Video Summary

[LSTV Public Forum] Tackling Shell Companies

As far as the timing of SEBI’s latest action against shell companies is concerned, it is like “if not now, then when”.
By IT's Video Summary Team
September 05, 2017


  • Introduction
  • What is Shell Company?
  • What is Dormant Company?
  • Government steps
  • Is the decision taken at the right time as it has revoked the mixed reactions from all the corners?
  • Is there a need for a better legislation or the existing (Benami & Company) laws are enough?
  • How can the decision of SEBI be looked at?
  • What kind of impact will such move from SEBI have on investors in short and long term?
  • What will be the impact on real estate?
  • What kind of a relief to those who have put in their money into these companies?
  • Suggestions
  • Conclusion

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  • The market regulator Stock Exchange Board of India (SEBI) has started issuing show-cause notices to 331 listed firms suspected to have acted as shell companies & has banned these companies from trading.
  • It has taken the action against more than hundred unlisted entities & others, suspected to trade stocks with black money & violating security laws.
  • The decision on trading restrictions has been reversed in case of some suspected shell companies after they approached the Securities Appellate Tribunal.
  • But the crackdown by SEBI has left investors and the corporate world worried.

What is Shell Company?

  • There is no definition of any word shell company in Companies Act. Everyone has a right to register a company and based on that it will has its working.
  • Shell Company is known basically as a corporate entity without active business operations or significant assets and are seen as deliberating financial arrangements to avoid taxes.
  • They are just used for directing the money and keep it flowing, and use it for illegal purpose through multi layering and hiding their identity and ultimately invest in any business through those companies.
  • Many big corporate companies create shell corporations which are often used to park black money, carry out illegal transactions and sometimes act as facilitators of black money laundering.

What is Dormant Company?

  • There is a distinction between Dormant Company & a Shell Company.
  • Dormant Company is one which is legitimately registered which doesn’t file its returns and does not comply with the provisions in the Companies Act and therefore some of these dormant companies have the potential to be misused as a shell companies.

Government steps

  • There are the efforts made by the governments to ensure the checking of the mal practices in the form of shell companies.
  • Government has taken the steps under Benami and Income Tax Law. Till now they were dealt as per the definition of Income Tax Laws.
  • Under Benami Law these companies are detected and after reaching to their real owner the tax liability is increased, as Benami Law is not only related to immovable property but is also applicable to Tangible Assets and on the Money flowing through such companies.
  • Such companies remain untraceable and happen to be vehicle of choice for money launders, bribe givers and takers, tax evaders as well as financiers of terrorism.
  • There are increasing attempts from government to check tax avoidance which is why the shell companies have now come under the government scanner.
  • In fact, a task force with the members from the regulatory ministries as well as the enforcement agencies has been constituted recently to monitor actions against the shell companies.
  • The task force was setup under co chairmanship of revenue secretary and secretary of Ministry of Corporate Affairs involving members of all the other investigating agencies.
  • This task force suggested the Serious Fraud Investigation Office (SFIO) the company affairs wing of the Ministry to scan and identify such companies.
  • This brought all the companies under surveillance of government and other investigating agencies.

Is the decision taken at the right time as it has revoked the mixed reactions from all the corners?

  • As far as the timing is concerned it is like “if not now, then when”.
  • In India, out of 15 lakh companies only 6 lakh companies file returns which means details is available about them and the rest are out of the government scanner and there are the possible windows for exploitation as shell companies.
  • Based on the recommendation of committee under Central Board of Direct Taxes (CBDT) in 2012, and the Special Investigation team (SIT) established by Supreme Court in 2015 that clearly talked about these windows making black money white, government got active on this crackdown on shell companies.
  • During demonetization, it was found that this window of shell companies was again used by the people to deposit the 500 & 1000 rupees notes illegally & the unaccounted income and the black money came into the system through these shell companies.

Is there a need for a better legislation or the existing (Benami & Company) laws are enough?

