1

VIII Trimester: Corporate Law Project

SHELL COMPANIES: AN ANALYSIS

Ritwik P Srivastava (2017BALLB27)

Syamantak Sen (2017BALLB30)

1. Introduction:

'Shell companies' are simply an 'outer cover' that frequently have only a paper

existence with no real assets, liabilities or operations. They therefore generate no

economic activity but do impart separate corporate legal personality to the structure.

Various news reports and ministry circulars emphasize the efforts being undertaken to

curb the sprouting up and regulating of shell companies in India. A Task Force on

Shell Companies ("Task Force") in February, 2017 was set up by the Prime

Minister's Office, under the joint chairmanship of the Revenue Secretary and

Secretary, Ministry of Corporate Affairs ("MCA") with a "mandate to check in a

systematic way, through a coordinated multi-agency approach, the menace of

companies indulging in illegal activities including facilitation of tax evasion.1

Databases have been compiled, more than 2 lakh (two lakh) companies have been

identified and their names been struck off the Registrar of Companies("RoC") under

Section 248 of the Companies Act, 2013 ("Act").

Section 248 vests the power with the Registrar to remove the name of any such

company from the RoC where a company has failed to commence business within 1

year of incorporation or where the company has not been carrying on any business or

operation for a period of the preceding 2 financial years and has not applied for

dormant company status.2

 The Corporate Affairs Ministry (MCA) then put the onus on directors of non-

compliant companies — which have failed to file e-form ACTIVE — to set the
1
Press Information Bureau, Ministry of Finance, Government of India, 8 June 2018,
https://pib.gov.in/newsite/PrintRelease.aspx?relid=179863
2
Section 248(I), The Companies Act, 2013.
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VIII Trimester: Corporate Law Project
compliance record straight, failing which they run the risk of not being eligible to be

associated with compliant companies. E-form ACTIVE stands for Active Company

Tagging Identities and Verification.3

2. Review of Literature:

a. Guide to the Companies Act, A. Ramaiya, 18th ed., LexisNexis – An

understanding of the position of Shell Companies under Indian Law.

b. Company Law, R.K. Bangia, Allahabad Law Agency – An understanding of the

position of Shell Companies under Indian Law.

c. The Role of Domestic Shell Companies in Financial Crime and Money

Laundering, US Department of the Treasury – Understanding of why Shell

Companies are dangerous to the economy and how they are used in financial

crimes from an international perspective.

d. Shell Companies in India, A. Obhan & N. Jaisingh, Mondaq – Contemporary

relevance of Shell Companies in India and recent steps taken by the Indian

Government to regulate them.

e. An overview of shell companies in the European Union, I. Kristo & E. Thirion,

European Parliamentary Research Service – An understanding of Shell

Companies from the European Law perspective and the risks that they pose.

3. Research Question:

a. To discuss and entrail upon the understanding and working of shell companies.

b. To undertake a cross-jurisdictional analysis of shell companies.

3
Govt turns the heat on directors in fight against shell companies, KR Srivats, The Hindu Business Line, 21
May 2019, https://www.thehindubusinessline.com/economy/govt-turns-the-heat-on-directors-in-fight-against-
shell-companies/article27199155.ece#
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VIII Trimester: Corporate Law Project
c. To undertake an analysis of the steps taken by the Indian Legislature in breaking

down upon the shell companies, with special mention of the Companies Amendment

Ordinance, 2018, in the country.

4. Hypothesis:

Indian Laws are not adequately prepared to deal with the menace of Shell Companies.

5. Objective of Study:

This project aims to discuss in detail the provisions in the Companies Act, 2013 pertaining to

the conceptualisation of shell companies. In recent years, numerous multi-billion dollar

scams have been bought to the forefront as the lawmakers’ understanding of using a ‘hollow’

or a shell company. Satyam Computers Scam, Big Bull Market Scam, Teak Plantation

Companies Scam, TyCo International, WorldCom Scam, are merely a few in the long list of

corporate scams involving such a modus operandi.

The paper aims at highlighting the balancing imperative for the regulators to keep a check on

incorporation of shell companies and the need to develop encouraging environment to

facilitate incorporation of companies for the bona fide business objectives. It undertakes a

study of the recent developments and currently undertaken actions of the Indian legislator in

breaking down such companies and attempts to understand a possible future that the existing

framework holds for the Indian markets.

