate law dealing with Shell companies |
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Amendments in Companies law 2013 |
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Double tax avoidance agreements |
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Using technology |
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CONCLUSION: Although, shell companies are not harming investors but the government by the illegal by doing hawala transactions converting black money into white and by not paying the tax. So, there is a need to bring the transparency in taxation & laws along with its implementation and widen the tax base.
SOURCES http://pib.nic.in/newsite/PrintRelease.aspx?relid=186743 https://economictimes.indiatimes.com/news/company/corporate-trends/how-shell-companies-turn-black-money-of-india-inc-politicians-into-white-and-vice-versa/articleshow/20947474.cms |
Mains Questions 1) What do you mean by Shell companies? Describing their mechanism, explain why India faces issues in dealing with them? 2) Shell company is an important way for corporates in India to evade taxes. In this context, discuss various Government initiatives to tackle the menace of Shell companies. |