Shell firms thriving amid slack law enforcement

Shell firms thriving amid slack law enforcement

By DIBYENDU MONDAL | New Delhi | 6 May, 2017
Companies Act 2013, chartered accountants, Registrar of Companies, Ministry of Corporate Affairs, rjun Ram Meghwal, Fraud Investigation Office, CBI
CAs and lawyers help such companies circumvent the law.

Lack of effective and strict implementation of certain key provisions of the Companies Act 2013 has led to the successful functioning of several shell companies across the country, financial and legal experts have said. The owners of these shell companies are also getting help from some chartered accountants (CA) and lawyers who help them in circumventing the law.

The Registrar of Companies (RoC) under the Ministry of Corporate Affairs, Government of India, has recently identified over three lakh companies that have been operating without filing their returns to the RoC for years, which is unlawful under the Companies Act 2013.

According to Arjun Ram Meghwal, Minister of State in the Ministry of Corporate Affairs, who was answering a question in the Lok Sabha, a group of 11 companies have been found to have laundered money to the tune of Rs 3,790 crore during 2004-05 to 2010, which was identified by the Serious Fraud Investigation Office (SFIO) recently. The SFIO has identified 54 professionals, including CAs, lawyers and CS, who have helped 559 beneficiaries in laundering illicit money.

Meghwal also said that the law does not describe anything as “shell companies” in the Companies Act.

Also, earlier this week, the CBI has arrested two promoters-directors of a private firm based at Kolkata and Delhi as the accused had allegedly defrauded 14 public sector banks through diversion of funds, showing high cost of false capital expenditure, among other charges.

It was further alleged that over 150 shell firms were allegedly arranged through a group of brokers against fixed commission, for obtaining false invoices and diversion of bank funds. It was also alleged that some of the suppliers were non-existent and some other firms had no genuine business. A practicing chartered accountant, who did not wished to be named, told this newspaper, “There is no definition as such of shell companies; companies can be incorporated for tax planning and structuring, but evading tax and routing money through such companies are illegal and that is why many of such companies are incorporated.”

A director of a newly incorporated company said on the condition of anonymity that officials from the RoC sometimes do come to verify addresses, but not always. “When the RoC official came to verify the registered address of our company that the director had newly incorporated, the address at which the company was registered with the RoC was that of a paying guest in south Delhi, but the RoC official did not object.”

Over 150 shell firms were allegedly arranged through a group of brokers against fixed commission.

The CA who spoke to this newspaper also said that RoC officials do not check whether the company is actually functioning from the registered address or even if the address given has an office space or not, leaving scope for so-called shell companies to grow.

Siddharth Srivastav, advocate and partner, Link Legal, told The Sunday Guardian that the law within Companies Act provides the RoC with powers under Section 206 to call for information, inspect books and conduct inquires. “However, we are unaware of any incident where the RoC has verified or has come for an inspection of the registered office of a company.”

The law also provides for provisions for the RoC to verify details of a company, if a company shifts its registered address, which it (company) can only do after a resolution is passed and adopted by all the directors of the company. The company has to notify the RoC about the new registered address within 15 days, but companies with malicious intention hardly do that.

However, when the RoC and the secretary of the Ministry of Corporate Affairs was approached by this correspondent through emails and phone calls for a reaction on why the RoC does not verify the details of companies or if they do, how shell companies are still growing, both the RoC and the secretary did not reply nor answered phone calls.

 

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