More rules likely to flush out 'shell' companies

The government may be readying a set of rules to shut down and further check the formation of shell companies.

By Dipak Mondal  
Thursday, September 6, 2018

The government may be readying a set of rules to shut down and further check the formation of shell companies. A committee constituted by the government in July 2018, to make recommendations for promoting better corporate compliance, last month submitted its report to the finance ministry. The recommendations of the committee also deal with the problem of mushrooming shell companies and the ways and means to check them.

For example, the committee recommends re-introduction of the provision, whereby a company needs to declare commencement of business.

The provision was originally there in the Companies Act 2013 but was done away with for the sake of ease of doing business. The provision required a company to declare that it has received the value of the shares by the subscribers and has filed a form for verification of its registered office, within 180 days of incorporation.

The committee in its report says that such a provision would help in early detection and striking off of inactive companies.

It also recommends including non-maintenance of a registered office as one of the grounds for striking off the name of a company from the Registrar of Companies, under Section 248 of the Companies Act.

According to a PwC analysis, the move is to ensure that companies maintain a registered office to prevent the existence of paper companies.

Section 248 of the Companies Act, 2013, says that RoC has the right to remove the name of a company if it fails to start any business within one year of incorporation or does not carry out any operations for three years.

It should be noted that ever since the Section 248 was notified in December 2016, over 2.26 lakh companies have been struck off and another 2.25 lakh have been identified for being struck-off.

The committee also recommends disqualification of directors, who are holding directorship beyond the maximum limit prescribed under the act.

It also pointed out that the Ministry of Corporate Affairs should have a system in place, which disallows people from holding directorship beyond the prescribed limit.

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