Over 2.33 lakh shell firms struck off between 2019 and 2024, maximum 36,856 in Maharashtra

The INDIA Alliance has been crying hoarse over several money laundering scams involving luminaries from business world as well as the chief of Securities Exchange Board of India (SEBI), considered to be close to the ruling Bharatiya Janata Party (BJP). The role of Enforcement Directorate (ED) has also been under the scanner for selective targeting of suspects involved in financial frauds, largely through such shell companies and offshore shell entities, as alleged in Hindenberg Research report.

These Shell companies or dummy corporations, enrolled with the aim of fecilitating money laundering, reducing tax liabilities, concealing income, come handy as a key tool involved in many high-profile scandals.

Although there is no clear definition of the term ‘Shell Company’ in Companies Act, these are companies identified to be inactive as per the provision of sub section (1) of Section 455 of the Companies Act, 2013 (the Act). These companies have been found not to be carrying on any business or operation, or have not made any significant accounting transaction during the last two financial years, or have not filed financial statements and annual returns during the last two financial years.

In past five financial years, a whopping 2,33,566 such firms were identified and struck off between 2019-2020 and 2023-24 under section 248 (1) of the Companies Act, 2013 (the Act). The state of Maharashtra witnessed a maximum of 36,856 such firms being identified and struck off under the Act in the country followed by 35, 637 shell companies in Delhi and 22,644 dummy firms in Uttar Pradesh.

In the top-10 list of states with maximum number of Shell Companies being struck off has West Bengal on fourth spot with 20,304 such firms followed by 19,242 firms in Karnataka on fifth position. The remaining five states on the list include Tamil Nadu (16,143), Telangana (13,764), Haryana (9047), Rajasthan (8998) and Gujarat (8684) respectively.

Official records revealed, in past five financial years, a maximum of 82,125 shell companies were struck off in 2022-23, followed by 62,275 shell companies in 2021-22, 59,995 companies in 2019-2020, 16,465 companies in 2023-24 besides 12,706 companies were struk off in 2020-21 financial year respectively.

Further, under Section 248 (1) of the Act read with the Companies (Removal of names of companies from the Register of Companies) Rules, 2016 (Amended Rules, 2019), Registrar of Companies (ROCs) can also strike off companies for certain other violations also such as failure to commence business within one year of incorporation, not carrying on any business or operation for a period of two immediately preceding financial years and not making any application within such period for obtaining the status of a dormant company, not carrying on any business or operation, as revealed after the physical verification etc.

Shell corporations are often created in tax havens, and can be opened by opening a bank account and buying real estate. They can make it very difficult to identify and verify the ultimate ownership and involved parties, especially when companies cross borders

Benefits of Shell Companies

Tax benefits: Shell corporations are often used to avoid or reduce tax liabilities, or to conceal income.

Money laundering: Shell corporations are a key tool in money laundering schemes, and have been involved in many high-profile scandals.

Hiding identity: Shell corporations can be used to disguise business ownership from law enforcement or the public.

Raising funds: Startups may use shell corporations to raise funds before beginning business.

Hostile takeovers: Shell corporations can be used to conduct hostile takeovers.

Going public: Shell corporations can be used as a vehicle to go public.

Shell Companies identified and struck off during last five years