Steps Taken for Removal of Shell Companies from Indian Economic System

It is a well-established fact that the existence of black money creates imbalances in the economy, finances terror and crimes like money laundering etc., puts the honest at a disadvantage, deprives the State of the much needed revenues and ultimately adversely affects the poor of the country. One of the ways to siphoning off money and accumulation of black money is through Shell Companies, doing continuous menace in the Indian economic system.

The Government of India alongwith Ministry of Corporate Affairs has taken several noteworthy steps to remove shell Companies from the system. In this Article, we shall be studying them chronically and their consequences:

The Government has launched a sustained campaign in the last 4 years against black money and has taken several bold steps including constitution of the ‘Special Investigation Team on Black Money’, enactment of the ‘The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’, Income Declaration Scheme, 2016, Benami Transactions (Prohibition) Amendment Act, 2016 and the demonetization scheme.

In its war against black money and fake notes in the economy, the Government brought demonetisation of high currency notes in 2016. This was the beginning towards the Governments’ drive to prevent fraud through shell companies.

Simultaneously, the Ministry of Corporate Affairs (“MCA”) notified Sections 248 to 252 of the Companies Act, 2013 on 26^th December 2016.  Section 248 of the Act provides that a dormant company, that have not obtained dormant status under section 455 of the Act, can be struck off from the records of the Registrar of Companies (“RoC”) by filing application in prescribed manner. The Act provided defunct companies with an opportunity to voluntarily apply for striking off their names from the records of the RoC.  Along those lines, the MCA also issued the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 prescribing procedure for the Companies to apply for striking off.

Further, section 248(1) of the Companies Act, 2013 empowers the Registrar of Companies (“RoC”) to remove the name of company from the register of companies, if it has reasonable cause to believe that—

(i) a company has failed to commence its business within one year of its incorporation

(ii) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455 of the Act

(iii) the subscribers to the memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of a company and a declaration to this effect has not been filed within one hundred and eighty days of its incorporation under sub­section (1) of section 10A; or

(iv) the company is not carrying on any business or operations, as revealed after the physical verification carried out under sub-section (9) of section 12

The MCA also exercised its powers under sections 164 and 167 of the Act to disqualify directors of defaulting companies that had failed to file annual returns for the past three years. Section 164 of the Companies Act, 2013 corresponds to section 271 of the Companies Act, 1956 that did not take private Companies in its ambit. While Section 164 is inclusive of both private and public companies. Though this step taken by MCA was much in conflict due to its retrospective effect.

A ‘Task Force on Shell Companies’ under the Joint Chairmanship of Revenue Secretary and Secretary, Ministry of Corporate Affairs was constituted in February, 2017 with a mandate to check in a systematic way, through a coordinated multi-agency approach, the menace of companies indulging in illegal activities including facilitation of tax evasion commonly referred to as ‘Shell Companies’ in a comprehensive manner adopting whole of the government approach. Other members of the Task Force are from Department of Financial Services, Central Board of Direct Taxes, Central Board of Excise & Customs, Central Bureau of Investigation, Enforcement Directorate, Serious Fraud Investigation Office and Financial Intelligence Unit.

Consequences:

