What are shell companies and why does govt wants to strike them off?

Shell Companies in India

Shell Companies in India

The government has launched concerted efforts to streamline the economy by rooting out black money and unscrupulous companies. In the month of August, the Securities and Exchange Board of India issued a directive to stock exchanges to take action against 331 shell companies. In his Independence Day speech, Prime Minister Narendra Modi too has said that around 1.75 lakh shell companies had been de-registered.

What are shell companies?

At present, there is no clear definition for the term shell companies in India. However, in the US the term shell company has a clear definition. A shell company can be considered to be an organization that does not have any active business operation, neither does it have possession of any significant assets. Some shell companies are set up for legitimate purposes; however, there are many that have been established for illegitimate purposes.

Illegitimate uses of a shell company

The government in India has ordered a crackdown on shell companies as it seen that these companies have been set up for illegitimate purposes and are harmful to the economy. These companies are set up for activities such as avoiding payment of taxes, money laundering etc. These bogus companies are an ideal instrument to turn black money into white, as all the transactions that are undertaken are shown as legitimate on paper. These companies do not have a physical present and only exist on paper. Hence, these companies do not conduct any kind of economic activity such as manufacturing a product or rendering a service to its customers.

Why does the Government want to strike off shell companies?

It would be wrong to say that all shell companies are indulging in illegal activities. There are many such companies that are conducting business by fair means. But the number of shell companies set up for illegitimate purposes are staggering and these are resorting to activities that are detrimental to the health of the Indian economy. In the month of September, it had been reported that some 200,000 firms had been struck off by the government on grounds of being shell companies.

To fight the menace of black money it is essential to come down heavily on shell companies that are indulging in unfair practices. The government aims at preventing money laundering and the misuse of the corporate structure by these bogus companies for illegitimate purposes.

Steps taken by the government

The government has initiated tough action against shell companies. In August, the stock exchanges were directed to take action against 331 shell companies. These companies would be prohibited from trading in the future. The Ministry of Corporate Affairs has canceled the registration of more than 2,00,000 defaulting companies. Around 106,578 directors would also be disqualified for associating with companies that have not filed annual returns for three years.

Perhaps, government’s tough steps against shell companies indulging in illegal practices would go a long way in cleaning up the system and strengthening the economy.