6. Research Methodology:

The research methodology is doctrinal. The data for this project has been collected from

various sources such as government websites, journals, newspaper articles, books, etc. After

the collection of the data it was assembled in one place and analysed thoroughly. The

important and relevant information was retained and arranged in a meaningful order under

headings and subheadings. Thus, the objectives were accomplished and the project was

completed.
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VIII Trimester: Corporate Law Project
7. What are Shell Companies?

Neither the Companies Act 2013, nor Companies Act 1956 nor any other Act has defined this

term. In a formal sense, a shell company is a business entity formed to protect, or even hide, a

company's assets, in a perfectly legal manner4.

Shell companies usually have no discernible business operation or generate any real assets,

and in the real world, are used as a vehicle by companies to control or even disguise assets5.

8. Why businesses use Shell Companies?

A deeper dive into shell companies reveals other highly rewarding ways why corporations

rely so heavily on shell companies. It is pertinent to note that not all shell companies may be

money laundering vehicles. There are many shell companies that work within legal limits and

do not have financial irregularities. For example, a company may separate its HR function

into another company altogether. The second one is a legal entity, which operates like any

other company6. 

8.1. Tax Avoidance

Ultimately, the goal of any shell company is to avoid paying taxes to the federal and state

government. In fact, dodging taxes is the actual reason a shell company exists in the first

place. Basically, as long as the assets held in the shell company were earned abroad (and

in an accounting sense, they were) then those assets are perfectly legitimate and can't be

taxed by outside countries.

Companies set up shell companies in off-shore venues that are more efficient from a tax

point of view (which is why they're referred to as "tax havens".) These tax havens, found

in popular, tax-advantaged offshore hotspots like Panama, the Cayman Islands or

Switzerland, fit the bill nicely.

4
What is a Shell Company?, B. O’Connel, The Street, 28 March 2019, https://www.thestreet.com/personal-
finance/education/what-is-a-shell-company-14908714
5
Ibid.
6
What are shell companies?, AK Sharma, LiveMint, 19 September 2017,
https://www.livemint.com/Money/gFqqUTa6pYGWVkjyHh58QO/What-are-shell-companies.html
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VIII Trimester: Corporate Law Project
Essentially, by parking corporate assets in offshore bourses in a shell company, a

company could hide assets and significantly reduce their tax burden in the process.

8.2. Insulation from Intra-Country Situations

By parking a company's assets in a shell company, corporations can also protect their

assets from volatile national economies. Consider Greece a decade ago, where the public

rioted in the streets over national economic belt-tightening and inflation and the national

deficit skyrocketed.

Or, more recently, consider Venezuela's plummeting economy in the second half of the

decade, where citizens starve and businesses topple. Yet if a regional corporation placed

assets in an offshore shell company, capital was protected and the corporation was

insulated from toxic national economies that were swallowing up the assets of other

companies.

8.3. Sales Vehicles

Businesses can also use shell entities to protect assets from taxation via the sale of a shell

company.

For example, a corporation might steer assets into a shell company and then sell that shell

company to shield the assets in the shell company from taxation.

Let's say a company had a large real estate asset which is listed as a piece of a shell

company. In that scenario, the corporation could sell the shell company (and with it, the

real estate) and avoid the fees and taxes usually linked to real estate ownership, and

generate more of a profit on the real estate property.

8.4. Reverse Merger

A reverse merger is the acquisition of a publicly traded company that has usually lain

dormant for a number of years. Because the shell company is already listed on the public
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VIII Trimester: Corporate Law Project
market, purchasing the entity allows an investor to avoid going through the lengthy and

expensive process of setting up an Initial Public Offering (IPO)7.

In this case, buying a shell company is similar to buying a shelf corporation. The

company has value because it already exists, and the purchase provides a significant

shortcut. For new start-ups, the reverse merger can present a major savings8.

8.5. Avoiding Criminal Targeting

On the extreme end, shell companies are used around the world to hide the ownership of

assets in order to avoid being targeted by kidnappers, thieves, and con artists. While this

is certainly not used by ordinary entrepreneurs, it remains a sad reality9.

In Latin American countries, for example, wealthy individuals have been using shell

companies for years to hide their assets in order to avoid being targeted by kidnappers.

And in the world of high-end art, many large-scale collectors use offshore shell

companies to mask the true owners of world masterpieces10.

