All you wanted to
know about...Shell Companies
August 14, 2017
Investors were shell shocked last week by SEBI’s sudden directive to
stock exchanges to initiate action against 331 suspect shell companies and ban
them from trading. Following SEBI’s diktat, BSE and NSE moved 162 and 48
companies, respectively, into Stage-VI of the Graded Surveillance Measure
(GSM), implying these stocks would not be available for active trading. With
over ₹7,000 crore of public money stuck in them, investors are rankled by the
move.
What is it?
Sadly, there is no clear definition of shell companies in India. In
the US, however, the Securities Act defines a shell firm 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. In other words, a shell company should not have active business
operations or assets.
The Centre may be coming down hard on shell companies, but interestingly
not all shell companies are illegal. Some were formed to raise funds to promote
startups. But as they say, even one bad apple can spoil the bunch.
Given the umpteen instances of individuals and corporates abusing shell
companies, either to avoid tax or use them as conduit for money laundering,
these are generally viewed as dubious and questionable enterprises.
SEBI has asked exchanges to verify credentials / fundamentals of suspect
companies by appointing an independent auditor. If exchanges do not find
appropriate fundamentals about existence of the company, the stock can be
delisted.
Why is it important?
The Centre has been cracking down on shell companies in recent months.
The corporate affairs ministry cancelled the registrations of over 1.62 lakh
companies for not filing financial statements for the immediate two preceding
fiscals. Some of these are shell companies possibly used for money laundering
or tax evasion, or other fraudulent activities.
The SEBI’s move to come down hard on suspect shell companies is
important to protect investor interest. Companies with financial
irregularities, set up by errant promoters for the sole purpose of money
laundering, can cause heartburn to investors. In the past, many investors have
burnt their fingers with companies that have suddenly vanished without a trace.
Many companies that listed during the IPO boom in 1994-95 have vanished since
then.
Why should I care?
If you are an honest tax payer, increasing instances of individuals and
corporates escaping the tax net by devious means, is bound to exasperate you.
The multitude of opportunities for fraud through brass-plate companies is not a
good news for the broader economy either.
The need to shield investors from such fraudulent shell companies is
also understandable. But since there is no clear cut definition of a shell
company put down by law, don’t jump the gun on every news that crops up on such
companies.
In the recent incidence too, there is lack of clarity over what prompted
SEBI or the corporate affairs ministry to identify 331 companies as suspect
shell companies. If you are an investor, stuck with such stocks, don’t panic
and resort to fire sales. Your company could well be in the clear and have
genuine business operations.
While of the 162 BSE companies, 23 have reported nil net sales for FY17,
about a fifth have a notable turnover of around ₹100 crore and above.
The bottomline
Till the shell is cast away, the last word is not out.
Govt blacklists
300,000 directors of shell Companies
07 SEPTEMBER, 2017
Source : LIVEMINT.COM
The
corporate affairs ministry will also track down owners of suspected shell
companies and take penal action against those who divert funds from firms that
are struck off the records of Registrar of Companies
Mumbai: The government on Wednesday
decided to bar as many as 300,000 directors of companies that have defaulted on
statutory compliances from serving on the boards of other firms to improve
corporate governance and check financial irregularities through the use of
shell companies.
The
ministry of corporate affairs, which regulates unlisted companies, also decided
to track down the beneficial owners of suspected shell companies and take penal
action against those who divert funds from companies that are struck off the
records of the Registrar of Companies (RoC).
The
ministry said it is also monitoring the action being taken by regulatory bodies
against professionals such as chartered accountants, company secretaries and
cost accountants who have been found to have colluded with the shell companies
in committing financial irregularities.
The
move came a day after the government froze the bank accounts of more than
200,000 companies struck off the records of RoC to prevent their directors from
accessing the accounts.
The
idea is to ensure companies take their statutory obligations seriously and to
deter firms from using a complex corporate structure to divert funds raised
from financial institutions or to launder money.
“Weeding
out shell companies would not only help in checking the menace of black money
but also would promote an ecosystem of ‘ease of doing business’ and enhancing
investors’ confidence to which the present government is fully committed,”
minister of state for corporate affairs P.P. Chaudhary said in a statement. He
took charge on Monday.
