Government Actions on Shell Companies: Key Data and Developments

Lok Sabha Discusses Action Against Shell Companies

On November 25, 2024, during the Lok Sabha session, a query was raised concerning government measures against shell companies—firms that exist only on paper, often for activities like tax evasion and money laundering. The un-starred question, tabled by MPs Shri Shafi Parambil and Shri B.K. Parthasarathi, sought clarity on the identification of dormant and fraudulent companies and the steps taken to curb their activities.

Minister of State for Corporate Affairs, Shri Harsh Malhotra, addressed the concerns, providing detailed insights into the government’s approach and actions.

Definitions and Legal Framework

Under the Companies Act, 2013, the term “shell company” is not specifically defined. However, provisions like Section 455 define “dormant companies” as those formed for future projects or intellectual property holdings, with no significant accounting transactions. Companies inactive for two consecutive financial years and those not filing statutory returns can obtain dormant status.

Fraudulent companies failing to comply with regulations may face action under Section 248(1). This section allows the Registrar of Companies (ROC) to strike off companies that:

• Fail to commence business within a year of incorporation.
• Cease operations for two consecutive financial years.
• Do not apply for dormant status.
• Are non-compliant after physical verification.

State-Wise Action on Shell Companies

The government has intensified its scrutiny over the past five years. Data from the MCA-21 portal highlights the number of companies struck off for non-compliance, including dormant and shell-like entities.

Key statistics:

• Delhi saw the highest number of companies struck off (35,637) over five years.
• Maharashtra followed with 36,856 companies.
• Andhra Pradesh accounted for 5,091 companies.
• Smaller states like Ladakh and Lakshadweep recorded minimal activity with 10 and 4 companies, respectively.

In total, 2,33,566 companies were struck off across India between FY 2019-2020 and FY 2023-2024.

Role of Investigative Agencies

The Serious Fraud Investigation Office (SFIO) and other investigative arms are actively involved in identifying fraudulent companies. They examine cases flagged for suspicious activities, including money laundering and tax evasion.
Key measures include:

1. Conducting physical verifications of company premises.
2. Scrutinizing financial statements and transactions.
3. Cross-referencing data with tax authorities to detect anomalies.

Rising Numbers of Shell Companies

The MPs highlighted concerns about a potential rise in the number of shell companies in recent years. While no official data conclusively indicates such a trend, the government acknowledges increased cases of financial fraud involving these entities.

To address this:

• Comprehensive audits and inspections have been enhanced.
• A centralized system for monitoring compliance is being developed.
• Collaboration with agencies like the Financial Intelligence Unit (FIU) has been strengthened.

Future Steps to Control Fraudulent Companies

The government is focusing on several preventive and corrective measures to curb the misuse of shell companies.

1. Enhanced Compliance Monitoring: Stricter timelines for filing statutory returns and conducting audits.
2. Regulatory Amendments: Introducing new provisions in the Companies Act for better oversight.
3. Public Awareness: Educating businesses on compliance obligations to prevent inadvertent lapses.
4. Data Integration: Strengthening coordination between the Ministry of Corporate Affairs and tax authorities for real-time monitoring of suspicious activities.

Conclusion

The Indian government is actively tackling the menace of shell companies, as reflected in the striking-off of over 2.3 lakh firms. By leveraging technology, regulatory amendments, and inter-agency coordination, the authorities aim to maintain corporate transparency and curb illicit financial activities.

This proactive approach underscores the commitment to fostering a compliant and robust corporate ecosystem while safeguarding the nation’s financial integrity.

GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS

LOK SABHA
UN-STARRED QUESTION NO. 182
ANSWERED ON MONDAY, 25^th NOVEMBER 2024
Agrahayana 4, 1946 (Saka)

Action Taken against Shell Companies

182. Shri Shafi Parambil:

Shri B K Parthasarathi:

Will the Minister of CORPORATE AFFAIRS …….  be pleased to state:

(a) whether the Government has detailed information about the dormant and fraudulent companies in the country which do not conduct any real business but register only for tax evasion and money laundering and if so, the details thereof, State-wise including Andhra Pradesh;

(b) whether the Government has taken any action against such companies via Serious Fraud Investigation Office and other such Investigative Divisions to identify shell companies in the country and if so, the details thereof along with the list of such companies identified by the Government during the last three years, State-wise including Andhra Pradesh and if not, the reasons therefor;

(c) whether there has been an increase in the number of shell companies during the last five years; and

(d) if so, the measures taken by the Government to control such fraudulent companies known as shell companies?

ANSWER

Minister of State in the Ministry of Corporate Affairs; Minister of State in the Ministry of Road Transport and Highways

(Shri Harsh Malhotra)

(a) to (d): ‘Dormant Company’ is defined under Section 455 of the Companies Act, 2013 (the Act) as (i) any company formed for a future project or to hold an asset or intellectual property and has no significant accounting transaction or (ii) any inactive company which has not been carrying business or operation or has not made significant accounting transactions during last two Financial Years or has not filed Financial Statements and Annual Returns during last two Financial Years and such company or inactive company, as the case may be, has obtained ‘dormant status’ from the Registrar of Companies (ROC) with due compliance of Companies (Miscellaneous) Rules, 2014. There is no definition of the terms ‘fraudulent company’ or ‘shell company’ under the Act.

However, in terms of Section 248 (1) of the Act read with the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016, Registrar of Companies can strike off name of companies for certain defaults such as failure to commence business within one year of incorporation, not carrying on any business or operation for a period of two immediately preceding Financial Years and not making any application within such period for obtaining the status of a dormant company, not carrying on any business or operation, as revealed after the physical verification etc. Action has been taken from time-to-time for striking off such companies.

The number of companies identified and struck off under section 248 (1) of the Act during the last five years, listed state-wise including Andhra Pradesh, are shown below:

(Source: Data has been provided from MCA-21 Portal)

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