A decision is likely to be arrived at after getting inputs from probe agencies.
The Centre is likely to introduce a definition of a “shell company” from August, sources close to the Ministry of Corporate Affairs (MCA) said. The move is part of efforts to check rising litigation and “justify” the government’s action in courts of law against “only-on-paper” firms (shell companies) for their suspected involvement in money laundering, the sources said.
According to MCA officials, a decision in this regard may be arrived at after getting suggestions from the investigative agencies, including the Enforcement Directorate (ED), Financial Intelligence Unit (FIU), Directorate of Revenue Intelligence (DRI), capital markets regulator Securities and Exchange Board of India (SEBI) and the Income Tax department. The suggestions include a list of norms for defining shell companies.
A senior MCA official told The Sunday Guardian: “The companies facing action due to irregularities and misuse have come up in large number to challenge regulatory action against them in recent months. Therefore, it is necessary to remove the existing regulatory flaws and introduce a standard definition of the shell company. The lack of definition is also affecting the investigation process.”
“The definitions for shell companies which are being considered include the prevailing definitions at the global level. However, regulators and government departments are insisting on definition of shell companies in the Indian context. The Organisation for Economic Co-operation and Development has also suggested a policy for the purpose of restricting economic crimes at the global level,” the same official cited above said. Amit Kumar, a Delhi-based chartered accountant, said: “Sadly, there is no clear definition of shell companies in India. In countries like United States, however, a shell firm is defined as one that has no or nominal operations and assets. The assets must consist mainly of cash and cash equivalents with very little other assets. The Centre is acting tough against shell companies, but not all shell companies are illegal. Some were formed to raise funds to promote start-ups.” As per a “general understanding”, a shell company is a firm that is formally registered in the economy, but not performing any kind of operation in this economy, apart from funding.
Following demonetisation, the Centre launched a massive crackdown and struck off over 3 lakh companies, terming them as shell companies. Most of these companies now have approached the court against the government’s action, stating that they are being wrongly termed as shell companies. The situation of ambiguity has occurred due to the absence of any standard definition for a shell company.
A source close to MCA said: “The government’s action against these companies came on the basis of information provided by 56 banks of about 35,000 companies and 58,000 bank accounts. The preliminary inquiry initiated against these firms revealed that around Rs 17,000 crore was deposited and withdrawn during demonetisation.”