Filing
annual reports on time will minimize the possibility of fraud and tax evasion,
the statement said, adding that it will also protect stakeholder interest and
improve India’s image globally. At a review meeting on Wednesday, the ministry
decided to take comprehensive steps to address the issue of shell companies and
their role in money laundering and circulation of unaccounted money, the
statement said.
The
government’s move is a clean-up exercise mainly targeting shell companies
suspected of money laundering in the aftermath of the 8 November
demonetization of high-value currency notes, said Kamlesh Vikamsey, former
president of the accounting rules maker, the Institute of Chartered Accountants
of India.
“The
government will take action against companies which have not complied with the
Companies Act and not filed returns for the past three years. However, the
decision to strike off companies’ name from records can be reversed if the
companies are able to prove that they were operational in all these years,”
said Vikamsey.
“It
is a step towards improving corporate governance, shaking the culture of
non-compliance,” said J.N. Gupta, co-founder and managing director of corporate
governance advisory firm Stakeholder Empowerment Services.
Shell companies:
Govt makes names of disqualified directors public
20
SEPTEMBER, 2017
Earlier this month, the government had
said more than 1.06 lakh directors will be disqualified for their association
with shell companies.
The ministry of corporate affairs (MCA) has made public the names of
directors whom it disqualified last week for associating with companies that
have not filed their financial statements or annual returns for three financial
years.
This is possibly the first of its kind naming and shaming exercise aimed
at directors who have been barred from assuming directorships at other firms
for five years as the government continues its crusade to eradicate the black
economy.
The names include some that are similar to prominent politicians, from
Arunachal Pradesh to Tamil Nadu, and businessmen, including non-resident
Indians.
Mint couldn’t ascertain whether these directors were indeed popular
public figures. (This story will be updated as and when we reach out to
people). There is no way of confirming this from the details released.
On 12 September, the MCA issued a statement saying that it has
identified 106,000 directors of companies that did not file their financial
statements or annual returns for three straight years, violating provisions of
the Companies Act, 2013. Prior to that, it struck off 200,000 firms that were
suspected to be shell companies and directed banks to restrict operation of
bank accounts of such companies by the directors of such companies or their
authorized representatives.
Shell firms, though not defined under the Companies Act, are those that
adhere to basic company laws and are used to avoid taxes and convert black
money into white.
At least 17 registrars of companies (RoCs) of various states have
released these names. In some cases, they have released the names of directors
in companies that been struck off the RoC list as well. At least six RoCs,
including those in Patna, Jaipur and Kolkata, are yet to release a list of such
directors.
“The government in the past had introduced a mechanism to encourage
companies to close down voluntarily if their financials did not check out. But
the current exercise seems to be of a different magnitude and scale.
Apparently, a lot of data analytics and data mining has gone into putting
together such voluminous data. It seems like a fallout of demonetization—an
integrative, consultative and inter-regulatory action to track black money and
instill a culture of compliance,” said S.N. Ananthasubramanian, practising
company secretary and past president, Institute of Company Secretaries of
India.
Centre disqualifies
over 1 lakh directors of ‘shell’ companies
Under Section 164 of the Companies Act,
2013, a director in a firm that has not filed financial statements or annual
returns for three financial years continuously would not be eligible for
re-appointment in that company or any other firm for five years.
After canceling registration of
2.09 lakh companies and restricting operations in their bank accounts, the
Ministry of Corporate Affairs has identified 1,06,578 directors for
“disqualification” as on September 12, 2017, the government said in a statement
on Tuesday. Money laundering activities performed under the aegis of these
companies are also being scanned by the government, it said. The move comes
after the Ministry of Finance directed banks to restrict operations of these
companies’ bank accounts by their directors or their authorised
representatives.
The government has “identified 1,06,578 directors
for disqualification under Section 164(2)(a) of the Companies Act, 2013 as on
September 12, 2017,” as per the statement. “Ministry of Corporate Affairs is
further analysing the data of these firms available with the Registrar of
Companies to identify the Directors and the significant beneficial interests
behind these firms. Profiles of Directors such as their background, antecedents
and their role in the operations/functioning of these firms are also being compiled
in collaboration with the enforcement agencies,” it added.
