STRICTER RULES AGAINST SHELL COMPANIES ON THE ANVIL

The Centre is considering fresh measures to crack down on shell companies by making the process of incorporation tougher for non-genuine entities. The ministry of corporate affairs (MCA) is understood to be in discussions over various proposals, such as a phone app to geo-tag pictures of the registered office of a company, as well as setting limits on the number of companies that can be incorporated by a single person.

“There have been reports of a single individual incorporating thousands of companies. It has also been found that often these companies are then sold off to other entities wishing to set up offices in India. The idea is to check that only genuine entities can incorporate firms,” said a person familiar with the development.

“The ease of doing business should not be misused by people with non-genuine intentions. This is especially so for incorporation of companies,” said a person.

This comes soon after the MCA had initiated action against Chinese shell companies operating in the country and the Serious Fraud Investigation Office had launched investigations against 33 entities. While there is no official definition of shell companies, these are firms that are largely associated with financial irregularities and money laundering.

The ministry plans to have discussions with the Institute of Company Secretaries of India to discuss a possible limit on incorporation of companies by a single individual. “An appropriate limit on the number of companies that a single company secretary can incorporate will first have to be discussed with the ICSI,” said the source.

The MCA had, last year, also tightened rules for companies for keeping their books of accounts, and registered offices. Under new rules for updating the address where they maintain their books of accounts, if it is different from their registered office, companies are required to provide the specific longitude and latitude of the address, proof of address including a conveyance or lease deed or rent agreement, copies of a utility bill and a photograph of the registered office along with the board resolution.

To ensure the authenticity of the pictures, the MCA is looking at launching a phone app that would enable geotagging of the pictures. “Such a facility is already used in various government schemes such as Pradhan Mantri Awas Yojana,” said the source.

The upgraded V3 portal of the government is also expected to have more checks and balances to ensure that operations of shell companies become more difficult. The MCA is considering a plan to introduce Aadhaar based authentication for signups on to the portal as another step for KYC.

While there is no official data on the number of shell companies operating in the country, the MCA has struck off 560,000 firms u/s 248 (1) of the Companies Act, 2013 for certain violations such as failing to commence business within one year of incorporation and not carrying on any business or operation for a period of two immediately preceding financial years.

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