Dissertation - Legality of Shell Companies As Per Company's Law

Legality Of Shell Companies As Per Companies Act
Dissertation Submission
To Post Graduate Department of Law
Maharashtra National Law University Mumbai
in partial fulfilment of the requirement for award of degree of
Masters of Laws
Submitted By:
Abhay Kaul
Enrol No - 2022m003
LL.M.
Batch 2022-23
Under the guidance and supervision of
CS Shama Shah Madam
ASSISTANT/ASSOCIATE PROFESSOR

CERTIFICATE
This is to certify that this dissertation titled Legality of shell companies as per companies act”, has been
prepared by Abhay Kaul , 2022M003 pursuing one year LL.M, programme from this institution, under my
supervision in partial fulfillment of the requirement for the award of the degree of LL.M by this institution.
Date: 05/06/2023
Name of Supervisor
Assistant Professor,
DECLARATION
DECLARATION
I the undersigned, hereby declare that the research work done on the topic titled “Legality of shell
companies as per companies act” is written and submitted under the guidance of CS Shama Shah madda
Assistant/Associate Professor, Maharashtra National Law University Mumbai.
The finding and conclusions drawn in dissertation are based on the data and other relevant information
collected by me during the period of my research study for the award of LL.M. degree in Post graduate
Department (Law) of Maharashtra National Law University Mumbai.
I further declare that thesis submitted on the research study is my original work and I have not copied
anything from any report of this nature while preparing this dissertation. The material obtained from any
other source has been duly acknowledged in the dissertation. It is further declared that to the best of my
knowledge that it is my original work. Neither the work nor any part thereof is published in any journal or
anywhere else.
If at all there are any lapse in acknowledging the source the researcher shall responsible and not the
guide.
Abhay Kaul
2022M003
ACKNOWLEDGEMENT
It is pleasant duty for me to make acknowledgement for the guidance received from esteemed teachers and
friends. I hereby acknowledge my sincere gratitude and indebtedness to my supervisor SHAMA SHAH,
Assistant professor, Maharashtra National Law University Mumbai, for her scholarly guidance and
affectionate encouragement and impeccable inputs given to me from time to time. Without h er
indispensable help, this work would not have been possible. Her critical approach towards the subject during
my research and thought-provoking discussion during the course of this research has helped me a lot to
enrich my knowledge. Her guidance has been particularly valuable in completing this research work.
I would be failing in my duty without extending my gratitude and revered gratefulness to Vice Chancellor,
Prof. Dr. Dilip Ukey, who has always been sincere and helpful. Without his productive guidance, this
dissertation would never has seen the light.
I also extend my appreciation and thankfulness to the staff of Maharashtra National Law University Mumbai
for their assistance. A share of gratitude is also reserved for all the scholars for their seminal work that has
greatly helped in building my theoretical foundation on the subject. I would also like to thank all the other
professor who have taught me about the existing scenario of the topic over the past year of my pursuit of the
degree.
Furthermore, I don’t claim all the information in this dissertation is included perfectly. There may be
shortcomings, factual error, mistaken opinion which are all mine and I alone am responsible for those.
Lastly, I thanks all my colleagues who helped me out during my research. I am indebted to my family
members for their love and moral support throughout the duration of research.
LIST OF ABBREVIATIONS
1. Anti-Money Laundering - AML
2. Central Board of Direct Taxes - CBDT
3. Companies Act 2013 - CA 2013
4. Financial Action Task Force - FATF
5. Foreign Contribution (Regulation) Act - FCRA
6. Foreign Direct Investment - FDI
7. Goods and Services Tax - GST
8. Income Tax Act - ITA
9. Indian Penal Code - IPC
10. Know Your Customer - KYC
11. Ministry of Corporate Affairs - MCA
12. Money Laundering - ML
13. Prevention of Money Laundering Act - PMLA
14. Registrar of Companies - ROC
15. Reserve Bank of India - RBI
16. Securities and Exchange Board of India - SEBI
17. Serious Fraud Investigation Office - SFIO
18. Shell Company - SC
19. Tax Evasion - TE
20. Transfer Pricing - TP

TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION...................................................................................................................1
RESEARCH QUESTIONS........................................................................................................................2
OBJECTIVE OF THE STUDY.................................................................................................................2
SCOPE AND LIMITATIONS....................................................................................................................2
RESEARCH METHADOLOGY................................................................................................................3
CHAPTER-2 THEORETICAL FRAMEWORK/LITERATURE REVIEW.............................................................5
PLACEMENT........................................................................................................................................7
LAYERING -.........................................................................................................................................7
INTEGRATION -....................................................................................................................................7
CHAPTER- 3..........................................................................................................................................11
CHAPTER-4 LEGAL FRAMEWORK FOR SHELL COMPANIES UNDER THE COMPANY'S ACT...................12
NOT COMMENCING BUSINESS...........................................................................................................14
NOT CARRYING ANY BUSINESS OR OPERATION...............................................................................15
NON-PAYMENT OF SUBSCRIPTION BY SUBSCRIBERS.......................................................................15
DEFAULT IN HAVING A REGISTERED OFFICE AFTER INCORPORATION.............................................16
CHAPTER- 5 EXAMINING THE LEGALITY OF SHELL COMPANIES & JUDICIAL DECISIONS..................20
COMPANIES ACT AND SHELL COMPANIES........................................................................................21
SEBI AND OTHER REGULATIONS.......................................................................................................22
JUDICIAL AND REGULATORY DEBATES.............................................................................................24
CHAPTER- 6 REGULATORY MEASURES AND CHALLENGES..................................................................27
REGULATORY MEASURES TO LEGALLY TACKLE SHELL COMPANIES...............................................27
CHALLENGES RELATING TO SHELL COMPANIES...............................................................................30
CHAPTER- 7 RECOMMENDATIONS AND FUTURE DIRECTIONS ON LEGALITY OF SHELL COMPANIES. 33
REFERENCES.........................................................................................................................................36
CHAPTER 1: INTRODUCTION
Shell Companies are not defined in the Companies Act, 2013 and the Companies Act, 1956. But in
the Assam Co. India Ltd. Vs. Union of India, according to the Guwahati High Court “shell
companies are companies having only a nominal existence, i.e., it exists only on paper without
having any office and employee. Such company is a corporate entity without having active business
operations or significant assets. Such company may be used as a deliberate financial arrangement
providing service as a tool or vehicle of others without itself having any significant assets or
operations. Interestingly, the High Court also observed that shell companies are identified as
companies which are used for tax evasion or money laundering, i.e., channelizing crime tainted
money or proceeds of crime into the formal economy.”1
According to the Companies Act, 20132 and the Companies Act, 19563 Owning a shell business is
not against the law, as long as you don't use it to do illegal things. Shell companies are often used to
avoid taxes, launder money and turn “black” money into “white” money, make money through Ponzi
schemes, and hide the names of the real owners. As we've seen, it's not illegal to own a shell
business, but it is illegal to use them, which is what most people do these days. Money laundering
must be the most well-known illegal use of a shell business. Since secret companies don't have basic
information about who owns them or how money moves through them, they are the perfect place to
move money from illegal sources.
RESEARCH QUESTIONS
The research questions which can be identified on the topic of the legality of the shell companies as
per the Company’s Act, i.e., the Companies Act, 2013 and the Companies Act, 1956 are as follows:
 Are shell companies governed by the Company’s Act, i.e., the Companies Act, 20134 and the
Companies Act, 19565?
 Are shell companies legal as per the Company’s Act, i.e., the Companies Act, 2013 and the
Companies Act, 1956?
1
“Assam Company India Ltd and Ors. v. The Union of India and Ors. (2018) SSC Online Gau 1735
2
The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
3
The Companies Act, 1956, No. 1, Acts of Parliament, 1956 (India).”
4
“The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).”
5
 What are the penalties if it is found that the shell companies are not legal as per the
Company’s Act, i.e., the Companies Act, 2013 and the Companies Act, 1956?
 What are the other laws which govern the topic of the legality of the shell companies?
 Are shell companies legal as per those laws?
 What are the overall liabilities, penalties if it is found that the shell companies are not legal as
per those laws?
These were some of the research questions which can be identified on the topic of the legality of the
shell companies as per the Company’s Act, i.e., the Companies Act, 2013 and the Companies Act,
1956.
OBJECTIVE OF THE STUDY

The objective and the aim of this research paper on the topic of the legality of the shell companies as
per the Company’s Act, i.e., the Companies Act, 2013 and the Companies Act, 1956 is to find the
whether the Shell companies are governed by the Company’s Act, i.e., the Companies Act, 2013 and
the Companies Act, 1956, whether Shell Companies are illegal as per the Company’s Act, i.e., the
Companies Act, 2013 and the Companies Act, 1956, whether Shell companies are liable to penalties
as they are not legal as per the Company’s Act, i.e., the Companies Act, 2013 and the Companies
Act, 1956 & whether the Other laws also govern the topic of the legality of the shell companies,
whether the Shell Companies are illegal as per those laws and whether the Shell companies are liable
to penalties as they are not legal as per those laws.
SCOPE AND LIMITATIONS
In this paper, we will talk about whether or not shell businesses are legal under the Company's Act.
First, we will come up with some research questions that need to be answered in order to find out if
shell companies are legal under the Companies Act, 2013 and the Companies Act, 1956. The
objectives regarding the Topic – “Legality of shell companies as per the Company's Act” will also be
discussed, which primarily revolve about the details of how this specific study or research paper is
appropriate and required at this particular contemporary and modern time when the issue of shell
companies is in the news a lot, particularly after the Adani – Hindenburg issue in which the primary
focus of the whole crisis revolves around shell companies. We will also discuss some important case
laws on the topic and will analyse their implementation and applicability by the Judiciary bodies and
Regulatory authorities of the country. Also, for better understanding we will consider Example and
case studies on the matter.
During the research several limitations were also acknowledged. Mainly, the data on which our
research is based and conclusions have been made being the secondary data and being collected in
past, that is why there are chances that there can be some deviation form the best conclusion we can
make. Another limitation is that if our judiciary or regulating authorities give new judgments and
make new laws in future then the credibility of our research will be decreased because of the change
in complete concept. These were the limitation of our research topic,
RESEARCH METHADOLOGY
This research paper's method is based on Doctrinal research, and it concentrates on existing legal
concepts, doctrines, laws, regulations, cases, and additional legal authorities that apply to Shell
companies, such as the Companies Act, 2013 6 and the Companies Act, 19567. By looking at legal
texts and materials, the goal of the study is to understand where the law is now and the way its
principles are used and interpreted. Since it is based on secondary sources, the goal of this study is to
look at and judge the available literature and sources on the topic of study. To find applicable studies,
papers, and other additional sources, a thorough review of the literature will be done.
