Suspect shell firms

As part of Operation Clean Money against tax evaders, the Central government has been tightening the noose on shell companies for quite some time post demonetisation. These companies have no active business operations; if they hold assets, these are mostly in the form of cash. They are therefore under scanner with tax authorities suspecting these to be fronts or conduits of money laundering and tax evasion. Not all shell companies are fraudulent — some have been set up with the sole aim to fince start-ups. But in general, shell companies have earned a bad me for various irregularities like failing to file tax returns regularly; many such entities have been known to disappear overnight after mopping up funds from investors in the stock market. After the Prime Minister’s cash ban move in November last year, taxmen began to mine vast mountains of data of possible tax evaders. With no specific legal instrument to target shell companies, the government has been using a combition of laws relating to regulating companies, prevention of money laundering and bemi transactions. The crackdown soon began on shell companies as generators of black money, with the Ministry of Corporate Affairs already cancelling the registrations of nearly 2.1 lakh companies for suspect transactions. Their accounts have been frozen and banks instructed not to allow company directors or their authorised representatives to withdraw money. Any attempt to ‘siphon off’ money from bank accounts would lead to the concerned director being jailed for terms ranging from 6 months to 10 years, the Department of Fincial Services has warned. And in a first move of its kind, the Central government on Tuesday last made public a list of 55,000 directors of shell companies to ‘me and shame’ them. Disqualified under Section 164 (2)(A) of the Companies Act, 2013, these directors/promoters cannot float new companies or be appointed in any other company in similar capacity.

In this list, there are prominent politicians like former J&K chief minister Omar Abdullah, former Kerala CM Oommen Chandy and VK Sasikala (presently behind bars and recently expelled from AIADMK). Assam’s Cultural Affairs Minister ba Kumar Doley and Congress MLA Sukur Ali Ahmed too figure in this list, apart from several entities from the Northeast. In his defence, Doley has said that the two companies with which he is associated as director have been operating in legitimate manner. Taxmen say that these companies have not filed returns for three or more fiscals, and all efforts will be made to identify the ‘real beneficiaries’ behind such entities. Minister of State for Corporate Affairs PP Chaudhary has said that the campaign against shell companies is aimed to “choke the availability of slush funds for illegal purposes”. Since shell companies are not exactly defined under Indian law, the authorities will have to spell out clearly what is objectioble in their operations, as the de-registered companies begin to apply for restoration to the tiol Company Law Tribul (NLCT) in coming days. Over the past few months, stock market regulator Securities and Exchange Board of India (SEBI) has been asking stock exchanges to probe suspect shell companies through independent auditors, and delist those in which proof of wrongdoing have been found. With over Rs 7,000 crore of public money reportedly invested in shell companies, the market was understandably spooked when Bombay Stock Exchange and tiol Stock Exchange authorities moved many such entities into ‘graded surveillance’, thereby taking out their stocks from active trading. Investors holding such stocks are now a bewildered lot, wondering whether these have been rendered utterly valueless, hoping against hope that their companies of interest will be able to prove their genuineness and legitimacy of operations. The need of the hour is thus clarity and availability of reliable information in public domain, so that potential investors are not taken for a ride by shell companies — backed by shady individuals and corporate whose actual motive is not to produce something or offer a service, but simply to avoid paying tax and launder their black money through devious means. Besides, it is high time to expose and punish rogue chartered accountants and other fincial experts who are often the brains behind such entities. The all-out offensive against dodgy shell firms will go a long way in restoring investor confidence in stock markets and destroying black money receptacles. It would surely contribute to cleaning up the country’s economy in the long run, similar to the ongoing campaign against black money and bemi transactions in real estate.