The Significance Of a Shell Company?

The Significance Of a Shell Company?

The anti-money laundering teams do conduct several active operations to stop tax evasion and illegal fund transfer. The shell companies themselves are not illegal entities, but it is observed that most of the shell companies are being used for illegal purposes.

What is a shell company?

There is no specific definition of the 'shell company' under the Companies Act 2013. However, the High Court of Gauhati tried to define it while hearing the case Assam Co. India Ltd. vs Union of India. The shell company can be like any other companies but having its existence only on paper, not in reality.

What are the features of a shell company?

A shell company exists only on paper and it does not have an office and any employee. This kind of company is a corporate entity without having active business operations or significant assets.

Such an entity may be used as a setup for a deliberate financial arrangement providing service or a support system of others without itself having any significant assets or operations.

In easier words the High Court found out that the shell companies are identified as companies that are used for tax evasion or money laundering, i.e., channelizing crime tainted money or proceeds of crime into the formal economy.

Is it illegal to form a shell company?

The shell company is not illegal per se, but the activities in which the shell company is being involved, matters in this case.

The Registrar of Companies, in any kind of adverse situation, can strike off the name of such company from the register of companies. However, that is not enough. In case the shell company is involved in money laundering activities or tax evasion or carries on any other illegal purposes, then it shall be regulated under the provisions of the Prevention of Money Laundering Act, 2002, Prohibition of Benami Transactions Act, 2016, Income-tax Act, 1961 and the Companies Act, 2013.

A company is classified as a shell company if it is a non-trading company that has been floated with the intention of financial planning.

To improve corporate governance and to check financial irregularities undergoing in these shell companies, various ROCs have recently removed the names of many companies from the register of companies exercising their powers under section 248 of the Companies Act, 2013 ('Act').

In the last few years, a huge number of shell companies are established, and to fight against black money cannot be enough successful unless the network of shell companies is broken. There is a lot of possibility of using the shell companies for laundering of the black money.

What is the Government doing to control the illegal activities through the shell company?

The Government tries to track down the beneficial owners of suspected shell companies and take penal action against them. The offenders divert funds from companies that are struck off the records of the Registrar of Companies (RoC).

The Government attempts to ensure that companies obey the statutory obligations seriously and to deter firms from using a complex corporate structure to divert funds raised from financial institutions or involve in activities to launder money.

The use of shell companies to provide accommodation entries to launder black money has been observed in a number of high profile cases investigated or under investigation in the recent past.

Proactive detection of creation of shell companies: This would involve intelligence gathering through regular data mining and dissemination of information gathered to various law enforcement agencies for active surveillance.

Deterrent penal action against persons involved in the creation of shell companies and providing accommodation entries.

However, in an operation conducted recently, the RoCs started issuing public notices in April 2017 to strike off the name of the companies from the register of companies and to dissolve them unless a cause is shown to the contrary, within thirty days from the date of the notice served. This shook the establishment of several shell companies and the entities using them for money laundering.

On September 5, 2017, the government confirmed that names of over 2.09 lakh companies have been struck off from the Register of Companies for failing to comply with regulatory requirements.

How is a shell company dissolved?

When a company is born as a separate legal entity, it has its own dissolution process. For the dissolution of a company in pursuance of the company's name being removed from the Register by the ROC following the provision under Section 248 of the Act.

This way, the corporate status of an entity ceases to exist, its functionality stops and for all practical purposes, corporate activities come to an end.