Academic databases, digital libraries, and reliable resources will be utilised for data collection. On
the basis of their trustworthiness, authority, and novelty, the sources selected will be evaluated
critically. The data analysis will involve a summary of the literature's conclusions, a recognition of
trends and patterns, and an evaluation of the positive and negative aspects of the existing studies. The
results will be analysed and debated in light of the study's aims and questions. The conclusion of the
study will include a summary of the primary results with an emphasis on their importance, and
recommendations for further study or implementation. To make sure that sources are recognised and
uphold academic honesty, appropriate referencing and footnotes will be employed.
6
7
CHAPTER-2 THEORETICAL FRAMEWORK/LITERATURE REVIEW
Instead of evoking images of a paradisiacal setting, the words “Panama” and “Paradise” have often
been used in recent years to refer to “shell corporations” set up in offshore tax havens. “Shell
companies” are nothing more than a “cover,” “protective layer,” or “outer cover” and sometimes
exist just on paper without any tangible assets, liabilities, or activities. This means they have no net
economic impact but do provide the building the protections afforded to a corporation. Efforts to
regulate and reduce the proliferation of shell corporations in India have been highlighted in recent
media and government memos. While the government has made some positive steps, there are still
major problems with the way things are run, implemented, and standardised.
Section 248 of the Act addresses the process for dealing with shell corporations. When the Registrar
has “reasonable cause to believe that (a) a company has failed to commence its business within one
year of its incorporation;...or (c) a company is not carrying on any business or operation for a period
of two immediately preceding financial years and has not made any application within such period
for obtaining the status of a dormant company under section 455, he shall send a notice to the
company...of his intent to dissolve the company under section 248 (1) of the For example, Section 5
of the same statute states, “At the expiration of the time mentioned in the notice, the Registrar may,
unless cause to the contrary is shown by the company, strike of its name from the register of
companies....” The certificate of incorporation granted to a company that has been dissolved
according to Section 248(5) is assumed to have been revoked as of the effective date of Section 250.
However, the National Company Law Tribunal accepts appeals from the RoC's decision within three
years. When the RoC believes that a corporation has been struck off in error or on the basis of
inaccurate information, it may file such an appeal. Prior to its notification in December 2016,
Sections 248–252 of the Companies Act, 1956 (1956 Act) were the controlling legislation.8
The new provisions of the Act are found in sections 249 and 250.Section 248 of the Act and Section
560 of the 1956 Act have very similar schemes, with minor differences in processes. Case law
8
A RAMAIYA, GUIDE TO THE COMPANIES ACT (LexisNexis, 18th Edition, 2015), at 4342.
interpreting the substance of Section 560 of the 1956 Act should, in theory, also apply to Section 248
of the Act. In U.N. Mandal's Estate Private Ltd. 9, the Calcutta High Court ruled that a company is not
in operation if its directors and shareholders never met, if its list of members, returns, balance sheet,
and bank accounts were never filed, and if its properties were never dealt with, sold, or transferred.
The court will only reinstate a company if it is convinced that: (a) the applicant was a creditor or
contributory at the time of dissolution; (b) the company is solvent; and (c) the company was
conducting business on the date of striking off.10 The MCA has also relied on Section 164(2) of the
Act in its pursuit of sham companies. Article 164 (2) states:
“No person who is or has been a director of the company which- (a) has not filed financial
statements or annual returns for any continuous period of three financial ……………….shall be
eligible to be re-appointed as a director of that company or appointed in other company for a period
of five years from the date on which the said company fails to do so.”
The Prime Minister's Office established the Task Force on Shell Companies (“Task Force”) in
February 2017 with the “mandate to check in a systematic way, through a coordinated multi-agency
approach, the menace of companies indulging in illegal activities including facilitation of tax evasion
and commonly referred to as 'shell companies.”11 The Task Force is jointly chaired by the Revenue
Secretary and the Secretary, Ministry of Corporate Affairs (“MCA”). The progress made in
eradicating shell firms thanks to the efforts of this Task Force is not insignificant. More than 2 lakh
(two lakh) firms have been detected and their names have been removed from the Registrar of
firms(“RoC”) under Section 248 of the Companies Act, 2013 (“Act”).
The essence of the law is found in Section 248, one of the few current statutes that aims to limit the
use of shell businesses. Where a company has failed to commence business within 1 (one) year of
incorporation, or where the company has not been carrying on any business or operation for a period
of the preceding 2 (two) financial years and has not applied for dormant company status 12, Section
248 grants the Registrar the authority to remove the name of any such company from the RoC.
9
AIR 1959 Cal 493.
10
Portrafram Ltd., 1986 BCLC 533 (Ch D); A RAMAIYA, GUIDE TO THE COMPANIES ACT, (LexisNexis
Butterworths Wadhwa, 17th Edition, 2010) at 5485.
11
https://pib.gov.in/newsite/PrintRelease.aspx?relid=179863
12
Section 248(I) of the Companies Act, 2013.
Limited liability corporations and other commercial organisations without substantial assets or active
business operations are often referred to as Shell firms. Shell businesses often have no employees, no
physical presence outside of postal addresses, and provide very little to no independent economic
value. They are routinely used to protect identities and/or conceal ill-gotten wealth. They are an
appealing vehicle for those consumers and have one main purpose: to assist their clients in
converting unaccounted money into white money or vice versa. The four fundamental procedures in
converting unexplained funds into unsecured loans
PLACEMENT - The owner (beneficiary) of unaccounted money identifies the brokers and operators
and chooses the method for converting the unexplained funds through legal channels. The
unexplained money is handed over to the broker in lots when the transaction is concluded at a certain
agreed-upon percentage of commission with the assistance of another broker who specialises in cash
transactions, the broker made deposits into bank accounts that he manages. Since banks are obligated
to record high-value transactions, money is often deposited over time in tiny amounts. Of the three
phases, this one is the riskiest and least well-organized. This is due to the fact that accounts are often
cancelled after a specific volume of transactions and become inactive quickly.
LAYERING - This involves distributing the funds around several financial institutions and numerous
shell firms through wire transfers and bank-to-bank transfers. The primary concept is to modify the
shape of the money while moving it between numerous bank accounts and various shell businesses.
It's considered the most difficult part of the procedure since the main goal is to make the money as
untraceable as possible. In the case of unsecured loans, the funds are distributed among numerous
businesses run by the operator or with the assistance of other brokers, where the availability of funds
may be artificially manipulated in legal ways, such as through share applications, investment
proceeds from sales, loan refunds, or fictitious billing. It is difficult to identify the original source
due to this layering. They are commonly used to conceal sources of unexplained money and/or
protect identities.
INTEGRATION - In this stage, unexplained funds are legally re-enter the economy in the form of
unsecured loans in the hands of the recipient firm. The process will often include a straightforward
loan from the recipient firm, with or without interest. The recipient may use the funds as unsecured
loans from these shell businesses since they look to be coming from a legitimate source and are thus
useable. Unaccounted funds are taken into the firm via money laundering and used for carrying out
legal operations. Disposition is the fourth and final step, in which the borrower—the de facto true
owner—shows the unsecured loans as repayments to these shell firms. Finally, the shell firms sent
these monies back to other businesses in accordance with the needs of the true owner, ostensibly
accounting for the transfer as purchases, costs, share capital, etc. by these shell companies. Tax
evasion is a widely recognised idea. Everybody has the right to manage their affairs in a way that
reduces their tax burden. However, the methods and behaviour used in such circumstances are
intentional tax evasion rather than tax avoidance. The act is more akin to money laundering tax
evasion. These are instances of blatant human ingenuity carried out with the blatant and malicious
goal of stealing money. Examining a Shell company's financial statements shows that the business
routinely posts a little profit or loses money and has no profitable commercial endeavours. These are
common signs of shell businesses that provide little to no independent economic value. Any genuine
or concrete commercial activity could not be tied to the high value financial transaction. They were
discovered to be only performing the necessary legal work and rerouting the funds via banking
channels, which excludes these transactions from being regarded as legitimate in and of themselves.
At most, it identifies them as paper or shell corporations trying to pass off hotel records as legitimate
business transactions.
As a preface to exploring the motivations behind shell businesses, it is important to clarify that it is a
common fallacy that such organisations are solely set up for unlawful purposes. Some of these
reasons are to hide while doing business with another company that has a poor reputation in the
market, to protect assets from lawsuits, to gain access to foreign markets, to avoid being a target of
criminals, to set the stage for a hostile takeover, etc. However, as reported by several governmental
authorities, the following are the most common motivations for forming shell corporations: During
the demonetisation period, government officials learned that shell firms were being used illegally to
keep large sums of money. It was then discovered that these businesses had engaged in similar
behaviour for quite some time. To avoid paying taxes, many multinational firms create “shell”
companies in tax havens like the Cayman Islands or the British Virgin Islands 13. “Tax Havens” is the
common name for the locations. As a result, they avoid paying taxes on the assets by hiding them in
“shell” corporations. Countries like Switzerland and Panama are well-known for being tax havens.
Helpful for shielding true ownership, since the directors of shell firms seldom show up at the
13
https://bbcincorp.com/offshore/articles/the-bvi-vs-cayman-islands Last visited May 31 2023.
registered office. The true owners may protect their anonymity in this manner. Because of the
difficulty in determining the true identities of those participating in the aforementioned fraudulent
schemes, corporations often use shell firms to engage in these practises.
According to the Gauhati High Court14, neither the fiscal nor criminal legislation have a definition of
a shell business. The High Court has made an effort to define “shell companies” as businesses with
merely a paper presence, i.e., businesses without an actual office or staff. Such a corporation is a
corporate entity without substantial assets or running a business. With no major assets or activities of
its own, such a corporation may be utilised as a planned financial structure, offering services as a tool
or vehicle for others. The High Court made the interesting observation that shell firms are recognised
as businesses employed for tax evasion or money laundering, i.e., transferring criminally
contaminated funds or criminal profits into the legal economy.
When shell companies do what they're known to do and participate in illegal activities like tax
evasion and money laundering, they provide a significant barrier to economic growth. In India,
collaborating with such firms presents significant challenges. This is owing to the fact that Shell
companies are not subject to any particularly stringent legal regulation. There is also no legally
binding definition or grounds for acknowledgment. It's clear that dealing with shell companies
requires a methodical strategy. Furthermore, such a framework must make sure that legal
organisations that seem like shell firms are not given any extra hurdles to jump over as a result of
such legislation.
There should be a comprehensive, well-balanced definition of shell firms that is both wide enough to
fulfil all requirements for detecting unlawful shell companies and narrow enough to exclude all
authorised shell companies. Shell corporations are not technically illegal in India, but they represent
a significant threat to the country's economy since they are often used for criminal activities like tax
avoidance and money laundering. Since there are no rules that directly address shell firms, the
situation has gotten more precarious. In addition, there aren't enough reliable criteria to pinpoint
which shell businesses are really up to no good. This has made it more difficult for government
entities to determine whether a shell company's activities are lawful or not. To address all concerns
14
Assam Company India Ltd. And Anr vs The Union Of India And 2 Ors on 7 March, 2019
about shell businesses, a comprehensive definition is required. This definition must be well-rounded,
with an acceptable scope and a logical structure. However, recent actions by the Ministry of
Corporate Affairs, the Income Tax Department, and the Task Force to strike down shells with illegal
purposes can be looked up as one of the first steps towards reducing the impact of shell companies
on the Indian economy.
