Regulatory Actions against the Shell Companies in India

This article in indepth chronicle on the crackdown against the shelcompanies

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Indian Securities Regulator, SEBI also known as Securities Exchange Board of India has imposed trading restrictions on 331 listed entities which it identified as shell companies. A surprise move that was declared by the regulators as the part of a broad crackdown on illegal offshore transfers and tax evasion.

This send the jitters in the corporate world about the shell companies, hence this is an effort to define the same and identify the chronology of events behind shell companies.

What are shell companies ?

There is no statute which defines the shell companies. However, the understanding of the regulators and revenue authorities which penalized them was to identify the companies which have no real business model and they only exist on the paper.

The announcement by the Securities Exchange Board of India (SEBI) did not clarified the nature of illegal activities the companies may have been engaged in. The restrictions include limiting trading in the notified companies. The traders, investors would be now able to trade only once in a month in these scripts. There are restrictions on the trading of shares held by the promoters and directors of the companies.

Trading in all such listed securities, Sebi said, shall be placed in Stage VI of the Graded Surveillance Measure (GSM) with immediate effect. If any listed company out of the said list is already identified under any stage of GSM, it shall also be moved to GSM stage VI directly.

The Indian Government is aggressively going behind companies it suspects of engaging in irregular transactions after a ban on high-value currency bills late last year, including transferring money abroad illegally, or “black money,” and evading taxes.

Update: Post the action of Classification of the shell companies by SEBI, many on the list appealed to the appellate tribunal and got their names removed. However, there are many more against whom SEBI ordered forensic audits. 

Chronicle of Shell Companies

Shell Companies is a Buzz word in the Indian compliance professionals. There is significant activity in the Indian Corporate world. The Revenue authorities have followed an interesting strategy to zero down on the shell corporations. It is interesting to check the chronology of the events.

Chronology of Events

  1. 07.08.2017 – In an interesting development Securities Exchange Board of India restricted the trading in 331 Listed Companies. Only 48 out of these 331 were listed on National Stock Exchange. The complete list was put on the website of BSE
  2. 18.08.2017 – Leading publication publishes list of 16000 plus companies 
  3. 06.09.2017 – The names of more than 209 thousand firms have been struck off under Section 248 of the Companies Act. This act provides that company registry may take action against the company if a
    • company has failed to commence its business within one year of its incorporation or
    • it has not carried out any business for two financial years or
    • has failed to file its financial statements for three years
  4. 12.09.2017 – The government of India identifies 1,06,578 directors for disqualification under Section 164(2)(a) of the Companies Act, 2013 as on September 12, 2017. This section restricts the directors of the firm which has not filed the Financial Statements for last 3 years.

List of all the directors disqualified under section 164(2) is available for download

Post disqualification of the companies and the directors, government sought the information from Banks about the bank accounts and the financial transactions to understand the role of shell companies which were involved in laundering the cash during the period of Demonetization.

Data obtained from 13 banks produced names of merely 5,800 companies out of more than 2 lakh that were struck off involving 13,140 bank accounts. In few cases there were more than 2100 accounts opened in the name of a single company.

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