PMO orders crackdown on deviant shell companies

The Prime Minister’s Office (PMO) on Friday ordered action against deviant “shell companies” that do not conduct any operations but indulge in money laundering in India.

The move came after it was found that Rs 1,238 crore has been deposited in these entities during the November-December period. Also, 559 beneficiaries were found to have laundered money to the extent of Rs 3,900 crore with the help of 54 professionals who have been identified.

The Serious Fraud Investigation Office (SFIO) has filed criminal prosecution for cheating the national exchequer after investigation of entry operators running a group of 49 shell companies and other proprietorship concerns.

Officials said the crackdown was to prevent misuse of the shell companies for money laundering and tax evasion, especially in the context of unearthing black money post demonetisation.

At a meeting held by the PMO, attended by senior officers from various departments, to review the functioning of shell companies, it was found that only 6 lakh companies file their annual return as against about 15 lakh registered companies in India.

In large numbers

“This means that large number of these companies may be indulging in financial irregularities,” said a senior PMO official.  

In the initial analysis, it was found that shell companies are characterised by: nominal paid-up capital, high reserves and surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover and operating income, nominal expenses, nominal statutory payments and stock in trade, and minimum fixed asset.

These details have been shared with the Supreme Court-monitored Special Investigation Team, Income Tax Department, Enforcement Directorate, Securities and Exchange Board of India (Sebi) and The Institute of Chartered Accountants of India (ICAI).

The PMO’s action follows the Income Tax Department reopening completed assessment in these cases.

The Enforcement Directorate has initiated action under Prevention of Money Laundering Act (PMLA), 2002. The ICAI has also initiated disciplinary proceedings against its members.

The winding up process has been initiated in respect of 49 shell companies.
In order to create a credible deterrence, a “whole of government approach” would be adopted through coordinated efforts and by leveraging technology.

The PMO wanted use of appropriate red flag indicators to identify shell companies, and a database of such companies and their directors would be built by pulling in information from various agencies.

The database will also capture Aadhaar number of individual directors in the companies.

Among the punitive actions that are to be taken against the deviant shell companies include freezing of bank accounts, striking off the names of dormant companies, and invocation of Benami Transactions (Prohibition) Amendment Act, 2016.

As an immediate measure, a task force has been set up with members from various regulatory ministries and enforcement agencies under the co-chairmanship of the revenue secretary and corporate affairs secretary to monitor the actions taken against these companies by various agencies.