CHAPTER- 3 GLOBAL CONTEXT
The topic of shell companies has been a matter of discussion and examination within the worldwide
commercial environment. The legality and ethical implications of entities that are frequently
identified by their restricted or negligible operations are subject to inquiry. The objective of this
study is to investigate the legal status of shell companies in the international arena, scrutinizing the
legal structures and statutes in diverse nations and underscoring the significance of assessing their
legality.
The term "shell companies" refers to business entities that lack active business operations or
significant assets. The primary purpose of shell companies is to serve as a vehicle for various
financial transactions, such as mergers and acquisitions, tax avoidance, and money laundering.
Shell companies, which are also commonly referred to as "mailbox companies" or "paper
companies," are legal entities that possess a nominal existence but do not engage in significant
business activities. Usually, they are established with the purpose of retaining assets, executing
financial transactions, or enabling intricate corporate frameworks. Although certain shell companies
have valid functions like tax planning, asset safeguarding, or confidentiality, others are employed for
unlawful purposes such as tax evasion, money laundering, or concealing beneficial ownership.
THE IMPORTANCE OF EXAMINING LEGALITY:
In light of the potential for malfeasance and exploitation linked to shell companies, it is imperative to
scrutinize their legality.15 Comprehending the legal structure and regulatory policies that oversee
shell corporations yields valuable perspectives on the strategies employed to thwart unlawful
practices, uphold the soundness of monetary frameworks, and guarantee openness. Furthermore, the
examination of the legality of shell companies facilitates the identification of regulatory and
enforcement deficiencies that can be remedied to reduce risks and foster ethical business conduct.
15
Findley, Michael, Daniel Nielson, and Jason C. Sharman. Global Shell Games: Testing Money Launderers' and
Terrorist Financiers' Access to Shell Companies. Griffith University Centre for Governance and Public Policy, 2012.
UNITED STATES OF AMERICA
The regulatory framework in the United States has been designed to effectively tackle the issue of
shell companies' legality and curb any illicit activities associated with them. In this context, it is
noteworthy that two regulatory measures hold considerable importance, namely the Securities
Exchange Act of 1934 and the Anti-Money Laundering (AML) laws.16
The Securities Exchange Act of 1934, which is under the jurisdiction of the Securities and Exchange
Commission (SEC), governs securities transactions and strives to safeguard investors. Although shell
companies are not explicitly mentioned in the Act, its provisions have indirect implications on their
activities. As per Section 12(g), corporations that exceed a certain threshold of shareholders and
assets are obligated to register with the Securities and Exchange Commission (SEC) and adhere to
the prescribed reporting obligations. This particular clause serves the purpose of promoting
transparency and accountability within the financial markets, with the potential to discourage the
utilization of shell companies for fraudulent activities.
Apart from the Securities Exchange Act, Anti-Money Laundering (AML) regulations are pivotal in
the fight against unlawful practices linked to shell corporations. The Financial Crimes Enforcement
Network (FinCEN), which operates as a bureau under the U.S. Department of the Treasury, is
responsible for enforcing anti-money laundering (AML) regulations. As part of this responsibility,
FinCEN mandates that financial institutions must implement comprehensive due diligence measures.
The aforementioned measures encompass the implementation of customer identification protocols,
the reporting of potentially suspicious activities, and the application of heightened due diligence
measures for customers deemed to be of high-risk, such as those associated with shell corporations.17
The reporting of beneficial ownership constitutes a crucial element of anti-money laundering (AML)
regulations within the jurisdiction of the United States. Financial institutions, such as banks, are
obligated to ascertain the identities of the beneficial owners of accounts maintained by legal entities,
which may include shell companies. The objective is to mitigate the risk of money laundering and
16
Leasure, Peter. "Asset recovery in corruption cases: Comparative analysis identifies serious flaws in US tracing
procedure." Journal of Money Laundering Control 19.1 (2016): 4-20.
17
Bateman, Larry R. Shell companies: A regulatory and legal framework. Diss. Utica College, 2016.
terrorist financing by enhancing transparency and impeding the ability of individuals to conceal their
identities through the use of these entities. Transactions involving shell companies are subject to
enhanced due diligence measures, which mandate financial institutions to carry out supplementary
scrutiny and risk evaluations.
The Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network
(FinCEN) are responsible for the implementation of regulatory measures. The Securities and
Exchange Commission (SEC) oversees adherence to the Securities Exchange Act and initiates
enforcement measures against firms that contravene the Act's provisions. In contrast, FinCEN
prioritizes the enforcement of anti-money laundering (AML) regulations and collaborates closely
with financial institutions to identify and thwart money laundering endeavors.18
The United States has augmented its endeavors to counteract the unlawful exploitation of shell
corporations in recent times. The year 2020 witnessed the enactment of the Corporate Transparency
Act, which mandates specific companies, including shell companies, to reveal their beneficial
owners to the Financial Crimes Enforcement Network. The objective of this legislative measure is to
augment transparency and discourage the exploitation of shell corporations for unlawful intentions.
Despite the regulatory measures and enforcement efforts implemented in the United States to address
the misuse of shell companies, there are still persistent challenges that need to be addressed.
Identifying the authentic beneficial proprietors of said entities can prove to be intricate, particularly
if they are organized in a manner that intentionally conceals ownership. In addition, the
implementation of regulatory measures may exhibit variability, necessitating ongoing surveillance
and collaboration among regulatory entities to adequately tackle the matter.
UNITED KINGDOM
18
Albrecht, Chad, et al. "The use of cryptocurrencies in the money laundering process." Journal of Money Laundering
Control 22.2 (2019): 210-216.
The United Kingdom has established a comprehensive legal framework to govern the legality of
shell companies, with the objective of promoting accountability, preventing money laundering, and
ensuring transparency. The legality of said entities and the potential risks stemming from their
misuse can be effectively addressed through the implementation of various regulatory measures and
disclosure requirements.
The Companies Act 2006 is the predominant legal framework that regulates the establishment and
functioning of companies in the United Kingdom, encompassing shell companies as well. The
legislation delineates the lawful mandates, obligations, and accountabilities of corporate executives
and furnishes stipulations for the administration of corporate affairs. Although the Act does not
explicitly focus on shell companies, it creates a structure that fosters openness and responsibility
within the business realm, thereby indirectly influencing the activities of shell companies.
The United Kingdom has enforced Anti-Money Laundering (AML) regulations as a measure to
counteract the unlawful exploitation of shell companies, in conjunction with the Companies Act. The
aforementioned regulations entail the imposition of obligations upon entities to deter and prevent
activities related to money laundering and terrorist financing. The AML obligations that businesses,
including shell companies, must comply with are delineated in the Money Laundering Regulations,
which integrate the EU's Fifth Money Laundering Directive (5MLD).19
The maintenance of a Persons with Significant Control (PSC) Register is a noteworthy component of
the regulatory framework in the United Kingdom. The purpose of this registry is to ascertain and
reveal the persons who possess ultimate control and reap the advantages of a corporation. It is
mandatory for corporations, including those operating under shell entities, to disclose and record the
identities of their beneficial owners. This measure promotes transparency and accountability with
respect to the ownership and management of such entities. The PSC Register facilitates the access of
information on beneficial owners by regulatory authorities, law enforcement agencies, and financial
institutions. This enables the enhancement of due diligence and the mitigation of risks associated
with shell companies.20
The Register of Beneficial Owners is a significant component of the regulatory framework in the
United Kingdom, which was implemented in accordance with the Money Laundering Regulations.
This particular registry mandates that specific entities, such as shell corporations, must provide
19
Nitu, Alin Sergiu, and Aurelian Constantin. "Shell Companies-White Collars Mafia." Acta Universitatis Danubius.
Œconomica 18.3 (2022).
20
Findley, Michael, Daniel Nielson, and Jason C. Sharman. Global Shell Games: Testing Money Launderers' and
Terrorist Financiers' Access to Shell Companies. Griffith University Centre for Governance and Public Policy, 2012.
details regarding their beneficial owners. The registry serves as a centralized repository of
information regarding beneficial ownership, which can be accessed by pertinent authorities such as
financial institutions, law enforcement agencies, and other relevant entities. The implementation of
such measures serves to augment transparency, curb the occurrence of money laundering, and
facilitate the process of investigating and prosecuting illicit activities.
The onus of ensuring compliance with regulatory measures and disclosure requirements lies with
Companies House, which serves as the official registrar of companies in the United Kingdom. The
incorporation and registration of companies, along with the maintenance of several registers such as
the PSC Register and the Register of Beneficial Owners, falls under the purview of Companies
House. The regulatory body known as Companies House is responsible for ensuring adherence to
legal mandates and assumes a pivotal function in overseeing and scrutinizing possible instances of
exploitation involving shell corporations.
Furthermore, the National Crime Agency (NCA) bears the responsibility of investigating and
addressing money laundering and other financial offenses. The NCA collaborates closely with
Companies House and other pertinent entities to detect and scrutinize dubious undertakings,
encompassing those that pertain to shell corporations. The endeavors made by individuals aid in
upholding the soundness of the financial system and discouraging the exploitation of shell companies
for unlawful intentions.
Despite the UK's implementation of a comprehensive legal framework and regulatory measures,
there are still obstacles to overcome in order to ensure the efficient enforcement of these regulations
and to address the issue of shell company misuse. Identifying the accurate beneficial ownership of
such entities can be intricate, particularly if their structure is intentionally designed to obscure
ownership. Sustained collaboration and harmonization among regulatory entities, law enforcement
organizations, and financial establishments are imperative to tackle these predicaments and uphold
the UK's commercial milieu's soundness.21
SINGAPORE
The legal framework in Singapore pertaining to shell companies is comprehensive and designed to
promote transparency, prevent money laundering, and uphold the integrity of the corporate sector.
21
Supra Note 19.
The municipality has instituted various regulatory protocols and disclosure mandates to tackle the
legality of these establishments and alleviate the hazards linked to their misapplication.