9. Shell Company v. Dormant Company

A Dormant company is the one which does not have active running business operations.

A company may start with active business but due to some reason cease to operate or

does not have an active status. Such companies can acquire the status of a dormant

company by making an application to the registrar of companies. These companies are

not involved in any fraudulent transactions unlike the shell companies11.

7
Why do a Reverse Merger instead of an IPO?, K. Clark, Investopedia, 14 September 2019,
https://www.investopedia.com/ask/answers/08/reverse-merger-ipo.asp
8
The Truth About Shell Companies: The Good, the Bad, and the Ugly, D. Forester, allBusiness
https://www.allbusiness.com/shell-companies-legitimate-uses-corruption-105041-1.html
9
Ibid.
10
Ibid.
11
What is a Shell Company?, K. Batra, Chartered Club, https://www.charteredclub.com/shell-company/
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VIII Trimester: Corporate Law Project
A dormant company is simply a regular company with no active business operations

whereas a shell company may or may not have active business operations but might be

involved in unlawful transactions12.

10. Why are shell companies problematic?

In most cases in reality, the actual funds are generally right here onshore in Indian banks,

but the assets are earmarked as the property of a foreign shell company. This is the best of

both worlds: no taxation and the stability of banks 13. The U.S. Public Interest Research

Group and Citizens For Tax Justice estimated that between 2008 and 2014, some $2.1

trillion of American firms’ untaxed assets rested in offshore accounts 14. This causes huge

loss to the national government, impeding the development of the nation.

Expensive assets can be placed into a shell company and sold as a way of avoiding

taxation and registration fees. A millionaire’s yacht, for example, can be listed as the

property of a shell company. Instead of selling the vessel itself, the company can be sold

as a whole. No new registration fees and no new taxes15.

Criminal operations use shell companies to launder money throughout the world. So-

called dirty money can be shuffled through a series of shell companies, coming out

“clean” on the other end in the form of investments, bearer bonds, commodities, and other

assets. Since these companies can be set up with nominee directors, there is no way to

trace the laundered assets back to the illegal activity that generated them. This is often the

modus operandi of organized criminal rackets and terrorist groups16.

11. Relevant Legal Framework in India

12
Challenges to the Shell Companies in India, SBS and Company LLP Chartered Accountants, 25 March 2019,
https://www.sbsandco.com/blog/challenges-to-the-shell-companies-in-india
13
Supra note 8.
14
Offshore Shell Companies 2014: The Use of Offshore Tax Havens by Fortune 500 Companies, U.S. Public
Interest Research Group & Citizens for Tax Justice, June 2014, https://www.ctj.org/pdf/offshoreshell2014.pdf
15
WHAT ARE SOME OF THE BENEFITS OF HAVING A SHELL COMPANY?, EPGD Law, 16 January 2019,
https://www.epgdlaw.com/what-are-some-of-the-benefits-of-having-a-shell-company/
16
Combating Money Laundering and the Financing of Terrorism, The World Bank, 2009,
http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/CombattingMLandTF.pdf
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VIII Trimester: Corporate Law Project
The phrase “Shell Company” has not been defined in any law in India, including the

Companies Act 2013 and its predecessor, the Companies Act 1956. Given the objectives

of the formation of a shell company, it ends up violating the following laws:

11.1. The Companies Rules 201717

On 20th September 2017, the MCA notified the Companies (Restriction on Number of

Layers) Rules, 2017 which prescribed those classes of companies, not permitted to

have layers. Under these rules, companies other than banks, non-banking financial

companies, insurance companies or government companies are not permitted to have

more than two layers of subsidiaries barring one layer of the wholly-owned

subsidiary18.

11.2. Benami Transactions Act, 198819

This Act gives the government the power to confiscate benami assets i.e. assets that

have been held in the name of another person or fictitious person to avoid taxation or

conceal the wealth unaccounted for20.

11.3. Prevention of Money Laundering Act21

When the money on which tax has not been paid i.e. unaccounted or black money is

passed through a shell company to reflect it as untainted money, it results in the

offense of money laundering22 and is punishable with rigorous imprisonment for a

term of 3 to 7 years and a fine23.

