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Context
Recently, the Centre has initiated action against more than two lakh shell companies as part of Operation Clean Money. Also, SEBI has identified 331 companies and initiated action against them. Here is all you need to know about shell companies.
What are shell companies?
- The Companies Act, 2013 has not defined what a ‘shell company’ is and as to what kind of activities would lead to a company being termed a ‘shell’.
- Shell companies are typically corporate entities which do not have any active business operations or significant assets in their possession.
- The government views them with suspicion as some of them could be used for money laundering, tax evasion and other illegal activities.
How are shell companies governed in India?
- In India, there is no specific law relating to “shell companies.”
- However, some laws help, to an extent, in curbing illegal activities such as money laundering and can indirectly be used to target shell companies — Benami Transaction (Prohibition) Amendment Act 2016; The Prevention of Money Laundering Act 2002 and The Companies Act, 2013.
How can a shell company be strike off?
- Companies can be removed from the rolls of the Ministry of Corporate Affairs by two means: strike off by Registrar of Companies (RoC) — (Section 248 (1) of the Companies Act, 2013) and voluntary strike off — (Section 248 (2) of the Companies Act, 2013).
- Voluntary closure can be done with the approval of the board and shareholders and the firm should have nil liabilities.
Under what conditions, can a company be striked off by the Registrar of Companies?
- A company is strike off when it has failed to commence business within a year of incorporation.
- Also if a company does not carry out any business or operation for a period of two continuous financial years and did not apply for the status of ‘dormant company’ under Section 455 of the Companies Act, then RoC issues a show-cause notice to such companies and their directors seeking their response within 30 days. If the response is not satisfactory, the company’s name would be removed from the register.
What is a dormant company?
As per Section 455 of the Companies Act, 2013, a company that does not have significant financial activity or has been inactive can apply to the RoC and declare itself a dormant company.
How is a shell company different from dormant company?
- A dormant company gets its title in two ways: it has chosen to get a ‘dormant’ status from the RoC by way of an application and is in compliance of the requirements of Section 455.
- Further, in case a company has not filed financial statements or annual returns for two financial years consecutively, the RoC shall issue notice and include it in the register of ‘dormant’ companies.
- But a shell company is one which is typically suspected of illegal activities.