Under Section 164 of the
Companies Act, 2013, a director in a firm that has not filed financial
statements or annual returns for three financial years continuously would not
be eligible for re-appointment in that company or any other firm for five
years.
“The Professionals, Chartered
Accountants/Company Secretaries/Cost Accountants associated with such
defaulting firms and involved in illegal activities have been identified in
certain cases and the action by Professional Institutes such as the Institute
of Chartered Accountants of India, the Institute of Company Secretaries of
India and the Institute of Cost Accountants of India is also being monitored,”
the ministry said.
“The fight against black money
shall be incomplete without breaking the network of shell companies.
Possibility of using the Shell companies for laundering the black money cannot
be undermined,” Minister of State for Corporate Affairs P P Chaudhary said,
according to the government statement. There are now about 11 lakh companies
with active status after deregistration of over 2.09 lakh firms, it said.
Earlier speaking at the ICAI
event on July 1, Prime Minister Narendra Modi had
said that transactions of more than 3 lakh companies were under the radar of
suspicion post demonetisation. Modi added that names of one lakh companies were
struck off Register of Companies. These companies were removed as they have not
been carrying any business or operation for a period of two immediately
preceding financial years and have not made any application within such period
for obtaining the status of dormant company under section 455.
Chaudhary is also monitoring
the situation emerging out of cancellation of registration of the companies and
is holding regular meetings with officials of the ministry and various related
organisations. These include Serious Fraud Investigation Office (SFIO), ROCs,
Department of Financial Services, Indian Banks Association and other
departments involved in the crackdown against defaulting companies.
Shell companies:
NSE seeks clarification from firms on disqualified directors
30SEPTEMEBER, 2017
Source : WWW.LIVEMINT.COM
The NSE has asked for clarification from various
companies about the continuation of disqualified directors on their respective
boards
Mumbai: The National Stock Exchange
(NSE) said clarification has been sought from various companies about
continuance of disqualified directors on their respective boards, amid the
government cracking the whip on suspected shell companies .
As part of its fight
against illicit fund flows, the corporate affairs ministry has disqualified
more than 1 lakh directors for their association with shell companies.
Against this
backdrop, the NSE has asked for clarification from various companies about the
continuation of such directors on their respective boards. “We confirm that NSE
has sent out the letters to concerned companies and has sought clarification on
the subject matter,” an exchange spokesperson said.
The response came to
a query related to whether the bourse has asked about 200 companies listed on
it to consider whether directors disqualified by the ministry should continue
on their boards. Specific details could not be immediately ascertained.
When asked whether
the BSE has also issued such communications to companies listed on its
platform, an exchange spokesperson declined to comment.
The ministry has
“identified 1,06,578 directors for disqualification under Section 164(2)(a) of
the Companies Act, 2013 as on 12 September 2017,” according to an official
release issued on 12 September.
Under Section 164 of
the Companies Act, 2013, a director in a company that has not filed financial
statements or annual returns for three financial years continuously would not
be eligible for re-appointment in that company or any other firm for five
years.
Last month, the
Securities and Exchange Board of India (Sebi) had imposed trading restrictions
on 331 suspected shell companies after receiving such a list from the ministry.
Subsequently, the curbs on some of these entities have been lifted.
The ministry, which
is implementing the companies law, has also cancelled the registration of more
than 2.09 lakh firms that have not been carrying out business activities for a
long period. More entities are likely to face such action.
NOTE : NOW THE QUESTIONS ARISES ON THE MIND
OF THE PROFESSIONALS, HOW TO DEAL WITH THE SITUATION AND HOW TO PROTECT THE
INTEREST OF THE INVESTORS. WHAT WILL BE THE IMPACT OF THIS SITUATION, WHAT WILL
BE THE CONSEQUENCES, WHAT REMEIDES ARE AVAILABLE TO THE COMPANY, PROFESSIONALS,
DIRECTORS AND OTHER STAKEHOLDERS?
(AUTHOR – CS GAURAV SRIVASTAVA, GAURAV SRIVASTAVA &
ASSOCIATES COMPANY SECRETARY IN PRACTISE FROM DELHI AND CAN BE CONTACTED AT SRI.GAURAV.1988@GMAIL.COM)
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