11.4. Indian Penal Code24

17
The Companies (Restriction on number of layers) Rules, 2017.
18
Section 2(2), The Companies (Restriction on number of layers) Rules, 2017.
19
The Benami Transactions (Prohibition) Act, 1988.
20
Section 8, The Benami Transactions (Prohibition) Amendment Act, 2016; Section 5, The Benami Transactions
(Prohibition) Act, 1988.
21
The Prevention of Money-Laundering Act, 2002.
22
Section 3, The Prevention of Money-Laundering Act, 2002.
23
Section 4, The Prevention of Money-Laundering Act, 2002.
24
The Indian Penal Code, 1860.
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Where the shell companies are used for Ponzi schemes, it results in the commission of

an offense under the Indian Penal Code relating to cheating, which is punishable with

imprisonment or a term extending up to 7 years and a fine25.

11.5. POEM Guidelines26

Shell companies can be set up in tax havens out of India and the income can be

artificially shifted to such jurisdictions which are liberal in taxation. The place of

effective management (POEM) guidelines provides for determination of the place of

effective management for an entity and if this is in India, Indian tax laws shall apply.

11.6. The Companies Act27

The Act authorizes the Registrar of the Companies to strike off a company from

register of companies when the company has failed to commence business within one

year from the date of its incorporation or upon notice to the company and the directors

where the company has failed to carry on business for two financial years and has not

applied to obtain the status of dormant company28.

12. Relevant Legal Framework in the United States

As defined in Rule 405 under the Securities Act29 and Rule 12b-2 under the Exchange

Act30, a company (other than an issuer of asset-backed securities) with no or nominal

operations that has any one of the following:

 No or nominal assets.

 Assets consisting solely of cash and cash equivalents.

 Assets consisting of any amount of cash and cash equivalents and nominal other

assets.
25
Section 420, The Indian Penal Code, 1860.
26
Guiding Principles for Place of Effective Management (POEM) of a Company, Central Board of Direct
Taxes, Ministry of Finance, Government of India, F. No. 142/11/2015-TPL, 24 January 2017,
https://pdicai.org/docs/circular-06_2017_271201710597837.pdf.
27
The Companies Act, 2013.
28
Section 248, The Companies Act, 2013.
29
The Securities Act of 1933 (USA).
30
The Securities Exchange Act of 1934 (USA).
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Shell companies are restricted from using certain forms and taking advantage of certain

conveniences under the federal securities laws. For example, shell companies are not

permitted to use Form S-831 and shell companies are considered ineligible issuers that

cannot use free writing prospectuses for communications during a registered offering.

These restrictions are designed to prevent the use of shell companies in committing fraud

and other abuses in the securities markets.

The Corporate Transparency Act32, which requires companies to disclose their true

owners, was approved by a vote of 249-173, with 25 Republicans joining 224 Democrats

in support33.

The US has been repeatedly reviewed and the biggest anti-money laundering loophole is

the ease with which one can incorporate an anonymous shell company. Currently, no US

states require companies to provide details of their ultimate owner.

The new measure would require corporations and limited liability companies to:

 Disclose their beneficial owners, including names and identification numbers from a

passport, drivers’ license or other government identity card, at the time of their

incorporation34;

 File annual updates listing their current beneficial owners and any ownership changes

that occurred during the previous year35;

 Define a beneficial owner as anyone who exercises substantial control, receives

significant economic benefits or owns 25% or more of the company36.

31
Form S-8: Registration Statement under the Securities Act of 1933, United States Securities and Exchange
Commission.
32
The Corporate Transparency Act of 2019 (USA).
33
Roll Call 577: H.R. 2513, The United States House of Representatives, 22 Oct 2019.
34
Section 3(a)(1), The Corporate Transparency Act of 2019 (USA).
35
Ibid.
36
Ibid.
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VIII Trimester: Corporate Law Project
Ownership data would be disclosed to the Treasury Department’s Financial Crimes

Enforcement Network (FINCEN), which would keep the information in an internal

database that other law enforcement agencies could review upon request.

In order to be enacted into law, the Corporate Transparency Act must also be approved by

the Republican-controlled Senate and signed by President Donald Trump.

A similar bill called the ILLICIT CASH Act 37 has drawn bipartisan support in the Senate,

and in a statement this afternoon, the White House expressed support for the measure,

although it urged Congress to revise the bill’s language to make it easier for small

businesses to comply38.

