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Defining "Shell Companies"

Published: 10 Apr 2018

As it is widely known now, in a major crack down the Indian Government had de-registered 226,000 companies from the registry of the Indian companies due to irregular or no filings of statutory returns and non-compliance with certain compliance requirements.

As a consequence, such companies ended up defunct companies and directors thereof were disqualified and no more eligible to act as directors.

In this backdrop, a Parliamentary panel has identified the eminent need to incorporate “Shell Companies” definition under the Companies Act, 2013 with the objective to differentiate companies guilty of fraud from those companies irregular in legal and compliance filings.

This panel has recommended to the Central Government to incorporate “Shell Companies” definition under the Companies Act, 2013 accordingly.

This recommendation has garnered substantial prominence as the Central Government I no mood to relent in its tirade against black money and in cracking its whip on companies that have not conducting any business operations over a long time and incorporated only with the intent to channelize the illegitimate funds and evade payment of taxes.

The very basic notion and ideology behind such recommendation is that all of the shell companies may not have the intent to commit fraud and accordingly the panel recognized the requisite to draw a clear line and give a different treatment for companies committing fraud and companies irregular in filings while handling the shell companies.

According to the media reports, the Ministry of Corporate Affairs is considering the possibility of enunciating commonly and universally accepted shell company definition.

As a consequence of upsurge in the corporate frauds, the panel suggested for the provision of real time data sharing amid Ministry of Corporate Affairs and connected agencies that will facilitate swift disposal of such cases and make indispensable modifications to the existing laws to efficiently curb the menace of black money.

One can hope that the incorporation of the “Shell Company” definition under the Companies Act, 2013 and implementation of the provision of sharing the data on real time basis amid the connected authorities will aid in avoiding any legal ambiguities in handling shell companies and prevent corporate misfeasance/ malfeasance.

Research inputs by Paruchuri Baswanth Mohan


About the Author:

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.co

Firm: Addleshaw Goddard

Practice Area: Trade & Customs

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