The Companies Act serves as the principal statutory framework that regulates the establishment and
functioning of corporations in Singapore, encompassing shell corporations as well. The legislation
delineates the lawful mandates, obligations, and accountabilities of corporate executives and
furnishes stipulations for the administration of organizations. Although shell companies are not the
primary focus of the Act, it creates a structure that fosters transparency and responsibility within the
corporate industry, thereby exerting an indirect influence on the activities of shell companies.22
Singapore has established regulations for Anti-Money Laundering (AML) and Countering the
Financing of Terrorism (CFT) in conjunction with the Companies Act to address the unlawful
exploitation of shell companies. The enforcement of these regulations falls under the purview of the
Monetary Authority of Singapore (MAS), which serves as the central bank of the nation. The
Monetary Authority of Singapore (MAS) has adopted a risk-based strategy that mandates financial
institutions and other entities to establish strong anti-money laundering and countering the financing
of terrorism (AML/CFT) measures. These measures include conducting customer due diligence,
maintaining accurate records, and reporting any suspicious transactions.
A noteworthy feature of the regulatory framework in Singapore pertains to the obligation imposed on
companies to uphold records of their members, directors, and shareholders. The utilization of
registers facilitates transparency and enables regulatory bodies to determine the ownership and
control of corporations, including those categorized as shell companies. The disclosure of significant
shareholdings and alterations in shareholdings is mandated by the Companies Act, thereby ensuring
the identification of beneficial owners.
The Accounting and Corporate Regulatory Authority (ACRA) is the official organization tasked with
the management and implementation of corporate regulations within Singapore. The Accounting and
Corporate Regulatory Authority (ACRA) is responsible for the regulation of company registration,
ensuring adherence to the Companies Act, and upholding the precision and authenticity of corporate
data. The monitoring and investigation of potential abuses of shell companies and the subsequent
enforcement actions are deemed crucial responsibilities of ACRA.
The Variable Capital Company (VCC) framework has been implemented by Singapore as a legal
structure for investment funds, offering an alternative option. The Variable Capital Company (VCC)
22
Newson, Marc, and Craig Deegan. "Global expectations and their association with corporate social disclosure practices
in Australia, Singapore, and South Korea." The International Journal of Accounting 37.2 (2002): 183-213.
framework enables investment fund managers to create and oversee investment funds in the form of
corporate entities within the jurisdiction of Singapore. The VCC framework, although not
exclusively directed towards shell entities, amplifies regulatory supervision and lucidity in the realm
of investment funds. This, in turn, curtails the likelihood of any possible abuse.23
In addition, Singapore has forged robust partnerships and implemented effective channels for
collaboration and dissemination of information with regulatory and law enforcement entities on a
global scale. The aforementioned entails engagement in global endeavors such as the Financial
Action Task Force (FATF) and upholding worldwide norms and optimal methodologies in the fight
against money laundering and terrorist financing. The cooperative efforts among entities enhance the
efficacy of Singapore's regulatory structure and mitigate transnational obstacles linked to shell
corporations.
Despite the implementation of comprehensive measures by Singapore to address the legality of shell
companies, there are still existing challenges. Identifying the accurate beneficial ownership of such
entities can prove to be intricate, particularly if they are organized in a manner that intentionally
obfuscates ownership. The preservation of Singapore's business environment's integrity necessitates
the implementation of continuous monitoring, risk assessments, and collaboration among regulatory
bodies, law enforcement agencies, and financial institutions.
GERMANY
The legal framework governing shell companies in Germany is predominantly based on the German
Commercial Code (Handelsgesetzbuch) and the German Stock Corporation Act (Aktiengesetz). The
aforementioned statutes serve as the lawful foundation for the establishment and functioning of
business entities, encompassing those commonly referred to as shell corporations. Although shell
companies are not subject to specific regulations, the legal framework mandates broad guidelines for
corporate registration, shareholder entitlements, and corporate administration, which have an indirect
influence on the activities of shell companies.
Germany has enforced Anti-Money Laundering (AML) regulations as a measure to counteract the
illegitimate employment of shell companies, in conjunction with the Commercial Code and the Stock
Corporation Act. The regulatory framework for anti-money laundering (AML) in Germany is
23
Elliott, Lorraine. "Legality, criminality and agency beyond the state: forest governance, illegal logging and associated
trade." Osgoode CLPE Research Paper 52 (2013).
predominantly founded on the directives of the European Union and global benchmarks, specifically
the Fourth and Fifth Anti-Money Laundering Directives (4AMLD and 5AMLD).
As per the Anti-Money Laundering (AML) regulations, various entities, including shell companies,
are obligated to comply with the customer due diligence (CDD) requirements. The aforementioned
tasks encompass the process of ascertaining and validating the identity of individuals who stand to
gain from a business transaction, as well as the upkeep of documentation pertaining to said
transactions and commercial associations. The regulations require the reporting of transactions that
are deemed suspicious to the Financial Intelligence Unit (FIU) Germany. This unit is tasked with the
responsibility of receiving, analyzing, and disseminating financial intelligence to combat the
activities of money laundering and terrorist financing.24
In addition, the Transparency Register has been implemented in Germany with the objective of
augmenting transparency and thwarting the occurrence of money laundering and unlawful
undertakings.25 The regulatory framework mandates that enterprises, encompassing shell
corporations, divulge details pertaining to their beneficial proprietors. The aforementioned pertains to
data regarding the identification, proprietorship, and management of the organization. The
Transparency Register is made available to proficient regulatory bodies, monetary establishments,
and other entities with legal obligations to perform appropriate investigations and alleviate the
hazards linked with shell corporations.
The responsibility for enforcing regulatory measures and disclosure requirements in Germany is
assigned to multiple authorities. The Federal Financial Supervisory Authority (BaFin) serves as the
principal regulatory body responsible for ensuring adherence to anti-money laundering (AML)
regulations among financial institutions and other entities with legal obligations. The BaFin is
responsible for ensuring that these entities have effective anti-money laundering (AML) systems in
place. It also carries out routine inspections and investigations to identify and prevent instances of
money laundering that may involve shell companies.
Apart from BaFin, the Financial Intelligence Unit (FIU) of Germany assumes a pivotal function in
the fight against money laundering and terrorism financing. The Financial Intelligence Unit (FIU) is
responsible for receiving and scrutinizing reports of transactions that are deemed suspicious,
particularly those that involve shell companies. The intelligence gathered is then disseminated to
relevant law enforcement agencies for further investigation and possible prosecution.
24
Bateman, Larry R. Shell companies: A regulatory and legal framework. Diss. Utica College, 2016.
25
Bazyler, Michael J. "www. swissbankclaims. com: The Legality and Morality of the Holocaust-Era Settlement with the
Swiss Banks." Fordham Int'l LJ S- 25 (2001): 64.
Despite the implementation of a comprehensive legal framework and regulatory measures in
Germany, there are still challenges that need to be addressed in order to ensure the effective
enforcement of these regulations and to tackle the issue of shell company misuse. Ascertaining the
accurate beneficial ownership of said entities may prove to be a formidable task, particularly if their
structure is intentionally designed to obfuscate ownership. Sustained collaboration and
synchronization between regulatory entities, law enforcement organizations, and financial
establishments are imperative to tackle these predicaments and uphold the credibility of Germany's
commercial milieu.
CHAPTER-4 LEGAL FRAMEWORK FOR SHELL COMPANIES UNDER THE
COMPANY'S ACT
Shell firms are businesses that are created only for the purpose of establishing a new legal entity;
they do not actually engage in any commercial activity. Even though there is no official definition of
what a “Shell Company” is, many people still use the term to refer to businesses that can be placed in
this category. On the other hand, in the vast majority of instances, its founders do not now have any
ambitions to make use of it for reasons related to commerce. It is conceivable that in the not-too-
distant future, this category of corporation will be established for the sole objective of engaging in
commercial activity.26 Shell companies are typically limited liability corporations or other sorts of
organisations that are neither actively engaged in business nor possess any significant assets.
Companies that just exist in name, do not have any employees, and generate value that is
insignificant from an economic point of view are referred to as “shell” companies. It is usual practise
to utilise them for the purpose of concealing one’s identity as well as the storage of valuable
monetary assets. Their entire purpose in this world is to aid the transformation of their customers’
illegal funds into legitimate ones, or vice versa. In the case of Assam Co. India Ltd. vs. Union of
India,27 the Gauhati High Court came to the conclusion that neither fiscal nor criminal constraints
may be considered to be a “shell business.” The Supreme Court has made an effort to provide a
definition for “shell companies,” which are also known as organisations that have just a “nominal
existence”. A corporation like this does not engage in significant business or have major assets under
its control. A corporation such as this one, which does not have large assets or operations of its own,
may be used as a tool or vehicle for the benefit of other parties as part of a financial agreement to
provide service. This agreement may be in the form of a contract to perform a specific service. The
High Court highlighted the critical fact that it is widespread practise to use shell businesses for
criminal activities such as money laundering and tax fraud.28
26
Rahul Oberoi, These 331 shell company stocks have stopped trading from today; do you own any?, Aug 11, 2017,
ETMarkets.com
27
WP(C) 2572/2018
28
Divesh Goyal, ‘Whether Disqualification of Director Can Be Removed by Restoration of Name of Company’ (2017) 86
Taxmann.com 241.
At first, the primary motivation behind the formation of these entities was the lawful pursuit of
benefits that might be obtained through favourable tax treaties. This shed light on the phenomenon
that had been keeping the market so quiet. Nevertheless, as time went on, these ostensibly law-
abiding enterprises were, in reality, utilised for unethical endeavours. It shouldn’t come as much of a
surprise that the underground economy has been expanding over the course of the previous few
years. Despite the fact that this structure has existed ever since people first conceived of the concept
of a “economy,” the astounding expansion of shell companies in recent years has occurred at an
extremely rapid rate. When the economy is in a state of instability, the growth of criminal enterprises
such as the use of shell organisations for the purposes of money laundering, tax evasion, and other
illicit activities is encouraged. There is some doubt over the dependability of a shell corporation.
There are a great number of shell firms out there that carry out their business in an ethical manner. A
corporation has the option of focusing all of its attention on the management of its human resources
rather than delegating the responsibility of running the primary business to another organisation. It
would be a lawful corporation, but it wouldn’t serve any purpose.
The first action that regulators have taken to combat unlawful activities is the commencement of a
multi-pronged campaign directed against shell firms. A task force against shell corporations was
constituted in February 2017, and it was jointly chaired by the Secretaries of the Ministries of
Revenue and Corporate Affairs. Following the completion of an investigation that uncovered a
network of shell companies operating as conduits, the authorities in charge of the collection of
income taxes have begun criminal procedures against individuals who benefited from the plan. The
Ministry of Corporate Affairs had the intention of taking legal action against shell corporations in
order to cancel the licences that had been issued to them. The pressure was initially exerted on those
businesses since they were the ones who were late in submitting their annual reports. 29 According to
Section 248 of the Companies Act 2013, the Registrar of Companies has the authority to remove a
company from the register of companies if the company fails to begin operations within one year of
its incorporation or if it ceases operations for two consecutive fiscal years without applying for
dormant company status. This provision was added to the Act via an amendment in the year 2013.
