Hundreds of shell firms may face criminal action over unexplained deposits

The noose around "shell companies" continues to tighten as hundreds of such entities could be facing criminal action soon. 

Hundreds of such entities that deposited unexplained high-value currency notes during the government's demonetisation drive or operated bank accounts after their names were struck off from the Registrar of Companies (RoC) could be facing criminal action under the Companies Act, the Times of India reported on Monday.

Citing sources, the national daily said that the Ministry of Corporate Affairs (MCA) plans to go after such entities by invoking provisions of Section 447 of the new Companies Act. Under the law, the report added, a person can face imprisonment for three to 10 years in case of fraud, along with a penalty that is equal to the value of the offence. Sources told the national daily that the RoC would conduct a thorough investigation of the concerned companies to ascertain the source of funds. 

Govt unearths startling data

The move comes after the government collected data on multiple accounts of 5,800 shell companies out of the over 200,000 that were struck off by the RoC. As reported earlier, some of these companies operated accounts even after their names were taken off the rolls. The companies deposited and withdrew huge amounts from banks post-demonetisation, while they had meagre deposits before November 8, 2016.

Of these, one company, Gold Sukh Trade India Limited, had  2,134 accounts alone. Another company, Ashwin Vanaspati, had 900 accounts, official sources told Business Standard. Similarly, other companies — Shanti Infrastructure and Colonisers Private Limited, Aptive IT Solutions, and Swarnalabh Trade Link, among others — had multiple accounts.

The government had asked for data from banks about over 200,000 companies whose accounts were frozen. The data from 13 banks revealed that 5,800 companies have more than 12,000 accounts. 

An official statement said that these companies, which had meagre amounts in banks, deposited more than Rs 4,570 crore in their accounts and withdrew an equally large amount of Rs 4,552 crore, post-demonetisation. Before demonetisation, these companies had a balance of Rs 22.05 crore, net of loans, in banks.

The companies continued to operate by making deposits and withdrawing even after being struck off the rolls of the RoC. In one of the banks, 429 companies, with zero balance before demonetisation, deposited and withdrew over Rs 11 crore and left a cumulative balance of Rs  4,200 crore at the time of their accounts being frozen.

Directors associated with shell firms also face the heat

Further, as reported earlier this month, Union Minister P P Chaudhary has said that as many as 450,000 directors could face disqualification for their association with shell companies. Asserting that genuine corporates would not face action, the minister of state for corporate affairs had said that non-compliant companies were tarnishing the image of good ones. Chaudhary had told news agency PTI in an interview that the profile of all disqualified directors would be examined.

Days before Chaudhary's remarks, according to reports from the first week of October, the MCA disqualified more than 200,000 directors of shell companies, within a span of 15 days, for not filing their financial statements or annual returns for two straight years, violating provisions of the Companies Act, 2013. After the crackdown, the total number of directors disqualified by the MCA reached 300,000.

According to MCA officials, a total of 319,637 directors were disqualified, while 217,239 companies were deregistered as on October 3, 2017.