India aims at shell companies to get rid of black money

Key Highlights: 

• Ministry of Finance ask over 2 lakh companies bank account to be frozen
• Sebi identified 331 listed firms as suspected shell companies
• 1.78 lakh companies have been deregistered by ministry so far 

The Government of India has stepped up its fight against black money. In yet another move, the finance ministry struck off names of over 2 lakh companies and made their bank accounts inoperable. 

The ministry, on September 05, said, “The names of 2,09,032 companies have been struck off from the Register of Companies under Section 248 (5) of the Act. The existing Directors and Authorised Signatories of such struck off companies will now become ex Directors or ex Authorised Signatories.”

It added, “ These individuals will therefore not be able to operate bank accounts of such companies till such companies are legally restored under Section 252 of the Companies Act by an order of the National Company Law Tribunal. The restoration, as and when it happens shall be reflected by change in the status of the company from ‘Struck off’ to ‘Active’.”

This is a clear indication that the government is stepping up against companies falling within the ambit of Section 248 of the Companies Act – which says a registrar has a reasonable cause to believe that a firm has failed to commence its business within one year of its incorporation.

Earlier, on August 07, 2017, the Securities Exchange and Board of India (Sebi) directed BSE, National Stock Exchange (NSE) and Metropolitan Stock Exchange to identify listed companies out of the list of 331 suspected shell companies received by the Ministry of Corporate Affairs vide letter dated June 09, 2017. 

On August 11, the Corporate Affairs Minister Arun Jaitley told Lok Sabha that there is no definition for shell companies under the Companies Act but such entities are used for round tripping of money.

A Shell company is an entity without any active business operations or significant assets.

How can you identify a shell company.?

For identifying shell company, Sebi has implemented a stage VI of Graded Surveillance Measure (GSM) under which trading in the these firms will be permitted for trading once a month under trade-to-trade category.  

GSM framework came into force with effect from March 14, 2017. It's main objective is to alert and advise investors to be extra cautious while dealing in these securities and also to enable market participants to carry out necessary due diligence while dealing in these securities.

Here's how stock exchanges can identify shell company through stage-wise surveillance actions. 

Stock exchanges will be appointing an independent auditor to conduct audit of such listed companies and if necessary, even conduct forensic audit of such companies to verify its credentials/fundamentals. 

As per Ministry of Finance, a shell companies can be identify by nominal paid-up capital, high reserves & surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover & operating income, nominal expenses, nominal statutory payments & stock in trade, minimum Fixed Asset. 

Few places like Cayman Islands, Mauritius; Lichtenstein etc are known for being tax havens and have been a favorites of shell companies. 

Recently, as many as 1.78 lakh companies have been deregistered according to ministry.  Also the Registrars of Companies (RoCs) have removed 1,62,618 companies from the register of the companies as of July 12, 2017.