After the provision was put into effect, the MCA released on their website a list of the more than two
lakh businesses that had their operations ceased in 2017 in compliance with their ROC. The MCA
has also disclosed to the general public the identities of the company’s directors. It was forbidden for
the directors of the companies to serve on the boards of any other companies during the length of
time that the ban was in effect, which was five years, and it was also against the law for them to
29
Arkamoy Dutta Majumdar, How shell companies are used in black money creation, laundering, Aug 18 2017
apply for directorships at other companies during that time. It was against the law for these firms to
engage in any kind of financial activity, and it was also against the law for the directors of these
companies to use bank accounts. Since vast amounts of currency were demonetized, the MCA’s
investigation into the use of shell organisations to deposit big sums of cash in banks has made
substantial progress. This is due to the demonetization of the currency. According to the findings of
this inquiry, “four companies based in Maharashtra disclosed to authorities that they were being used
as a front face to carry out money laundering actions.” These companies were utilised by criminal
organisations as a “front face” for money laundering activities. These four companies engaged in
largely tax-exempt activities throughout their existence. Because the government is placing such a
strong emphasis on rooting out corruption and the shadow economy, it is reasonable to anticipate that
it will become more difficult to establish and maintain shell firms in the years to come. This is due to
the fact that the government is making efforts to make it simpler to conduct business, which is
directly tied to making it easier to conduct business. The MCA’s Condonation of Delay plan, 2018,
which was announced in a General Circular on December 29, 2017, has provided some consolation
for a few of the disqualified directors who serve on the board.
Several options exist under the Companies Act, 2013 (Act of 2013) for dissolving shell corporations.
Sections 10A, 12, and 248–252 of the Code are applicable. The reasons for removal, the actual
removal process, and the legal ramifications of this provision can be examined separately. The
reasons the Registrar of Companies may file an action to have names removed are listed in
subsection (1) of section 248. This section should be read in conjunction with 10A and 12(9). The
government’s primary motivation for this measure was to crack down on the unlicensed use of shell
corporations for illicit purposes including money laundering and tax avoidance after the recent
demonetization. The government formed a Special Task Force to investigate the issue of shell
companies, which concluded that such businesses have the following characteristics: low turnover
and operating income; low expenses; low statutory payments and stock-in-trade; high cash on hand;
private companies as majority shareholders; and minimal Fixed Asset. The following are the many
grounds for removal that are specified in these provisions:
NOT COMMENCING BUSINESS

In accordance with the provisions of this clause, legal proceedings may be brought against the
company if it takes more than one year after the date of its establishment to start conducting
business. It is referred to as the “commencement of business” when a newly formed corporation
makes its first official foray into the world of commerce following the company’s formal
incorporation. Before it can begin operating as a company, a corporation is required under the
Act of 2013 to complete two distinct procedures first. These must be completed before the
corporation may begin conducting business. A director is required to file a declaration with the
Registrar within the first 180 days after the company has been incorporated, verifying that all
subscribers to the memorandum have paid the value of the shares agreed to be accepted by them
on the date of making such a declaration. This declaration must state that the subscribers have
paid the value of the shares. In order to make such a declaration, a company has up to 180 days
from the date it was incorporated to do so. Second, the business has demonstrated to the
Registrar, by submitting official records, that its registered office can be found at the address that
was provided.
NOT CARRYING ANY BUSINESS OR OPERATION

This section may subject the corporation to legal action if it has not carried on any kind of
business or operation for the two most recent fiscal years and has not submitted an application for
dormant status in accordance with Section 455 during that time. The Act fails to provide a
definition for the phrase “not carrying any business or operation.” As a result, the Registrar of
Companies has the ability to come to the conclusion that a company is not conducting business
either at his own discretion or on the basis of the firm’s inability to comply with the conditions of
Sections 10A and 12. The common inference is that the company is not carrying on business or
operations, notwithstanding the fact that the Act imposes distinct fines for the failure of a
company to file statutory documents with the Registrar.30
NON-PAYMENT OF SUBSCRIPTION BY SUBSCRIBERS

If the subscribers to a company’s memorandum fail to pay the subscription they agreed to at the
time of incorporation and no declaration is submitted pursuant to Section 10A(1), the company
may bring an action under this provision. Section 10A contains a similar requirement. According
to subsection (3) of section 10A, a company’s name may be removed from the register of
companies if no declaration has been filed with the Registrar under section 10A(1) within one
hundred and eighty days of the date of incorporation of the company and the Registrar has
reasonable cause to believe that the company is not carrying on any business or operations.
Companies (Amendment) Act, 2019 included a new section 10A, effective as of 2 November
2018 retroactively. The phrase “not carrying of any business or operations” is what sets section
248(1) apart from section 10A(3). In addition to non-payment of subscription by the subscribers
or non-filing of a declaration to this effect, Section 10A(3) specifies that the Registrar may
30
Companies (Removal of names of companies from the register of companies) Rules, 2016, Rule 3.
initiate the process of removing the name if the Registrar has reason to believe that company is
not carrying on any business or operation.
DEFAULT IN HAVING A REGISTERED OFFICE AFTER INCORPORATION

If it can be proven through physical inspection that the company is not engaged in business or
operations, then legal action can be taken under this provision. Section 12 contains an equivalent
provision. If a company fails to maintain a registered office as required by the Act, the Registrar
may seek to have the business’s name removed from the register. After causing a physical
verification of the registered office, the Registrar can determine if there is a failure to have a
registered office. The process of causing physical verification is outlined in Rule 25A of the
Companies (Incorporation) Rules, 2014. To comply with this regulation, all businesses must
submit an e-form ACTIVE (INC-22A). A business is considered “ACTIVE-non-compliant” if it
does not provide the required information using electronic form ACTIVE. The Registrar can then
implement the name-cancellation policy. The Companies (Amendment) Act, 2019 included a new
section 12(9), effective as of November 2, 2018. Physical verification of the registered office is
emphasised by both section 248(1) and section 12 to show that the company is not engaged in
any business or operation.
If the Registrar has reason to suspect that any of the grounds for removal listed below are present,
then he may start the process of removing a name from the registry. These grounds for removal are
listed below. When the Registrar of Companies makes the decision to strike the name of a company
from the register, he must first give notice to the company and all of the directors who are associated
with it. The major objective of the notice is to demand that the directors and the firm hand over any
representations and pertinent information within a time frame of thirty days. This is specified in the
notice. The notice is delivered in accordance with the specifications of the STK 1 form. Additionally,
the Registrar publishes public notices in STK 5 and STK 5A form on the website of the Ministry, in
addition to publishing them in the Official Gazette and other venues that have been authorised to do
so.31 In addition, the Registrar is required to notify other regulatory agencies that have control of the
firm, such as tax authorities, before removing or striking off the names of such firms. The Registrar
must also listen to the complaints raised by these other regulatory organisations. Within the time
frame that is specified in the notification, directors and the corporation have the opportunity to argue
and submit supporting documentation for their position. It will be thirty days from the day that the
notification letter was received before the regulatory authorities are required to respond to the notice
letter. After the allotted amount of time has passed, the regulatory authority’s lack of response will be
31
Companies (Removal of names of companies from the register of companies) Rules, 2016, Rule 7
taken to mean that they agree with the name removal or striking off that was requested. When the
Registrar issues another notice in the Official Gazette using form no. STK 7, if the company fails to
show that it is still functioning, the name of the company will be deleted from the register of
companies. The Act of 2013 stipulates that the Registrar of Companies has the authority to revoke
the name of a company either on their own accord or in response to an application submitted by the
company itself. As of the date of publication of this information, the company has been formally
dissolved in accordance with the Act of 2013, which took effect in 2013. Prior to that time, the
company was unable to submit an application due to the provisions of Section 560 of the Companies
Act of 1956. According to the Act of 2013, a corporation is eligible to submit a request to have its
name changed if it has no outstanding debts and passes a special resolution. The application must be
submitted by the company using the appropriate attachments and Form No. STK 2, which may be
found here.10 After then, the Registrar of Companies issues a notice to the general public in the form
number STK 6, asking for objections to the action that is going to be taken. Concurrently, other
regulatory bodies, such as tax authorities, are told of the proposed action to remove company names,
and their feedback is solicited. These regulatory organisations are informed of the action. If the
specified time limit for responding to the notice has already passed, the Registrar may remove the
firm’s name from the list of firms by publishing a new notice in the Official Gazette using form STK
7.32 Once this notice has been issued, the firm will be terminated and dissolved. It is against the law
for a corporation to file an application with the intention of evading its duties, misleading its
creditors, or defrauding any third party, according to the Act of 2013, which was passed in 2013. 33
Those in charge of the company may be held legally responsible for any damages that occur as a
direct result of the notice of dissolution, and they may be subject to criminal charges if it is
discovered that they engaged in fraudulent activity.
In certain situations, such as those involving listed companies, vanishing firms (listed companies that
have not filed returns with the Registrar or Stock Exchange for a continuous period of two years),
section 8 corporations, and other similar situations, the Registrar of Companies is unable to
commence a suo motu procedure on their own initiative. 34 The application cannot be continued if the
corporation has changed its name, moved its registration office, applied for a compromise or
arrangement, or done any of the other activities.35
32
33
The Companies Act, Act no. 18 of 2013, § 251
34
35
If a “person aggrieved” feels wronged by a company’s decision to change its name, then that person
has the right to petition the Tribunal to have the company go back to its previous name. 36 Depending
on the circumstances, the phrase “aggrieved person” could signify a few different things. If the
aggrieved party is a firm or any member, creditor, or workman, the application for restoration may be
made within an extended time of twenty years, which is otherwise three years for other aggrieved
people. Section 252(3) of the Act of 2013 provides the sole guidance on the matter. It states that the
application for restoration may be made within an extended time of twenty years. The National
Corporation Law Appellate Tribunal (NCLAT) has stated that the term “person aggrieved” can only
be used to refer to the firm itself or any member, creditor, or employee of the firm. It cannot be used
to refer to “debtors” of the corporation. The appellate body stated that “it is undeniable that in their
capacity as ‘Debtors,’ they could not assert that they were the ‘aggrieved persons’ qua the order of
restoration of the Company’s name,” and that “the appeal requested against the striking of the
Company’s name from the Register of Companies at their request would not be allowed to
proceed.”37 This was in response to the appellants’ request to have the company’s name removed
from the register. In order for a company’s name to be removed from the Register of Companies,
“the person aggrieved cannot be any person other than the Company, any member, creditor, or
employee, who are the necessary stakeholders, their fortunes being linked with the fate of the
Company.”38
As an additional requirement, the proviso to section 252(1) mandates that the Tribunal must first
provide the Registrar, the company, and any interested parties with an opportunity to be heard before
issuing an order to restore the company’s status. The NCLAT has reached the conclusion that the
phrase “Person concerned” ought to be rewritten as “Person Affected.” It was brought to the attention
of the appeal board that the first proviso to the first subsection (1) of Section 252 mentions a single
“person aggrieved.”
