New Delhi: The government will “very soon” come out with a definition for shell companies, union minister P.P. Chaudhary said Sunday, amid a crackdown on such entities indulging in financial irregularities. Obscure ownership, excessive leveraging and disproportionate investment in shares of other companies are among the possible criteria being looked at for defining shell companies.
While a multipronged action plan is being implemented in the fight against the black money menace, absence of a proper and uniform definition for shell companies under the legal framework is hampering investigations. Generally, shell companies exist only on paper and are often used by fraudsters for carrying out their illegal activities. Against this backdrop, the government is working on putting in place a proper definition for shell companies.
“We are working on it. Very soon, we will come out with it (definition of shell companies),” said Chaudhary, minister of state for corporate affairs as well as law and justice.
The corporate affairs ministry has already received preliminary suggestions from a task force comprising representatives from the Enforcement Directorate (ED), Financial Intelligence Unit (FIU), Directorate of Revenue Intelligence (DRI), Securities and Exchange Board of India (Sebi) and the Income Tax Department, among others.
According to Injeti Srinivas, secretary in the corporate affairs ministry, one of the key issue hampering the investigations and prosecutions against entities involved in financial irregularities has been lack of a proper and uniform definition for “shell companies”.
According to Srinivas, the task force has arrived at a criteria to define shell companies. “The task force has suggested some possible parameters to define if a company has been set up to launder money or exploit regulatory arbitrage,” Srinivas said in the May newsletter of the corporate affairs ministry.
Obscuring ownership, excessive leveraging, rotation in transactions with no apparent business purpose, majority of shares held by other companies and disproportionate investment in shares of other companies are among the criteria, he said in the newsletter.
The task force on shell companies was set up by the government in 2017.
After striking off around 2.26 lakh companies for not carrying out business activities for long, another set of about 2.25 lakh firms have come under the scanner of the corporate affairs ministry, with the minister saying that action would be taken after analysing their details. Out of the 2.26 lakh companies that were deregistered, cash was deposited in the bank accounts of 1.68 lakh firms post demonetisation on 8 November 2016, according to data available with the ministry.