  • The existing laws are very clear and the modifications have taken place. The important aspect is the difference between Dormant & Shell Company.
  • Shell Company are just the paper company for layering the black money.
  • Dormant are those which do not take any business or could not take off due to any reason which should be delisted and has to be done by the Registrar of Companies.
  • Important to note here is that when ease of doing business is considered it means ease of entry so there should also be ease of exit which can reduce such dormant companies.
  • The shell companies are those which are misused in manipulating the benefits of security transactions.
  • There are complexities in the laws for companies for its liquidation, so there is a need to segregate them.
  • It is now clear that there are bigger entities that have created these shell companies to make their black money white and carry on their illegal operation.
  • As far as investors are concerned at times they do not check which kind of company they are investing in.
  • The Laws and mechanism are not much strong if such cases come forward to immediately get back the money. So those getting trapped in to it will suffer.
  • Though the Laws are being created but it is difficult to get the money from such companies.

How can the decision of SEBI be looked at?

  • It can be seen as a hasty decision as 331 Companies are supposed to be out of the list of Shell Companies, as they are listed on the stock exchange.
  • Those Companies in the scanner will be looked after by different investigating agencies like CBI, ED, Income Tax, & ROC.
  • SEBI has to regulate those companies which are listed on stock exchange & hence these 331 Companies are considered as per the list of the government but still there is a confusion as to how many of the companies have come under this list even though they have a high level of net worth.
  • It is also seen in continuation of the measures introduced by the government to discourage the individuals & companies indulging in tax evasion & money laundering.
  • The new set of measures promised harsh punitive actions against deviant shell companies which includes freezing of bank accounts, striking out the names of dormant companies & invocation of Benami Transactions Prohibitions Amendment Act of 2016.

What kind of impact will such move from SEBI have on investors in short and long term?

  • These steps became the need of an hour and there was a credible information from the system itself.
  • When market regulator takes such action on a listed company, it has to be more cautious before doing so.
  • As the genuine companies get affected in such hasty moves on them, & this mechanism stops trading in these companies and are totally under the surveillance and everybody would be very sceptic of trading in these companies.
  • Presently all the agencies are investigating the companies and when the regulator is having credible information against such listed companies and no actions are taken then it will cause bigger harm to the investors in the long run.

What will be the impact on real estate?

  • According to the concept of shell companies they do not have any business or trade or any activities so those companies with real estate projects will not come in shell companies.
  • Government is bound to take action on such entities but earlier it was not able to take the actions because Benami interest was not being defined properly in the intangible asset.
  • Shares are intangible asset and company law does not define it.
  • But now the government has created the law and now it can identify the beneficiary interest of the company.
  • Hence it is not to worry about for the people as these companies just manipulate the market and circumvent the legal provisions to cheat the people through various Ponzi Schemes as these are the paper companies.

What kind of a relief to those who have put in their money into these companies?

  • Closing of these companies is in itself a beneficial step for investors as already many people have lost money in to those companies.
  • If they are allowed to operate more than they done, it will never give interest back to the investors.
  • There is no money stuck as it is the layering of the promoter’s money and is a sort of Hawala transactions and creating white money from black.
  • However, in the dormant company, the money of the people may have stuck that’s a genuine failure of the business community.
  • It is the exit route that the government needs to give to those dormant company and allow them to liquidate and distribute between the shareholders.
  • Hence it has to be settled in a certain way.


  • Income tax department and Corporate Affairs Ministry should look transparently to all the companies if it doesn’t file returns or details for 2 years then they should be delisted immediately.
  • The moment all the records are available of all the companies and then if put under investigation surveillance, it will become hard for them to do such businesses. Thus, transparency should be there so it becomes strong deterrent for bigger companies who use shell companies to run illegal businesses and can be punished.


  • It definitely gives advantage to fight black money & corruption & for economic development.
  • Shell Company was not harming the investors much, it was actually harming the government by doing Hawala transactions converting black money into white and by not paying the tax.
  • Hence there is a need to bring the transparency in taxation & laws along with its implementation and widen the tax base.


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