By Arushi Sharma
The Ministry of Corporate Affairs (MCA) has decided to deregister 1.20 lakh companies from official records due to reasons of non-compliance. The recent development comes after the names of over 2.26 lakh defaulting companies were taken down and nearly three lakh directors were disqualified in December 2017. The government has taken this step in an attempt to tackle the growing menace of black money in India.
What are shell corporations?
The government wants to target the shell corporations, which are non-trading companies with no or nominal assets that consist mainly of cash and cash equivalents. Some of these are dormant companies that are used for various kinds of financial manoeuvres. However, some shell companies can be created for legal purposes as well, such as raising start-up funds.
Such companies can be illegitimately used for money laundering, concealment of ownership, and tax avoidance. A key feature of shell companies is that they have emerged as a vehicle of turning black money into white as all the business transactions are shown as legitimate on paper.
The veil of shell
The businesspersons are able to avoid tax payment on the undocumented money that flows into these illegal shell companies. Their association with these companies also remains secret. In fact, the difficulty in tracing their true beneficiary reaffirms the corrupt nature of these corporate vehicles.
The governments aim is to curb illicit fund flowsa problem that has further aggravated after demonetisation. Following the note ban, various dormant companies that had negative or nil opening balances suddenly became active, depositing and withdrawing large sums of money. The Serious Fraud Investigation Office (SFIO) has also begun a detailed probe into the role of directors who serve on the board of these potentially illegal corporations. The SFIO detects and prosecutes white-collar crimes, functioning under the MCA.
Non-compliance is yet another issue. All companies registered under the Companies Act, 2013 are required to file their annual returns and financial statements through the MCA21 portal. The MCA has extended the submission deadline till 31 March 2018 for the defaulting companies under the Condonation of Delay Scheme. The scheme would help prevent unnecessary litigation and prosecution.
Enhancing corporate governance
The Panama Papers scandal and the latest Paradise Papers leak highlight the growing need to execute laws and identify the individuals who exercise significant control over corporate entities in India. On the part of companies, adoption of better corporate governance practices is a requisite for gaining investors trust. According to Minister of State for Corporate Affairs, PP Chaudhary, A fair, transparent and accountable corporate governance ecosystem shall form the bedrock of sustained high economic growth in new India.
According to the Ministry, compliance has increased after deregistration and disqualification. After the previous delisting exercise, over a thousand court cases for restoration had been filed with the National Company Law Tribunal (NCLT). The MCA release announced that the NCLT has issued orders for restoring 180 companies out of these cases after the completion of all the compliance formalities.
However, ensuring compliance is only one element of a good corporate governance ecosystem. So far as shell companies are concerned, the lack of open data on beneficial owners still remains a big problem. The recent amendments to the Companies Act have expanded the disclosure requirements for those who have a beneficial interest and control in a company. Going forward, there should be a public register of beneficial owners of all legal entities in India to achieve the highest standards of transparency.
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