If the default that was committed by the company is the same as that which results in the removal of
name under Chapter XVIII and disqualification of director under section 164(2), then the question
arises as to whether or not the revival of the company name in the records kept with the Registrar can
result in the removal of the director’s disqualification. This question arises in the event that the
default that was committed by the company is the same as that which results in the removal of name
under Chapter XVIII. Although a corporation is considered to be in default under each statute if it
36
37
Harsh Punitive Actions to Be Taken against Deviant Shell Companies Who Are Found to Be Indulged in Money
Laundering in India‟ Press Information Bureau (10 February 2017).
38
Kaynet Finance Ltd v Verona Capital Ltd (2019) 114 Taxmann.com 393 (NCLAT).
fails to file the requisite annual report or required financial statements, the circumstances under
which this occurs are different for each act. In the event that a director fails to submit the required
paperwork, they will be removed from their position, and a person’s name will be removed off the
register if there has been no commercial activity for the past two fiscal years. If a company fails to
provide the requisite annual returns or financial reports, the Registrar will most likely draw the
conclusion that the company is not involved in any kind of commercial activity. 39 In accordance with
the provisions of Chapter XVIII, the Registrar may initiate proceedings to have a business’s name
removed from the register if the directors of that company fail to submit financial statements or
annual reports for a period of three years in a row. The disqualification of the directors under section
164(2) of the Act, on the other hand, is apart from and in addition to any such action that may be
taken. Both results are completely separate and subject to their own sets of rules and regulations.
Therefore, the disqualification of a director does not instantly come to an end whenever their name is
reinstated to the board of directors.
39
Icchapurti Global Buildcon (P) Ltd v Registrar of Companies (2019) 113 Taxmann.com 481 (NCLT-Mumbai)
CHAPTER- 5 EXAMINING THE LEGALITY OF SHELL COMPANIES & JUDICIAL
DECISIONS
The “shell” corporation has been under investigation for quite some time in the professional world.
Concerns regarding legality and the possibility of its use in illegal activities are widespread among
such organisations, which can often be identified by a lack of major operations or assets as a
distinguishing characteristic. This piece takes a look at the Company's Act of India to determine
whether or not shell corporations may operate legally in that nation. We are going to investigate how
closely these businesses conform to the standards and prerequisites set out by the law. We will also
investigate the frequency of unlawful acts using shell firms, such as the laundering of illicit funds,
the avoidance of paying taxes, and the execution of fraudulent schemes. In order to have a better
understanding of the legal ramifications and difficulties that shell firms provide, we are going to look
at judicial rulings, regulatory efforts, and case studies.
In order to engage in illegal activities such as tax evasion and money laundering, wealthy people in
India often use shell firms. The current Yes Bank Scam concerns charges that the founder of Yes
Bank, Mr. Rana Kapoor, and his family utilised over a hundred shell companies to engage in various
financial wrongdoing as well as money laundering. Mr. Rana hid the proceeds of his criminal
operations by funnelling them via these front firms, which bore the names of his family. As a result
of the absence of legislation concerning shell corporations, Mr. Rana was able to establish more than
a hundred different businesses in order to perpetrate a significant amount of economic crime. The
Enforcement Directorate said in its investigation of the Punjab National Bank Scam (2018) that
Nirav Modi was responsible for laundering Rs. 5,921 Crores in 2017 using a network of 17 Indian
shell firms. Mehul Choksi, Nirav Modi's uncle and a rich diamond merchant sought by the
authorities, controlled an even more extensive labyrinth of shell businesses. While the SFIO looked
at far over 400 shell businesses, the ED focused on just 140 of them in its investigation. They fled
the nation after stealing letters of undertaking worth a total of Rs 14,000 crore and took the money
with them. In the case involving INX media, former minister P.Chidambaram received bribes to
allow illegal foreign investments (FIPB). His son, Karti Chidambaram, used front firms in order to
conceal the bribe money. The investigating team discovered investments in front firms amounting to
over 300 crores of rupees. According to the Panama Papers, his son was able to gain significant cash
through a business that was based in a country other than India.40
COMPANIES ACT AND SHELL COMPANIES

It is a common misunderstanding that the sole reason individuals create shell corporations is to
engage in criminal activities. Because of this, we will debunk this myth before moving on to cover
the legitimate applications of shell businesses. The desire to avoid becoming a target for criminals,
the anticipation of a hostile takeover, the pursuit of expansion into international markets, the desire to
remain anonymous when doing business with a rival firm with a negative public image, the need to
shield assets from potential legal action, the pursuit of expansion into international markets, the
desire to shield assets from becoming a target for criminals, etc. are all examples of such motives.
However, a number of government agencies, including the following ones, have determined that the
establishment of shell firms is for the following reasons: The fact that the authorities are aware of the
consequences of the demonetisation has led to an increase in the unlawful usage of shell corporations
to hold excess cash. Laundering refers to the practise of converting shady money into more
respectable forms of currency. When we consider the past, it is clear that these businesses have been
engaging in questionable business practises for quite some time.
The second reason why the Cayman Islands and the British Virgin Islands are regarded as tax havens
is because a large number of multinational organisations utilise “shell” companies in order to avoid
paying taxes in those jurisdictions. The common name for these kinds of locations is “tax havens.”
As a direct result of this, they use organisations known as “shell” corporations to conceal their riches
and avoid paying taxes on it. nations like Switzerland and Panama are examples of nations that
qualify as tax havens. Because the directors of shell corporations often do not operate out of the
location where the registered company is located, this helps to disguise the names of the true owners
of the business. By using this tactic, the true proprietors may keep their identity concealed.
Companies often make use of shell corporations due to the fact that it may be difficult, if not
impossible, to unearth the true identities of those taking part in fraudulent schemes. This is one of the
reasons why companies utilise shell corporations.41
40
Singh, Dharmvir. "Incorporating with fraudulent intentions: A study of various differentiating attributes of shell
companies in India." Journal of Financial Crime (2010).
41
Luna, Devendra Kumar, et al. "Finding shell company accounts using anomaly detection." Proceedings of the ACM
India Joint International Conference on Data Science and Management of Data. 2018.
The Company's Act is the piece of legislation in India that governs all commercial activity. The Act
does not define shell businesses, but it does spell out certain standards for how they must operate and
comply with those regulations. The Act includes shell businesses due to its broad scope in Section
2(87). The Act requires companies to fulfil a variety of requirements, including as submitting yearly
financial statements, keeping accurate books of accounts, and complying with all applicable tax rules
and regulations. Shell businesses, on the other hand, seldom pass muster with regulators since they
don't really carry out any business. The primary purpose of organisations of this kind is to conceal
the operation of illegal or other kinds of clandestine commerce.
Under the terms of the Companies Act of 2013, there is no formal definition of the term “Shell
Company.” When people talk about a “shell corporation,” they are often referring to a firm that isn't
doing much of anything and doesn't have many assets, but that is being used for illicit reasons such
as evading taxes, laundering money, concealing ownership, holding benami properties, and other
similar activities. The Organisation for Economic Cooperation and Development (OECD) defines
shell companies as “firms incorporated or organised or registered in the economy but do not engage
in the economic activities (other than pass-through capacity)”. To put it another way, “shell firms”
are nonexistent businesses that just exist on paper but do not have any kind of real presence in the
world. This provides them with the appearance of being a firm, despite the fact that they are not one.
The Companies Act of India does not include any language that clearly forbids the formation of shell
firms. The Act, on the other hand, emphasises the importance of accountability, openness, and
disclosure. When working with shell firms, it could be difficult to fulfil these obligations in a timely
manner. It is difficult for regulators, investors, and other stakeholders to accurately evaluate the real
financial status and performance of these enterprises since these businesses don't do anything of
substance.
SEBI AND OTHER REGULATIONS

The Securities and Exchange Board of India (SEBI) and other organisations have developed criteria
in order to detect these kinds of businesses. These criteria include the following: the lack of major
operational activities, significant assets, and transactions that largely function as intermediates. They
engage (financially) for no obvious economic purpose; (vii) there is no genuine economy that can
sustain the revolving door of money; and (viii) large-scale transactions may take place even in the
absence of contemporaneous firm activity.
In addition to breaking a great number of other crimes, it is a violation of Section 3 of the PMLA to
employ a front corporation in order to launder illegal monies for another individual. In accordance
with the Companies (limitation on the number of layers) Rules 2017, it is against the law for a
corporation to make use of a shell company in order to establish a large number of subsidiaries.
Because of this rule, a corporation may have difficulty opening up additional locations.
The Indian Penal Code, specifically Section 420, holds the owners of a Shell company as well as any
other beneficiary of the company liable for any fraudulent behaviour in which the company is
involved. As amended in 2016, the Act to Further Criminalise Benami Transactions (Benami Act). It
is against the law to assume another person's identity with the intention of concealing criminal
financial conduct.42
It is quite alarming that potentially illegal activity might take place using shell businesses as cover. It
is a matter of worry because the use of these firms makes it easier for illegal acts to take place, such
as the laundering of illicit funds, the avoidance of taxes, and several other types of fraud. Shell
companies are very popular among criminals because of the anonymity they provide and the
complexity of the organisational structures they use, which makes it difficult to trace criminals'
money. In particular, the act of laundering money has developed into a problem on a worldwide
scale. Money launderers use front firms, known as shell corporations, to conceal the true origin of
the money they are dealing with. Because of the secrecy surrounding the ownership of these
companies and the management of their business, it is difficult for law authorities to locate and
retrieve assets that have been stolen from them. Some persons have been known to create shell firms
in order to avoid paying taxes by taking advantage of legal loopholes. Some individuals and
businesses set up “shell” companies in tax havens so that they may avoid paying their fair share of
taxes and take advantage of loopholes in the transfer pricing and profit shifting systems. This allows
them to avoid paying their fair share of taxes. The size of the tax base will decrease as a direct result
of individuals losing faith in the fairness of the tax system.
The use of a shell company may be helpful in concealing the true nature of a transaction, which can
be useful when participating in fraudulent activities such as asset stripping or Ponzi schemes. It's
possible that criminals may use these companies to defraud potential investors or creditors. Victims
42
Nougayrede, Delphine. "After the Panama papers: A private law critique of shell companies." Int'l Law. 52 (2019): 327.
of fraud who lose money to a shell corporation have a tough time getting their money back due to the
fact that the firm has no real assets and does not really operate any kind of business.43
JUDICIAL AND REGULATORY DEBATES

Over the course of many years, the courts and authorities in India have addressed a diverse variety of
legal concerns that having to do with shell businesses. Several precedent-setting rulings have shed
light on the law and created guidelines for a variety of different categories of people.
