Greater scrutiny of shell companies in new rules

Companies with paid-up share capital of over Rs 500 cr will have to comply voluntarily with the rules from next fiscal

Don't want to miss the best from Business Standard?

New accounting norms will leave the little room for corporates to use shell companies, allegedly used widely in various scams.

The new Indian Accounting Standards (Ind-AS) will make it binding on companies that indirectly control other companies through shell structures or loan agreements or any other means, to prepare consolidated balance sheets.

Companies with a paid-up share capital of over Rs 500 crore will have to comply voluntarily with these rules from the next financial year and these will become mandatory a year later. Gradually the norms will cover other companies as well.

Companies that have shell structures will have to restructure as these will be treated as subsidiaries from the accounting point of view. This is because the definition of control has changed. The current definition of control is narrow and most such owner companies do not feel the need for consolidated financial statements, showing shell companies as subsidiaries.

According to existing accounting standards, a company can become a subsidiary only in two situations: when the owner company has more than 50 per cent of the voting power or when the owner controls the board or a similar authority.

"Now there are various other conditions which widen the definition of control and there may be more subsidiaries under the new standards," said Ashish Gupta, partner, Walker Chandiok & Co LLP.

According to the new standards, an investor company may control an investee company if it not only has the power but also the ability to use it over the investee company's decisions and has variable risks or returns related to the investee's performance.

For instance, an investor company may have bought 30 per cent of the investee company. So the investor has the power but may not have the ability to use it as there may be two other shareholders with a total holding of 35 per cent opposing its every decision. In such a case, the investee company will not be considered a subsidiary.

"The widening of the definition will hit those companies that do their business through shell companies and do not consolidate them in their balance sheet," said an expert who did not wish to be named.