Govt takes more action against shell companies

PMO sets up panel to monitor actions, share info among enforcement agencies

After trying to tighten the rules against shell companies through its Budget proposals, the government has decided to follow with "harsh punitive" action that will include freezing of bank accounts and striking off the names of dormant companies.

Their investments in real estate could also come under the scanner, as the government has also decided to invoke the Benami Transactions (Prohibition) Amendment Act. A meeting was held in the Prime Minister's Office with senior officers of various departments on Friday to review the functioning of companies which do not conduct any operations and do money laundering in India, went an official statement.

A task force has been set up under co-chairmanship of revenue secretary Hasmukh Adhia and corporate affairs secretary Tapan Ray to monitor actions against deviant shell companies by various enforcement agencies. The members will be from various regulatory ministries and enforcement agencies. The regulatory ministry concerned will ensure disciplinary action is initiated against professionals abetting such malpractices and operations.

The basic approach is to prevent money laundering and tax evasion. The government will use technology to identify shell companies. A data base on these companies and their directors would be built by pulling information from various agencies.

In the Budget for 2017-18, the government has proposed to impose a 10 per cent long-term capital gains tax on those who have invested in unlisted stocks but not paid the securities transaction tax after 2004. In a small sample analysis of shell companies, it was found that Rs 1,238 crore in cash was deposited in these entities during November and December (demonetisation was announced on November 8 and holders were asked to deposit in banks the cash in denomentation of scrapped Rs500 and Rs 1,000 currency notes till December 31).

The Serious Fraud Investigation Office has filed charges for cheating the exchequer after investigation of operators running a group of 49 shell companies and their proprietorship concerns. A charge is that 559 beneficiaries had laundered money to the extent of Rs 3,900 crore, with the help of 54 professionals. The information has been shared with the Special Investigative Team on undisclosed money, the income tax (I-T) department, enforcement directorate (ED), Securities and Exchange Board of India, and The Institute of Chartered Accountants of India (ICAI).

The I-T department has reopened assessments in these cases and the ED has initiated action under the Prevention of Money Laundering Act. ICAI has also initiated disciplinary proceedings against its members involved. Winding-up processes have been initiated in respect of these 49 shell companies.

In the initial analysis, it was found that shell companies are characterised by nominal paid-up capital, high reserves and surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover and operating income, nominal expenses, nominal statutory payments and stock in trade, and a minimum of fixed assets. There are about 1.5 million registered companies but only 600,000 file annual returns.

Under the scanner

• Shell companies’ investments in real estate could also come under the scanner
• The government has also decided to invoke the Benami Transactions (Prohibition) Amendment Act
• A task force has been set up to monitor actions against deviant shell companies by various enforcement agencies
• The basic approach is to prevent money laundering and tax evasion
• The government will use technology to identify shell companies
• A database on these companies and their directors would be built by pulling information from various agencies