Cracking The Whip On Shell Companies A Move That Was The Need Of The Hour

Sufficient checks and balances have been introduced in the current legislative regime to curb the menace of shell companies but whether their implementation will be as ambitious, only time will tell

The Companies Act, 2013 (2013 Act) does not define ‘shell’ companies, however, as commonly understood, shell companies are those companies that are formally registered with the relevant authority, but which do not carry out any business activity or do not commence any business operations. This common understanding regarding shell companies is synonymous to the definition of shell companies given by the Organization for Economic Cooperation and Development (in the OECD Benchmark Definition of Foreign Direct Investment).

In the recent past, the regulator has been active in cracking down on shell companies, which have been causing menace to the economy by being the vehicle for money-laundering and other financial wrongdoings. First, the regulator struck down lakhs of shell companies across India and disqualified lakhs of directors of such shell companies, and thereafter, it came up with certain progressive amendments (discussed below) to the 2013 Act to keep a check on such companies.

Legislative Background

Section 248 of the 2013 Act, which was enforced with effect from 26 December 2016, empowers the relevant Registrar of Companies (RoC) to strike off from the register of companies (Register), the names of such companies which (the RoC has reasonable cause to believe to) have inter alia failed to commence their business within one year of their incorporation or which are not carrying on any business or operation within a period of two immediately preceding financial years and have not made applications for obtaining the status of a dormant company under the 2013 Act. Further, Section 248 also empowers a company (having the consent of at least seventy five per cent of its members) which has defaulted in respect of the aforesaid provisions to (upon extinguishing all its liabilities) make an application to the RoC to remove the name of such company from the Register.