• Empowered from Section 248, the Registrars of Companies (ROCs) carried out a drive under the supervision of the Ministry of Corporate Affairs in the Financial Year 2017-18, wherein the ROCs identified and removed from the register of companies the names of 226,166 companies, which had not filed their Financial Statements or Annual Returns for a continuous period of two or more financial years. As many as 3,09,619 directors  were disqualified u/s.164(2)(a) read with Section 167(1) of the Companies Act, 2013 for non-filing of Financial Statements or Annual Returns for a continuous period of immediately preceding 3 financial years (2013-14, 2014-15 & 2015-16).
• With the concerted efforts of the Ministry of Corporate Affairs, Department of Financial Services and Indian Banks Association the ex-directors / authorized signatories of the struck off companies had been restricted from operating the bank accounts of these companies and they could not withdraw any amount from these bank accounts, other than for specified purposes, till the company is restored u/s 252 of the Companies Act.
• To help the genuine corporates in regularizing their pending returns, the Condonation of Delay Scheme, 2018 was brought in. It was effective from 1.01.2018 to 1.05.2018. A total of 13,993 companies benefitted from the scheme.
• For the 2nd drive launched during the current Financial Year 2018-19 a total of 2,25,910 companies were further identified for being struck off under section 248 of the Companies Act, 2013 out of which 1,00,150 companies were struck off till 21.12.2018.
• The Task Force directed all member Law Enforcement Agencies to send to Institute of Chartered Accountants of India, the details of action taken against Chartered Accountants by them. Establishment of an independent regulator for the auditing profession, i.e., the National Financial Reporting Authority, one of the key changes brought in by the Companies Act, 2013, was approved by the Union Cabinet on 1st of March 2018 and has been notified on .03.2018. Fraud as defined in section 447 of the Companies Act, 2013 has been made a predicate offence under Prevention of Money Laundering Act, 2002.
• After getting finished with removal of shell Companies and disqualified directors from the system, MCA took some measures to improve transparency in the Indian corporate:
• MCA notified Companies (Appointment and Qualification of Directors) fourth Amendment Rules, 2018 wef 10.07.2018 and introduced e-Form DIR-3 KYC to do KYC of all the directors having active DIN annually. Every individual who has been allotted a Director Identification Number (DIN) as on 31st March of a financial year as per these rules shall, submit e-form DIR-3-KYC to the Central Government on or before 30th April of immediate next financial year. The Central Government or Regional Director (Northern Region), or any officer authorised by the Central Government or Regional Director (Northern Region) shall, deactivate the Director Identification Number (DIN), of an individual who does not intimate his particulars in e-form DIR-3-KYC within stipulated time.
• The de-activated DIN shall be re-activated only after e-form DIR-3-KYC is filed along with a fee of Rs. 5,000 whereas no fee is chargeable if the form is filed well within the prescribed time limits.
• Continuing its crackdown on shell companies, the Government has promulgated the Companies (Amendment) Ordinance, 2019 (the “Ordinance”). The Ordinance, amongst other things, seeks to enhance accountability for non-filing of charges, maintenance of documents and non-commencement of business by a newly incorporated company. The Ordinance has also sought to reintroduce the commencement of business certificate under section 10A of the Companies Act, 2013 (the “Act”), which was removed from the Act to facilitate ease of doing business. The section has been reintroduced to enable the Government’s efforts to remove dormant companies from the system. Consequently, e-Form INC-20A under Section 10A of the Act is required to be filed within 180 days of incorporation of Company

Requirements for Filing Form INC 20A:

(i) The Subscribers has paid the share subscription amount to the Company

(ii) That the Company has obtained the regulatory approval required to be obtained for commencement of business for business activities which are specially regulated by other sectoral regulators like SEBI, RBI, IRDA etc.

(iii) A Bank Account in the name of the newly incorporated has to be opened at the earliest.

(iv) Share Subscription amount is required to be deposited in Company Bank Account

(v) Afterwards, form INC-20A can be filed not later than 180 days of Incorporation of Company

(vi) After enacting provisions for KYC of Directors, MCA has come up with KYC for the Companies as well by introducing e-Form ACTIVE. A new Rule 25A was inserted into the Companies (Incorporation) Rules, 2014 via an amendment dated 21.02.2019. This rule prescribes that Every company incorporated on or before the 31st December, 2017 shall file the particulars of the company and its registered office, in e-Form ACTIVE(Active Company Tagging Identities and Verification) on or before 25.04.2019.

In case a company does not intimate the said particulars, the Company  shall be marked as “ACTIVE-non-compliant” on or after 26th April, 2019 and shall be liable for action under sub-section (9) of section 12 of the Act. Section 12(9) of the Act prescribes that if the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may cause a physical verification of the registered office of the company and if any default is found to be made in complying with the prescribed requirements, he may initiate action for the removal of the name of the company from the register of companies.

Where a company files “e-Form ACTIVE”, on or after 26th April, 2019, the company shall be marked as “ACTIVE Compliant”, on payment of fee of ten thousand rupees.

With its efforts of cleaning up the registry, The Government expects that a transparent and compliant corporate ecosystem in the country will be created, promoting the cause of ‘ease of doing business’ and enhancing the trust of the public.

Some Important points to be kept in mind to ensure that the status of Company and its directors is active:

• Every individual who has been allotted a Director Identification Number (DIN) as on 31st March of a financial year as per these rules shall, submit e-form DIR-3-KYC to the Central Government on or before 30th April of immediate next financial year.
• The Companies incorporated on or after 02.09.2018 shall file e-Form INC-20A under Section 10A of the Act within 180 days of the incorporation.
• Every company incorporated on or before the 31st December, 2017 shall file the particulars of the company and its registered office, in e-Form ACTIVE (Active Company Tagging Identities and Verification) on or before 25.04.2019.

 Note: Figures in the Article have been taken from the Press releases issued by ‘Press information Bureau, Government of India, Ministry of Finance’.

(The author of this article is a Practicing Company Secretary located at New Delhi and can be reached at ankitasinglaandassociates@gmail.com)

Disclaimer: The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. No part of this article should be distributed or copied without express written permission of the author.