Centre’s Actions Against Shell Companies
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General Studies 2
- Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
General Studies 3
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
In news: The central government has asked states to complete identification of properties owned by deregistered companies at the earliest and ensure district administrations prevent transactions in those assets. Earlier, the names of around 2.25 lakh companies which have not been carrying out business activities for long have been struck off the official records and a number of directors associated with such firms have been disqualified.
What are shell companies?
- There is no clear definition for it. In the US, however, the Securities Act defines a shell firm as one that has no or nominal operations and assets. The assets must consist mainly of cash and cash equivalents with very little other assets.
- In other words, a shell company should not have active business operations or assets. But they are used to make financial transactions.
- Many individuals and corporates abuse shell companies, either to avoid tax or use them as conduit for money laundering
The objective of the government of India is to clean corporate culture. India’s corporate culture should be very transparent and clear. The shell companies were creating lot of problem through various channels of money laundering, misuse of funds and transfer of funds to the other companies. Along with it, Sec 164 (2) (a) of the Companies Act, 2013, that pertains to disqualification of directors due to non-filing of financials and annual returns for three years, is applicable to all types of companies, including private ones. India’s growing economy is the fastest moving economy and this is major breakthrough in the economy that the government has motivated the corporate culture that shell companies should not operate in the system.
Use of resources
The companies should create efficiency and efficacy of our natural resources, of resources from the financial sector and from the factors- land, labour, capital, and entrepreneurship. If we are not able to use them efficiently then they create inefficiency in the system and the economic cost is huge because of the misuse of these kinds of assets. These companies are debiting the employment within the economy. Whatever assets they are holding is not put to any kind of productive use. So there is a macroeconomic reason why these shell companies are being investigated. These assets should be used in a productive manner to create employment opportunities as employment is the major problem in the economy. Lot of employment opportunities have to be created because not much employment is generated as compared with many comparable economies.
The next step is to rectify the benami properties and how the resources were mis-utilised and how the resources were gapped from the system. There is a need to identify it and make them punishable which is for the benefit of the economy and for the benefit of young generation which is debarred from the employment opportunities.
Banking was also suffered as these are inter-related. The needy persons are not able to take credit from the banks because banks are facing huge NPAs due to creation of fictitious assets on paper as well as borrowing of large credits by such shell companies.
Cooperation with state government
Cooperation of the state government is required in terms of the assets holding especially immovable properties of shell companies. They also register sale and purchase of these properties. State government help is required firstly to identify their assets where they are located, what is the integrity behind those assets, how the land was allocated and how the provisions were made for them. These shell companies should not be dissolved without the help of the states and hence the state should come forward as prosperities of the states are the ambitious part of the whole process. They also have to create a lot of employment opportunities for the young public, tackle their fiscal deficit manuals and to allocate for the developmental activities.
However, it is not that so easy as afterall the conduct that is been challenged is criminal in nature and the state government have the overseeing authorities for these kind of immovable properties which are either in the name of the beneficiary or the person concerned or the person whoever has registered in his or her name or its name if it’s an entity. In addition, it also creates a nature of economic offence which will involve the state police. So centre has to gain lot of cooperation from states to fulfil the objectives.
Previous decision of central government like demonetisation was welcomed by the state government. Many states took decisions to facilitate people in their respective states and make demonetisation a successful attempt. When the GST regime was about to be implemented, the centre and the state worked together to ensure that there is sufficient trained man power to enforce the system.
Thus, in the same line, the central government is expecting good support from the state government to clean up corporate system because sometimes the bad element impact all the good companies too.
Going forward needs lot to be done at the ground level to clean up the system because this is the start-up of the system. Whole system has to be cleaned to give a push to economy and to the businesses. So the recovery of such kind of properties whether in cash or capital sitting ideal or immovable property is also subject to tax evasion and it is also not known whether income is being earned legally or illegally or still subject to tax. Either they will fight against system or they will try to evade the investigating authority. So the government taxation in terms of enforcing aadhar to identify individual through their mobile phone or computer or any kind of electronic device is very important.
Government will identify compliant and non-compliant companies and also talk to all the stakeholders. For the present cleanup of the system too, there are lot of agencies with the central government and at the state level also there are good departments. Hence, with the cooperation of the central and state agencies there are no difficulties to resolve all these issues.
Connecting the dots:
- What are shell companies and how to they affect the economy of a nation? Explain in brief.