13. Relevant Legal Framework in the United Kingdom

Frontmen of foreign shell companies that are used to hide the true ownership of some

of London’s most expensive properties could face up to two years in jail and

unlimited fines under new government plans. The United Kingdom government

announced the new sanctions as it unveiled plans to set out draft laws to lift the

secrecy surrounding foreign ownership of billions of pounds worth of British

property.

Under the draft laws, foreign companies must disclose who ultimately owns their

properties39. The plans follow new rules on ownership and control of UK companies

that were introduced in 201640.

37
The Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in
Shell Holdings Act of 2019 (USA).
38
H.R. 2513 – Corporate Transparency Act of 2019, as amended by Manager’s Amendment, Executive Office
of the President, 22 October 2019.
39
Frontmen for shell companies could face jail in UK Property crackdown, J. Elgot, The Guardian, 22 March
2018, https://www.theguardian.com/money/2018/mar/22/ministers-vow-to-end-secrecy-around-foreign-
ownership-of-uk-property
40
The Small Business, Enterprise and Employment Act 2015 (UK).
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However, the timetable for the new property register had been subject to numerous

delays and even a threat of rebellion by two Tory peers, who put forward an

amendment to the sanctions and anti-money-laundering bill in January last year41.

Facing a potential defeat, the government announced that it would table draft

legislation, though transparency campaigners have said this will still in practice delay

an operational register until 202142.

Hundreds of United Kingdom registered shell companies are at the heart of corruption

cases totalling billions of pounds. The UK’s system to prevent this abuse is failing.

Around 766 companies were identified, registered in the UK, that have been directly

involved in laundering stolen money out of at least 13 countries43.

These companies were effectively shell companies operating as layers to hide money

that would otherwise appear suspicious. Being UK-based, as opposed to offshore,

meant that they offered those using them illicitly the added advantage of providing

respectability uniquely associated with being registered in the UK44.

13. Government’s Intervention against shell companies

In its crackdown on black money, and the players involved in the game, the

government sought to come down harshly upon shell companies. For this, it identified

a causal link between dormant companies and the likelihood of fraud that can be

undertaken through the books of such companies.45 Demonetisation marked the

beginning of this systematic takedown.46

41
Supra note 39.
42
Register of Beneficial Owners of Overseas Entities coming your way in 2021, J. Cantor, Dentons Law Firm, 2
July 2019, https://www.lexology.com/library/detail.aspx?g=1121d6a8-a7fa-4e26-a832-3a2ffdc9e91b
43
HIDING IN PLAIN SIGHT: HOW UK COMPANIES ARE USED TO LAUNDER CORRUPT WEALTH,
Transparency International, November 2017, https://www.transparency.org.uk/publications/hiding-in-plain-
sight/#.WgVzaRKLRuU
44
Ibid.
45
Sanjay Vijayakumar, “Decoding Shell Companies”, dated 17 September 2017, available at
https://www.thehindu.com/business/Industry/decoding-shell-companies/article19704204.ece
46
G. C. Prasad, 35,000 companies deposited, withdrew Rs. 17,000 crores after demonetization, dated 06
November 2017, available at https://www.livemint.com/Companies/g3KUovJaafYFKbxaUIivJP/Shell-
companies-Govt-identifies-Rs17000-crore-of-suspiciou.html.
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VIII Trimester: Corporate Law Project
The beginnings of the operation can be traced to the formation of a Committee under

the chairmanship of Mr. Injeti Srinivas formed by the Ministry of Company Affairs

(“MCA”), called the Committee to Review Offences under the Companies Act, 2013

(“Committee”).47 The Committee looked into the offences listed under the

Companies Act, 2013, and gave recommendations for the revamping of the same to

better suit the newer developments. This was followed by the MCA pushing out

notifications on specific sections of the Act, inter alia, that on section 248 of the Act

which dormant companies as under section 455 of the Act to be struck off from the

records of the Registrar of Companies (“RoC”).48 Thereafter the MCA again came

forth, using its powers under sections 164 and 167, notifying about disqualification of

directors of companies which failed to file annual returns for the previous three

financial years.49

The Companies Act, 2013 already contained penalties which were more severe than

their counterparts in the 1956 Act, however, in the wake of a string of scams like the

Satyam,50 and Nirav Modi World Diamond Distribution Scam 51 scams, the

government felt the urgent need to liberalize and streamline the compliance

requirements with other laws, of the companies incorporated under the Companies

Act, 2013. The Ordinance, at the outset, sought to undertake the following reforms:52

