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[op- ed] A big broom-On crackdown on shell companies

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Note4Students

Mains Paper3: Money Laundering and it’s prevention

The following things are important from UPSC perspective:

Prelims: Shell Companies

Mains level: This article talks about the recent decision of the Ministry of Corporate Affairs to crack down on fake shell companies, why there are so many of them and the solutions to tackle the problem.


News

Context

  1. The decision by the Ministry of Corporate Affairs to crack down on so-called shell companies, disqualify select directors in these entities and debar them from taking board positions for a specified period.
  2. According to the ministry, this would help in clean up of many firms set up in many cases with less than bona fide intent and having virtually no business operations. 

Why this decision is fraught with risk?

  1. Naming and Shaming decision of the Union government has a real danger of tainting genuine firms and individuals.
  2. For example, SEBI also implemented similar decision and in a way it hastily imposed trading curbs on some entities which were given relief by Securities Appellate Tribunal recently.
  3. The sheer scale of the task at hand, with the ministry identifying more than 1.06 lakh directors for disqualification, it is imperative that there be great care and diligence to ensure that the authorities do not penalise anyone who for non-mala fide reasons failed to comply with the relevant provisions of the Companies Act

Why fake shell companies?

  1. Many entrepreneurs find it easier to register a firm than it is to dissolve or wind it up. 
  2. In public limited companies, a major portion of the extralegal activities including price rigging of shares, insider trading and other questionable practices have been found to occur in the large mass of smaller companies
  3. Various problems like illiquidity, weak governance and regulatory oversight have combined with the difficulty in delisting to make these firms prime targets for money launderers.

What can be done to curb fake Shell companies?

  1. The Centre and the regulatory arms need to address the underlying systemic shortcomings that have allowed so many companies, to become vehicles of malfeasance.
  2. Making the process to dissolve or delist online will improve governance and ensure that all stakeholders have an enabling atmosphere to operate freely.
  3. The government’s move to address banking sector stress by adopting the Insolvency and Bankruptcy Code is a step in the right direction.

Back2basics

What are Shell Companies?

  1. Shell Company is a corporate entity without active business operations or significant assets.
  2. There is no clear definition of shell companies in the Companies Act,2013.
  3. But there is nothing illegal if a company is not engaged in any economic activity at a given point in time.

                                                                                                                                                                                                                                                                                                                                                                                                                                          

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