The Securities and Exchange Board of India (SEBI) has achieved tremendous headway in the battle
against shell corporations via the implementation of more stringent laws. After compiling a list of
possible shell firms, SEBI froze trade, ordered investigations to begin, and demanded that exchanges
take corrective action. These safeguards were necessary if the securities market and its participants
were going to be able to engage in investing activity with confidence.
The Prime Minister's Office established the Task Force on Shell Companies (also known as “Task
Force”) in February 2017, with the “mandate to check in a systematic way, through a coordinated
multi-agency approach, the menace of companies indulging in illegal activities including facilitation
of tax evasion and commonly referred to as'shell companies.'“ According to Section 248 of the
companies Act, 2013, (the “Act”), it was necessary to gather data, identify more than two lakh (two
lakh) enterprises, and then remove their names from the RoC after doing so. At the moment, Section
248 is one of the few pieces of legislation that aims to crack down on shell companies. It does this by
removing shell companies' names from the Register of Companies (RoC) if they haven't started
doing business within a year of incorporation or if they haven't done business for the two financial
years prior to incorporation and haven't filed for dormant company status. This is one of the few
pieces of legislation that aims to combat shell companies. The “Amendment Act” (which gained the
President's signature on July 31, 2019), which amends Section 248, makes certain adjustments. The
Act of Amendment has a plethora of brand new provisions, some of which are as follows: Within one
hundred eighty (180) days after the day the Company was incorporated, a director is required to
make a statement certifying that each subscriber to the Memorandum has paid the value of the shares
agreed to be paid by him on the date of making such declaration. This declaration must be filed in
accordance with the order given by the Registrar.iii)With immediate effect, this new Section 10A will
replace the previous Section 10 as the applicable section.
43
Parker, Wilson, and Marc A. Van Allen. "the Illicit Use of Shell Companies, Where It Fails, and What to Do About It 1
Jacob Azrilyant." PUBLIC CONTRACT LAW JOURNAL 51.1.
If the Registrar has reasonable grounds to suspect that a company is not carrying on any business or
operations and no declaration has been submitted in compliance with Section 10 A, then the
Registrar may try to have the company's name deleted from the Register of Companies (ROC).
By adding a new paragraph (9) to Section 12 of the Act, the Amendment Act broadens the Registrar's
authority to verify a company's registered office in person if there is sufficient justification to do so.44
The Amendment Act has also broadened the jurisdiction of the Serious Fraud Investigation Office
(commonly known as the “SFIO”) in order to guarantee more timely and efficient enforcement. As
we have seen, the act of constructing a shell business is not in itself illegal. On the other hand, the
judge in the case involving Assam business took into consideration the drawbacks of having the
status of a shell business and reached a contrary conclusion. In the case India ltd. v. Union of India,
the court determined that the term “shell company” was inaccurate because of the negative
connotations that are associated with a firm that produces enough tea each year to satisfy the needs
of thousands of people. The Gauhati High Court came to the conclusion that “shell enterprises” are
not defined by either the fiscal legislation or the criminal code. This was a significant point that arose
over the course of the case. The Supreme Court has considered the possibility of classifying “shell
firms” as businesses that do not exist apart from the paperwork required by law. A corporation such
as this does not engage in large activities and does not have considerable assets. This kind of
organisation does not generate major assets or activities on its own; rather, it serves as a tool or
vehicle for the finances of third parties. The High Court made the perceptive observation that shell
firms are often engaged in illegal actions such as evading taxes and laundering money. Equally
available to all: The following is the second half of our in-depth investigation on “Shell Company.”
The decision of the High Court was a significant one, particularly since it said that “there is no
infringement to be a shell firm per se.” The Registrar of Companies' only real option is to have the
company's name expunged from the official records if they can't find any other solution. However,
the provisions of the Prevention of Money Laundering Act of 2002, the Prohibition of Benami
Transactions Act of 2016, the Income-tax Act of 1961, and the Foreign Exchange Management Act
of 1999 will come into play if the shell company is used for illegal activities such as money
laundering or tax evasion. These laws were passed in the years 2002, 2016, and 2016, respectively.
Because of this, it is essential to place less emphasis on the negatives associated with establishing a
shell corporation. Using what's known as a “shell business” that's headquartered in a different
44
Goswami, Prateek, and Vartika Shrivastava. "An Analysis of the Stygian World of Shell Companies and the Way
Ahead." Supremo Amicus 21 (2020): 277.
country is one way that people try to get out of paying taxes. Second, while the formation of shell
firms is not technically against the law, their very existence is murky.45
The question of whether or not shell corporations are under the purview of India's Company Act is
one that is fraught with ambiguity and subject to constant change. The Act does not ban the
formation of such organisations nor does it prevent them from already existing; however, it does put
an emphasis on accountability and openness. Concerns about legal compliance and the possible use
of shell businesses and organisations for illegal activity are raised as a result of shell firms' lack of
material activities and opaque organisational structures. Shell companies are also known as front
companies. The use of front firms to accomplish crimes like money laundering or tax evasion or even
fraud presents a substantial obstacle for law enforcement. Through the use of the court system,
regulatory activities like more stringent limits and investigations into firms that may be fronts for
money laundering attempt to tackle these challenges. A successful regulation of shell firms involves
more stringent legislative restrictions, stronger standards of openness and disclosure, and more
international coordination to fight illegal financial activities. To protect the corporate sector from the
dangers presented by shell companies, it may be beneficial to strike a balance between genuine
commercial activity and regulatory control.
45
Singh, Dharmvir. "Incorporating with fraudulent intentions: A study of various differentiating attributes of shell
companies in India." Journal of Financial Crime (2010).
CHAPTER- 6 REGULATORY MEASURES AND CHALLENGES
REGULATORY MEASURES TO LEGALLY TACKLE SHELL COMPANIES
a. Task Force on Shell Companies
To successfully address shell company malpractices, in February of 2017 a “Task Force on Shell
Companies” was created under the combined leadership of the Revenue Secretary and the Secretary
of the Ministry of Corporate Affairs.
SFIO's development of a database of shell firms is one of the Task Force's most notable
accomplishments. There are now three lists in this database: the “Confirmed List, the Derived List,
and the Suspect List.” Based on the data received from several Law Enforcement Agencies, the
proven List has a total of 16,537 proven shell corporations. There are 16,739 businesses on the
Derived List that have 100 percent of the same directors as the verified shell corporations. Using
certain Red Flag Indicators, SFIO compiled the Suspect List, which includes 80,670 potentially
fraudulent shell firms. Red Flag Indicators have been found by the Task Force and will be utilized to
find even more of these “shell” businesses. 46
The names of 2,26,166 companies that hadn't submitted their Financial Statements or Annual
Returns for an uninterrupted time frame of 2 or more financial years were eliminated from the
register of companies in accordance with Section 248 of the Companies Act, 2013 during the
Financial Year 2017-2018 as part of a drive that was supervised by the MCA. This effort was carried
out in the context of the Financial Year 2017-2018. Under the provisions of Section 164(2)(a) read in
conjunction with Section 167(1) of the Companies Act, 2013, a total of 3,09,619 directors were
disqualified for failing to file Financial Statements or Annual Returns for the three fiscal years that
immediately before the disqualification date (2013-14, 2014-15, and 2015-16).
b. Section 24847 and 25248 of the Companies Act, 2013
46
Press Information Bureau, Government of India, Ministry of Finance ‘Task Force on Shell Companies takes pro-active
and coordinated steps to check the menace of shell companies’ Available at https://pib.gov.in/newsite/PrintRelease.aspx?
relid=179863, last accessed 31 May 2023.
47
The Companies Act, 2013, § 248, No. 18, Acts of Parliament, 2013 (India).
48
On December 26, 2016, Sections 248 through 252 of the Companies Act, 2013 were formally
announced by the MCA. By submitting an application with the Registrar of Companies in the
manner specified, an inactive company that has not attained dormant status as per section 455 49 of
the Act may be removed from the register of companies. Under the Act, defunct businesses might
voluntarily submit an application to have their names removed from the RoC's database. In a similar
vein, the MCA enacted the Companies (Removal of Names of Companies from the Register of
Companies) Rules, 2016 to outline the steps necessary for companies to seek to have their names
removed from the register.
MCA issued a directive to the Registrars of Companies (ROCs) during the 2017–18 fiscal year. The
directive instructed the Registrars of Companies to exercise the authority granted to them by Section
248, find the names of “226,166 companies that had not filed their Financial Statements or Annual
Returns for a continuous period of two or more fiscal years”, and then remove those names from the
register of companies. The directive was issued during the fiscal year 2017–18. MCA issued a
directive, and in order to comply with it, this activity was carried out in the appropriate manner. In
accordance with the provisions of Section 164(2)(a) 50 and Section 167(1) 51 of the Companies Act,
2013, 3,09,619 directors were removed from their positions as a result of their failure to produce
Financial Statements or Annual Returns for the three fiscal years that immediately before the
disqualification date (2013-14, 2014-15, and 2015-16). Former directors and authorized signatories
of struck off businesses were not permitted access to the bank accounts of such companies until the
company was restored under Section 252 of the businesses Act. Additionally, former directors and
authorized signatories of struck off companies were not permitted to remove any cash from those
bank accounts, with the exception of restricted and predefined uses of those monies. The Indian
Banks Association, the “Department of Financial Services, and the Ministry of Corporate Affairs all
worked together on this project.”
c. RBI Directions:
Companies who fail to submit required financial statements and reports by the due date will have
their accounts frozen by the apex bank, RBI, as requested by the government.
d. SEBI Directions
49
50
51
SEBI has asked exchanges to hire an external auditor to evaluate the background and financial
stability of potentially fraudulent companies. If stock exchanges are unable to confirm the company's
basic information, the shares may be delisted.
e. Operation Clean Money

The government has shut down around two hundred thousand sham companies as part of Operation
Clean Money.52 Large cash deposits made following demonetization were verified in the operation's
first phase. The operation's second stage is identifying high-risk individuals for in-depth examination
by the ITD.
f. Tax Implications
The Central Board of Direct Taxes and MCA have signed an agreement to regularly and
automatically transmit tax information. The pact's stated purpose is to preclude the abuse of
corporate structures by shell companies for illegal activities including money laundering and the
circulation of “black money” inside the nation.
Under the Income Tax Act, a business is regarded to be resident in India if it either (1) is an Indian
company or (2) has its central office and primary administration of its activities in India for the
whole financial year. The second condition is what really gives rise to shell companies. The Finance
Act of 2015 was enacted as a consequence, and it stipulates “that a company is regarded to be a
resident of India if its Place of Effective Management (PoEM) was in India in the preceding calendar
year.”
g. “Office of Serious Fraud Investigations”
The Serious Fraud Investigation Office (SFIO) was established to examine high-stakes and intricate
cases of corporate fraud. The scope of SFIO's authority is restricted to examining frauds of a
corporation in accordance with the Companies Act. SFIO's probe is being treated as an independent
entity from any other routine corporate audits. 53
52
Income Tax Department, Govt. of India, ‘Operation Clean Money: An Overview’, available at
https://incometaxindia.gov.in/Pages/operation-clean-money.aspx last accessed 31 May 2023.