47
Press Information Bureau, Ministry of Corporate Affairs, “MCA has constituted a 10-Member Committee to
review the offences under the Companies Act”, dated 15 July 2018, available at,
https://pib.gov.in/Pressreleaseshare.aspx?PRID=1538673.
48
MCA, “Notice of Striking Off and Dissolution”, dated 08 August 2018, available at,
http://www.mca.gov.in/Ministry/pdf/STK7DelhiNotice_09082018.pdf.
49
MCA, Relief to disqualified directors under the Companies Act, 2013, dated March 2019, available at
http://www.mca.gov.in/MinistryV2/disqualifieddirectorslist.html .
50
Bhasin, M.L., 2016. Revisiting the Satyam Accounting Scam: A Case Study. International Journal of
Management and Social Sciences Research, 5, pp.31-46.
51
Hanumantu, K.D., Worlikar, V. and Narayanaswami, S., 2019. The Punjab National Bank scam: Ethics versus
robust processes. Journal of Public Affairs, p.e1952.
52
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
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VIII Trimester: Corporate Law Project
1. It sought to fill the technical gaps and procedural lapses in the categorization

of offences as they existed, by undertaking a recategorization exercise of

compoundable offences to an in-house adjudication framework.

2. Ensuring compliance by prescribing stiffer punishments for repeated

defaulters.

3. To ease the caseload of the National Company Law Tribunal (“NCLT”) by

undertaking a de-clogging exercise.

4. Other corporate governance and corporate social responsibility related

reforms.

14. Analysis of the Companies (Amendment) Ordinance, 2018

Post recommendations from the Committee, the Companies Act, 2018 (Ordinance)

was promulgated on 2 November 2018,53 and immediately entered into force. The

Ordinance had provisions providing for affirmative action on all the four fronts, as

were the objectives of the Government. Hereinunder, we take a closer look at the

Government’s, and in turn the Ordinance’s, attempt at countering the threat of money-

laundering from Shell companies.

As of June 2018, post-demonetization, a nearabout thirty-three (33) percent of

companies registered with the Registrar of Companies (“RoC”).54 The RoC struck off

names of close to 2.26 lakhs companies off its register for having failed to file their

financial statements and annual returns for two or more successive years.55 It further

disqualified 3.09 directors for non-filing of such annual returns for three successive

53
ET Online, Government-appointed task force to take action against 2.25 lakh shell companies, dated 08 June
2018, available at https://economictimes.indiatimes.com/news/company/corporate-trends/government-
appointed-task-force-to-take-action-against-2-25-lakh-shell-companies/articleshow/64505922.cms?from=mdr.
54
ET Online, Government-appointed task force to take action against 2.25 lakh shell companies, dated 08 June
2018, available at https://economictimes.indiatimes.com/news/company/corporate-trends/government-
appointed-task-force-to-take-action-against-2-25-lakh-shell-companies/articleshow/64505922.cms?from=mdr.
55
ET Online, Government-appointed task force to take action against 2.25 lakh shell companies, dated 08 June
2018, available at https://economictimes.indiatimes.com/news/company/corporate-trends/government-
appointed-task-force-to-take-action-against-2-25-lakh-shell-companies/articleshow/64505922.cms?from=mdr.
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VIII Trimester: Corporate Law Project
years.56 The action undertaken was a result of the actions of a Task Force constituted

under Hasmukh Adhia.57 It compiled a database of such shell companies, handing

over the list to the Serious Fraud Investigation Office (“SFIO”).58

The Task Force formulated in 2017 zeroed in on further 80,000 shell companies

operating in the nation.59 It used certain objective parameters to identify such hollow

body incorporates, inter alia, identifying people of no-means sitting on the board of

directors,60 finding discrepancies between the number of transactions undertaken by

the company61 and the profits reported, and scrutiny of the books of the companies.62

On the other front, the Ordinance made key policy changes in the dealings of the

regulatory authorities with such defaulters. Such key changes are highlighted below.

