Shell Company under Companies Act 2013

There is no definition of «shell company» in the Companies Act, 2013. It is usually a company with no active business activities or significant assets, which in some cases are used for illegal purposes such as tax evasion, money laundering, concealment of property, Benami real estate, etc. Due to a legal process, a corporation is born as a separate legal entity, just like its death process. In the event of dissolution of a company due to the removal of the company`s name from the register by the ROC in accordance with § 248 of the Act, the company status of a company expires, its functionality ends, and the company`s activity ceases for all practical purposes. The High Court made a very important point: «It is not a crime to be a shell company per se. The maximum that the commercial register can do is to remove the name of such a company from the commercial register. But the shell company is involved in money laundering or tax evasion or for other illegal purposes, then the relevant provisions of the laws under the Money Laundering Prevention Act 2002, the Benami Transaction Prohibition Act 2016, the Income Tax Act 1961 and the Companies Act 2013 would be attracted. «Shell companies can be used to transfer the assets of a company to a new company without having the liabilities of the previous company. For example, when Sega Sammy Holdings bought Index Corporation from bankruptcy in June 2013, they formed a shell company called Sega Dream Corporation in September 2013, into which the former company`s valuable assets were transferred, including the Atlus brand and Index Corporation`s intellectual property. [5] This meant that the liabilities of the former company were left in the old company and Sega Dream had own ownership of all the assets of the former company.

The former Index Corporation was later dissolved. Sega Dream Corporation was renamed Index Corporation in November 2013. Shell companies may pursue legitimate business objectives. For example, you may act as a trustee for a trust and not engage in other activities on your own behalf. This structure creates limited liability for the trustee. A corporate envelope can also be formed around a partnership to create limited liability for partners and other business ventures or to isolate one part of a business from the risks of another party. Shell companies can be used to transfer assets from one company to a new one while leaving liabilities in the old company. In addition, SEBI has also established specific parameters to identify these shell companies, and these characteristics are: (a) absence of significant operational activities, (b) absence of significant assets and (c) debit transactions.

Before we get into the lens behind shell companies, it is important to note that it is a misconception that these shell companies are only established for illegal purposes, as there may be a situation where such a shell company is formed for a legitimate reason. Some of these legitimate objectives are: temporarily holding money when the parent company is going to start a new business, hiding while dealing with another company that has a bad reputation in the market, protecting assets from lawsuits, accessing foreign markets, hiding from being a target for criminals, to set the stage for a hostile takeover, et al. According to a 2013 experimental study in which researchers called for anonymous incorporation in violation of international law, one in four business service providers offered to provide services in violation of international law. [4] The fight against black money in today`s world is being noisily circumvented. Recently, the Securities and Exchange Board of India (SEBI) announced that it would restrict trading activities in more than 300 companies in order to curb the accumulation of black money. Given these decisions, there are claims against letterbox companies everywhere. Therefore, it has become important to analyze what exactly constitutes a shell company and how it relates to black money. More importantly, what are the reasons that lead to such abuses? With these issues in mind, this article discusses the contours of the letterbox company in Part II. Subsequently, the legality of the shell company is analysed in Part III. After that, the legal provisions against letterbox companies for illegal purposes are discussed in Part IV. Finally, further steps taken by the State are presented in Part V and the concluding observations in Part VI. The Panama Papers leak in early 2016 revealed the financial and ownership details of more than 200,000 offshore shell companies and other companies set up by a law firm for their clients, many of which were created for wealthy individuals, politically exposed people and sanctioned parties.

Shell companies are often formed with complex ownership structures in jurisdictions that can be viewed as relaxed tax laws alongside financial institutions that offer opacity as a value proposition. Although these companies are legal in these jurisdictions, they have been used by beneficial owners to launder undeclared funds (funds derived from bribery/corruption), circumvent sanctions, fund illegitimate and illegal business interests, impersonate legitimate businesses, etc. Mosaic Fonseca, the law firm whose data leak is known as the «Panama Papers leak,» has allowed at least 30 people sanctioned by OFAC at the time to do business through shell companies. Another commonly heard term, «shell companies,» differs from «shell companies» in that shell companies typically have ongoing business activities, but the true nature of the business is obscured. Shell companies and shell companies are used for money laundering purposes. In 2016, a leak of 11.5 million documents to the Süddeutsche Zeitung revealed information about the owners of more than 214,000 shell companies run by the Mossack Fonseca law firm in Panama.