2021-03-11 06:09:43
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Action initiated to control fraudulent companies (PIB)
• Context: Based on non-filing of financial statements consecutively for two years or more, companies were identified and after following due process of law, more than 3.8 lakh shell companies were struck off during the last three years.
Analysis
• A
database of shell companies has been compiled of by the Serious Fraud Investigation Office (SFIO).
• Establishment of an independent regulator for the auditing profession, i.e., the
National Financial Reporting Authority, one of the key changes brought in by the Companies Act, 2013, was approved by the Union Cabinet on 1st of March 2018 and has been notified on 21.03.2018.
•
Fraud as defined in section 447 of the Companies Act, 2013
has been made a predicate offence under Prevention of Money Laundering Act, 2002.
o A predicate offence is a crime that is a component of a more serious crime.
o For example, producing unlawful funds is the primary offence and money laundering is the predicate offence.
o The term “predicate offence” is usually used to describe money laundering or terrorist financing activities
• The Special Task Force set up by the Government to look into the issue of “Shell Companies” has inter-alia recommended the use of certain
red flag indicators as alerts for identification of Shell Companies.
Shell Companies and Section 248 of the Companies Act, 2013 • The term "shell company" is not defined under the Companies Act, 2013.
o The term ‘Fraudulent Company’ is also not defined in the Companies Act, 2013.
• It normally refers to a company without active business operation or significant assets, which in some cases are used for illegal purpose such as tax evasion, money laundering, obscuring ownership, benami properties etc.
o These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public.
o Legitimate reasons for a shell corporation include such things as a start-up using the business entity as a vehicle to raise funds, conduct a hostile takeover or to go public.
• Section 248 of the Companies Act, 2013 is the crux, and at present, one of the few provisions in the legislation that seeks to curtail shell companies.
o Section 248 vests the power with the Registrar to remove the name of any such company from the Registrar of Companies (RoC) where:
a company has failed to commence business within one year of incorporation or
where the company has not been carrying on any business or operation for a period of the preceding two financial years and has not applied for dormant company status.
• The Companies (Amendment) Act, 2019 supplements the provisions of Section 248.
o A new Section 10A has been inserted which stipulates that a declaration is to be filed by a director within a period of a 180 (hundred and eighty) days from the date of incorporation of the company in the manner prescribed with the Registrar, affirming that every subscriber to the Memorandum has paid the value of the shares agreed to be paid by him on the date of making such declaration
• In a separate written reply, the Minister of State in Finance Ministry said that under Section 182 of the Companies Act, companies, other than government companies and companies less than three years old, are allowed directly or indirectly to contribute to any political party with the approval of their boards of directors.
o Such companies shall have to disclose in its profit and loss account the total amount contributed by them during the financial year to which the account relates and the name of the party is not required to be disclosed. Therefore, political party-wise data is not maintained.
442 viewsSahil Malhotra, 03:09
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