- September 28, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Registration rules tightened for companies to check shell companies.
- Several companies with links to Chinese entities were unearthed recently by the Serious Fraud Investigation Office.
- The new rules will facilitate tech-enabled real-time oversight of company incorporation and statutory filings
- It is part of the ‘company module’ of the revamped MCA 21 portal of the ministry of corporate affairs.
- It involves two-factor authentication involving directors of companies and professionals like chartered accountants and company secretaries who actually submit the statutory documents.
- It links the emails, user IDs and digital signatures of the person filing a company document and also requires the Permanent Account Number.
- The ministry will also deploy chatbots on its portal to help users.
- The phrase ‘Shell Company’ is not defined anywhere, but it can be interpreted to denote firms that are formed solely to create a separate legal entity that does not conduct any activity.
- The majority of the time, shell companies are used to conducting financial transactions.
- In most cases, these businesses merely have assets on paper and not in reality.
- Almost no economic activity is carried out by these businesses.
- These are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public.
- Shell corporations are used for a variety of purposes:
- To save money in order to start a business,
- As a cover for product development that a well-established corporation might want to keep secret until it’s ready,
- Facilitate financial institutions’ ability to conduct financial transactions in overseas markets,
- To raise funding and keep control over the conglomerate company,
- Create a “tax haven” in another country.
- Shell corporations are legal entities. When they are employed for criminal purposes, they become illegal.
What laws are violated by the shell companies?
- Benami Transactions Prohibition (Amendment) Act, 2016: This Act grants the government the authority to seize benami assets, which are assets held in the name of another person or fictional person in order to dodge taxation or hide unaccounted money.
- Prevention of Money Laundering Act (PMLA): When money that has not been taxed, i.e. unaccounted or black money, is passed via a shell corporation to appear as untainted money, it is considered money laundering under Section 3 of the PMLA and is punishable by 3 to 7 years in prison and a fine.
- Indian Penal Code: When shell corporations are used for Ponzi schemes, a crime under Section 420 of the Indian Penal Code relating to defrauding is committed, which is punishable by imprisonment or a term of up to 7 years in prison, as well as a fine.
- Section 248 of the Companies Act 2013 empowers the Registrar of Companies to strike a company off the register of companies if it fails to commence business within one year of its incorporation or if it fails to carry on business for two financial years and has not applied for dormant company status.
Legal uses of the shell companies
- A Special-Purpose Acquisition Company (SPAC) is utilised to finance an existing private firm by raising funds through a public stock offering. SPACs are referred to as shell companies because they may not have any company operations or employees.
- To stage a hostile takeover, a shell company could be established. This occurs when a company buys another company without the consent of the target company’s management.
- If a company wants to keep its dealings with another disreputable company, it can set up a shell company specifically for that purpose.
- When the main firm/owner of the shell company plans to launch a new company, the money is temporarily held or stored.
- People may construct shell corporations to hide money in order to avoid becoming a target for criminals and thieves, if a company is working in a risky country like Afghanistan, where terrorist activities are common.
- Shell corporations can also be established in order to get access to international markets.
- To safeguard assets from lawsuits.