1. Prohibition on issuing of shares at a discount: The Ordinance, except in

certain cases, prohibits a company issuing its shares at a less than usual price. If found

in contravention, the company, and every defaulting officer, has to pay a fine ranging

between one to five lakhs.63 On top of it, the company, and every defaulting officer is

also liable to pay a fine equal to the amount as raised by issue of such shares at a
56
ET Online, Government-appointed task force to take action against 2.25 lakh shell companies, dated 08 June
2018, available at https://economictimes.indiatimes.com/news/company/corporate-trends/government-
appointed-task-force-to-take-action-against-2-25-lakh-shell-companies/articleshow/64505922.cms?from=mdr.
57
ET Online, Government-appointed task force to take action against 2.25 lakh shell companies, dated 08 June
2018, available at https://economictimes.indiatimes.com/news/company/corporate-trends/government-
appointed-task-force-to-take-action-against-2-25-lakh-shell-companies/articleshow/64505922.cms?from=mdr.
58
https://economictimes.indiatimes.com/news/company/corporate-trends/government-appointed-task-force-to-
take-action-against-2-25-lakh-shell-companies/articleshow/64505922.cms?from=mdr
59
G C Prasad, Govt to launch fresh drive against shell companies, dated 09 June 2018, available at
https://www.livemint.com/Home-Page/P0hAehLC0YoRnP2QPdBrUN/Govt-to-launch-fresh-drive-against-
shell-companies.html.
60
G C Prasad, Govt to launch fresh drive against shell companies, dated 09 June 2018, available at
https://www.livemint.com/Home-Page/P0hAehLC0YoRnP2QPdBrUN/Govt-to-launch-fresh-drive-against-
shell-companies.html.
61
G C Prasad, Govt to launch fresh drive against shell companies, dated 09 June 2018, available at
https://www.livemint.com/Home-Page/P0hAehLC0YoRnP2QPdBrUN/Govt-to-launch-fresh-drive-against-
shell-companies.html.
62
G C Prasad, Govt to launch fresh drive against shell companies, dated 09 June 2018, available at
https://www.livemint.com/Home-Page/P0hAehLC0YoRnP2QPdBrUN/Govt-to-launch-fresh-drive-against-
shell-companies.html.
63
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
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VIII Trimester: Corporate Law Project
discounted price, or rupees five lakhs, whichever is lower. 64 The company shall

further refund the money with an interest rate of 12% per annum from the date of the

issuance of such disputed shares.65

2. Prohibition on commencement of business: The Ordinance prohibits a

company from commencing business unless it a) has filed a declaration within 180

days of incorporation, post confirmation that every subscriber to the Memorandum of

the company has been subscribed to, and proper procedure, as laid down, has been

followed; b) has filed a verification of its registered office address with the Registrar

of Companies within 30 days of incorporation. 66 If such compliances are foregone, the

company’s name is liable to be struck off the Register of Companies.67

3. Charges on Registration: The Ordinance requires companies to register

statutory and non-statutory charges on its properties within 300 days if the charge was

created before promulgation of the Ordinance,68 and within 60 days if it was created

post the promulgation.69 Any wilful furnishing of false information or suppression of

material information is to be meted out the punishment of fraud as per the Act.

4. Declaration of Beneficial Ownership: The non-disclosure by a person who

holds at least 25 per cent shares in a company is required to make a declaration of

64
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
65
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
66
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
67
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
68
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
69
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
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VIII Trimester: Corporate Law Project
his/her interest. The failure to do so is liable to be slapped with a fine, and or

imprisonment of up to one year according to the Ordinance.70

5. Disqualification of Directorship: The Ordinance provides for an upper limit

on the number of companies a person can be a director of, at 20. Contravening this, is

a ground for disqualification of directorship.

6. Stricter liability for repeat defaulters: The Ordinance, be it a company or an

officer, if they are found in the default again within a span of three years, they would

be liable for twice the penalty ordinarily provided for such default.71

15. Conclusion

The Government’s efforts have been commendable when it comes to doubling down

on shell companies. However, certain glaring regulatory gaps are blatant in the current

legal regime. A lack of discernible definition of “shell company” on a statutory level

prevents the Government’s efforts from being streamlined. The Ordinance seems to

focus more on dormant companies, and members of such companies, than on shell

companies. More nuanced parameters need to be adopted when it comes to identifying

such companies in the country. Hence, the Ordinance leaves much to be desired.

However, any policy intervention which seeks to promote accountability and

disclosure is a welcome one.

70
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.
71
Ministry of Law and Justice, The Companies (Amendment) Ordinance, 2018, dated 02 November, 2018,
available at http://prsindia.org/sites/default/files/bill_files/Companies%20Amendment%20Ordinance
%202018.pdf.