As it is widely known fact that in a major crackdown on the corporate sector – subject to the provisions of the Companies Act, 2013, the central government had de-registered 226,000 lakh companies from the registrar of companies as a consequence all de-registered companies end up defunct companies and more than 3 lakh directors of these companies were disqualified to act as directors.

According to the Companies Act, if any company fails to file statutory financial returns for a period of three consecutive years, the name of such company can be struck off from the registrar of the companies.

The central government further fortified its war against defunct companies and suspected another 225,000 lakh companies as shell companies.

Accordingly the central government bestowed notices to the suspected companies asking whether these companies had filed statutory financial returns and an opportunity of being heard is provided to the suspected shell companies.

PNB fraud is also another factor that contributed to the central government latest drive against shell companies.

Following the high profiled Punjab National Bank (PNB) fraud, the Serious Fraud Investigation Office (SFIO) probed 107 companies and 7 limited liability partnerships (LLP) belonged to Nirav Modi and Mehul Choksi.

It is suspected that most of these companies are shell companies with no business. The main fraudsters involved in the PNB fraud used these companies to divert the funds received from the banks.

As per the latest reports, the Chartered Accountants of India (ICAI) has submitted the report to the Ministry of Corporate Affairs on the issues which caused the systematic failure leading to PNB fraud – the ICAI report is under the review of the Corporate Affairs Ministry.

The Corporate Affairs Ministry has refuted the argument that the investigation into the shell companies by the Ministry has been slow down.

In response to the said argument, the Ministry issued a statement that accounts of 226,000 defunct companies were frozen in the first instance and notices are dispensed to 225,000 suspected shell companies seeking their status on filing of statutory annual statements.

As per the records, out of 226,000 shell companies, 168,000 companies had revealed bank account details and 73,000 companies deposited Rs 240 billion in banks post-demonetization.

However, 58,000 companies have not been revealed the bank account details and 68 shell firms were being probed, including 19 by the SFIO.

The central government efforts to restrict businessman from channelizing their black money via shell companies is a welcome measure. Given the difficulties faced by the innocent directors and other stakeholders during the earliest instance, the central government needs to take steps to ensure that interest of any genuine stakeholder will not be jeopardized and they won’t get exposed to any hardships.

We can hope that government labors to hunt down shell companies will aid in curbing black money and fraudulent acts – businessman also need to understand the negative impact of the frauds like PNB fraud on the development prospects of the nation and support central government in its war against shell companies – then only it will be possible to completely exterminate the fraudulent tactics employed by people like Nirav Modi and Mehul Choksi and safeguard the economic interest of nation and citizens from such fraudsters.

 Research inputs by Paruchuri Baswanth Mohan