Economy

KEY POINTS

Shell Companies

·        Companies Act, 2013 has not defined what is “Shell Company”

·        Shell companies are generally corporate entities which do not have any active business operations or significant assets in their possession.

Working of Shell Companies

·        Shell companies are mostly virtual entity, which appears only on paper.

·        They are maintained by operators, who appoints “dummy” directors whose identity is untraceable.

·        Money Laundering - The shell company operator acts as an intermediary or a broker between one who wants to convert white to black vice versa

·        Large companies issues cheques to shell companies and accounts for it as payment of commission.

·        These shell companies return the money as cash (after taking a small cut) to the large company. Thus, white money becomes black.

·        Those who wants to convert black money into white money will buy these shell companies at a very discount rate. (i.e. paying say, Rs.1 for a share worth Rs.50. But, they will pay the remaining through black money).

·        Thus, a formal entity is bought using black money and it is converted to white as an asset formation.

·        The owner of the asset, then convert black money of his own into white by fake invoices and revenue receipts showing profits of this company. 

·        Thus, shell companies entrenched corruption, terror funding and illegal activities.

·        Tax evasion - To avoid income tax on earnings, shell companies shows payments to another numerous shell companies towards fulfilment of contracts.

·        All these money flows are notional – no actual money flows to these firms.

·        In cases involving forex, large remittances are sent out as payment for fictional imports, advances or commissions, later moved into other shells and then brought back as receipts (called round-tripping).

·        These companies have also been used for rotating and siphoning off funds through fictitious sales, inflated purchases, and unjust commissions or for creating equity for individuals operating behind the scenes.

Govt. of India’s steps

·        Benami Transaction (Prohibition) Amendment Act 2016

·        The Prevention of Money Laundering Act 2002

·        The Companies Act, 2013.

·        Operation Clean Money was initiated by Income Tax Department (ITD).

·        Information sharing agreement between Ministry of corporate affairs and CBDT

·        MCA 21 - portal in which all corporate filings reside, can be mined for common directors, common registered addresses, and little business and suspicious transactions to create alerts.

·        A task force was constituted to monitor the malpractices by shell companies.

·        Delisting and revealing the names of the directors who owns shell companies by SEBI.

Solutions

·        Defining what is “Shell Companies” and what activities would lead to a company being termed as such.

·        In India, there is no specific law relating to Shell Companies. Framing an exclusive law that will address the issues and stringently monitor the shell companies.

·        Making measures easy, to wind up operation of a company will help to ensure honest dormant companies to exit from the formal structure giving no opportunities for malfunctions as shell companies. 

1. Money Laundering: Often, shell companies remain untraceable and happen to be the vehicle of choice for money launders, bribe givers, and takers, terror financing.

2. Tax avoidance: While it is argued that tax avoidance is not illegal but it is surely not desirable. Recent release of Panama Papers 2016 showed a number of shell companies facilitating tax avoidance.
   

3. Stock Market Rigging: Brokers in Mumbai used listed penny stocks to convert black money into white and vice versa by rigging prices. This is against investor's interest.
   

4.  Promotes strong nexus between Politician and Industrialists as seen in coal or 2G scams in which shell companies played a major role. This nexus might have a biased effect on future government policies.

1. Special Investigation Team on black money had recommended proactive mining of the Registrar of Companies (RoC) database to weed out shell companies. Further SOP should be in place for sharing legal information and also a method to deal with it. It might tap the money laundering.

2. Double Tax Avoidance Treaties with Tax haven countries will prevent round-tripping of money that is done via shell companies. Recent treaties with Cyprus and Maldives is a welcoming move.
   

3. The Companies Act and SEBI act did not define shell company. Hence codification of laws relating to shell companies to remove discrepancies in criteria and also fix responsibility to deal with it become important.
4. Push for strict implementation of strong anti-corruption laws such Lokpal will act as a deterrent against the nexus between Politicians and Industrialists.

5. The name and shame exercise is definitely a reformative measure to act against the proven illegal shell company directors.