53
Ministry of Corporate Affairs, Govt. of India, ‘Serious Fraud Investigation Office’ available at
https://www.mca.gov.in/content/mca/global/en/about-us/affiliated-offices/sfo.html last accessed 31 May 2023.
The Ministry of Corporate Affairs is responsible for regulating SFIO. Major fraud investigations are
being conducted by the SFIO. When investigating fraud, it works in tandem with the Income Tax
Department and the CBI. The Office of Serious Fraud Investigations is collecting information on
anonymous companies
h. Registrar of Companies
Balance sheets and other financial records of corporations raising money via public issue, as well as
the use of those funds, will be scrutinized by the Registrar Of corporations.
i. Stringent KYC Requirements

Company directors are required to provide “personal information including their phone number,
email address, and passport number” as part of a massive Know Your Customer (KYC) initiative
initiated by the corporate affairs ministry. As part of a bigger plan to crack down on “shell” or
“paper” corporations that try to operate illegally, the government has taken this step. The government
is investigating a large number of these businesses on suspicion that they are being used to launder
money that has been hidden to avoid paying taxes. In addition, “e-Form DIR-3 KYC was established
to conduct yearly KYC on all directors with an active DIN. Anyone who has been issued a Director
Identification Number (DIN) by the end of a fiscal year's March must submit e-form DIR-3-KYC to
the Central Government by the end of the following fiscal year's April. If a director fails to fill out e-
form DIR-3-KYC within the allotted time, the Central Government or Regional Director, or an
officer authorized by the Central Government or Regional Director, will disable the Director's
DIN.”
CHALLENGES RELATING TO SHELL COMPANIES
a. Lack of Legal Definition

To begin, the term “shell company” does not have a defined meaning under the Companies Act of
2013 or any other corporate law. In addition, there is no special statute that applies just to shell
companies. A legislative commission has only in the last few years requested that the Ministry of
Corporate Affairs define what exactly a shell corporation is. Therefore, various suggestions were
made to clarify its meaning. The present procedures are regulated by the “Companies Act of 2013,
the Prevention of Money Laundering Act of 2002, and the Black Money (Undisclosed Foreign
Income and Assets) and Taxation Act of 2015.”
b. Difficulty in differentiating between legitimate and criminal shell companies
It may be hard to find shell enterprises in India owing to the country's convoluted corporate structure
and the difficulty of collecting transaction data and discriminating between legal and criminal shell
corporations. Because the directors of shell businesses often don't work out of the registered
company office, it may be difficult for government authorities to track them down and determine
who the true owners are. The true owners may protect their anonymity in this manner. Because of the
difficulty in determining the true identities of those participating in the aforementioned fraudulent
schemes, corporations often use the employment of “shell” firms.
c. Difficulty in Detection
The designated legal representative of a shell company may have no connection to the firm or its
beneficial owner54 and may even represent many shell companies. “Tax fraud, bribery, corruption,
drug trafficking, money laundering, mortgage fraud, bankruptcy fraud, terrorist financing, and the
illegal transfer of nuclear technology” are all facilitated by the company's structure.55
The purpose of this is to trace the true origins and owners of every given transaction. Unfortunately,
the intellectual players of shell firms utilize a wide variety of middlemen and other parties to carry
out paperwork and transactions on their behalf, making identification difficult despite best efforts.
When assets are moved through a web of related legal entities and held in several internal and
external accounts in the financial system, identification becomes much more of a challenge.
Since the OECD has “implemented more stringent multilateral tax transparency standards and more
thorough Know Your Customer (KYC) policies in financial institutions”, it has become increasingly
difficult to detect shell companies and their beneficiaries. 56 Nevertheless, it seems that the
54
N. Vail, ‘Cracking shells: The Panama papers & looking to the European Union's anti-money laundering directive as a
framework for implementing a multilateral agreement to combat the harmful effects of shell companies’ (2018) TEX.
A&M L, 5 (1).
55
A. Cooley et al., ‘The rise of kleptocracy: Laundering cash, whitewashing reputations Journal of Democracy’ (2018)
JOURNAL OF DEMOCRACY 29 (1); M. Tiwari et al., Shell companies: Using a hybrid technique to detect illicit activities
Poster session presented at 2021 Accounting and Finance Association of Australia and New Zealand (AFAANZ) Virtual
Conference (2021).
56
B.B. Allred et al., ‘Anonymous shell companies: A global audit study and field experiment in 176 countries’ (2017)
J. INT. BUS., 48.
development of international commerce and technical advancements have favored the formation and
maintenance of shell businesses. One country that has done so is Mexico, which has used technology
to its advantage by adopting a digital billing method to increase confidence in the legitimacy of tax
payments. In cases where shell businesses were used, the same technology enabled a rise in
deductions through phony invoices.57
d. Corruption and bribery
It is estimated that around seventy percent of instances involving widespread corruption employ
proxy businesses for the purpose of identity masking. 58 The government has a close relationship with
the practice of using front companies for illegal activities including bribery and blackmail.
Politicians and other state officials routinely utilize front companies, sometimes known as shell
businesses, to launder money from public sources into private accounts. 59
They use a convoluted
web of shell firms to create the appearance that they are genuine while negotiating a variety of
contracts for various public and social activities. 60
The following diversion of money is carried out
via bank transfers between the government entity and a network of shell firms that mask the identity
of the principal benefactor. These bank transfers take place in between the government entity and a
network of shell businesses. When public officials are involved, it makes detection even more
difficult.
57
S. Barajas et al., Evasión fiscal derivada de los distintos esquemas de facturación [Tax evasion derived from the
different invoicing schemes] Center for Economic Studies, Mexican College (2011).
58
C. Pacini et al., ‘Thace role of shell entities in fraud and other financial crimes’ (2018) MANAGERIAL AUDITING
JOURNAL, 34 (3).
59
Nielson, D. & Sharman, J, Signatures for sale: How nominee services for shell companies are abused to conceal
beneficial owners (2022), Stolen Asset Recovery Initiative, World Bank Group.
60
JANCSICS, D., SHELL COMPANIES AND GOVERNMENT CORRUPTION, Global Encyclopedia of Public Administration,
Public Policy, and GovernancE, (Springer 2018).
CHAPTER- 7 RECOMMENDATIONS AND FUTURE DIRECTIONS ON LEGALITY OF
SHELL COMPANIES
Although it is not against the law to establish a shell company in India, it has been determined that
most shell companies are established with the intention of engaging in illicit activities such as tax
evasion, money laundering, and other similar activities that pose a substantial risk to the Indian
economy. The problem has been made much worse by the lack of specific regulation that deals with
shell companies. In addition, there is a lack of acceptable criteria for identifying these shell firms that
are engaged in illegal activities. As a direct consequence of this, it is becoming more difficult for
governmental authorities to differentiate between shell organisations that pursue legal and legitimate
objectives. To address all of the issues that are associated with shell companies, it is necessary to
have an equitable definition of shell businesses that has an appropriate breadth and a coherent
structure.
Nevertheless, the recent actions taken by the Ministry of Corporate Affairs, the Income Tax
Department, and the Task Force to shut down shells with illegal objectives can be regarded as one of
the first steps towards reducing the use of shell companies as a means of deteriorating the Indian
economy. This is because these departments and the Task Force are all working together to take these
actions.
The Ministry of Corporate Affairs has started monitoring companies that have failed to furnish the
appropriate financial statements in order to identify shell companies as potential candidates for
deregistration. As a result of the ongoing investigation, the Registrar of Firms has removed numerous
of these shell companies from the register in accordance with Section 248 of the Companies Act of
2013. In a similar vein, the Income Tax Department is investigating shell corporations that are
suspected of being involved in illegal operations. As a direct consequence of this, the agency has
brought legal action against a number of these companies.
Recently, a joint task force was established with the purpose of uncovering such shell companies
having questionable motivations. As a direct result of these steps, the Ministry of Corporate Affairs
and several task teams have deregistered close to two lakh shell companies that failed to provide the
necessary financial statements and reports.
Before digging into the function of shell companies, it is crucial to point out that it is a frequent
misconception that these enterprises are established only for the goal of engaging in illegal activity.
In reality, such a company may be established for the aim of advancing a worthy cause. Some of
these legitimate purposes include the following: holding money temporarily when the parent
company is about to start a new company; hiding while dealing with another corporation that has a
bad reputation in the market; protecting assets from lawsuits; gaining access to foreign markets;
protecting oneself from becoming a target for criminals; setting the stage for a hostile takeover; and
so on.
However, according to a number of experts within the government, shell companies are often
established for one of the following reasons:
Following the implementation of demonetisation, government authorities became aware of the illegal
purpose of shell enterprises, which was the storage of surplus money. Money laundering refers to the
process of converting illegal funds into legal funds. Later on, it was found out that these companies
had been engaged in practises quite similar to those for a considerable amount of time.
Companies often engage in tax evasion by establishing a “shell company” in offshore jurisdictions in
which the rate of taxation is much lower than in the countries in which the companies' primary
business activities are conducted. These locations are often referred to as “Tax Havens.” As a
consequence of this, they are able to evade paying the taxes that they would have been required to
pay if they had not transferred their assets to shell companies. Both Switzerland and Panama are
widely recognised as leading examples of tax havens.
Because the directors of shell companies do not often live at the registered company office, it may be
difficult for state authorities to identify the real owners of a shell company when the company in
question is a “shell.” Because of this, the genuine owners are able to keep their identities a secret.
Fraudulent schemes: Corporations often use shell businesses to create fraudulent schemes in order to
generate quick money. This is done owing to the fact that it is difficult to find the real people's
identities who were involved in such activities due to the nature of shell firms, as was discussed in
the previous paragraph.
As was said before, the formation of a front business does not in and of itself constitute a criminal
act. On the other hand, in the case of Assam Co. India ltd. v. Union of India, 61 the court decided that
it was inappropriate to classify the corporation as a “shell company” owing to the negative
61
WP(C) No. 2572 OF 2018
connotations that are associated with the word “shell company.” This was due to the fact that the
corporation was responsible for the manufacture of millions of kilogrammes of tea on a yearly basis,
which was sufficient to provide food for thousands of households.
It is thus hard to pay attention to every aspect of a shell corporation since they have so many moving
parts. To begin, if a shell business is founded in a foreign country, it is permitted to transfer domestic
revenues offshore. This is because the foreign nation houses the shell company. As a second point to
make, these shell firms occupy a grey area in the law despite the fact that they are not legally
breaking any laws. Because of this, many individuals advise against the establishment of front firms.
It has also been observed that the owners or directors of such companies are often persons with little
financial means. These people may work as drivers, cooks, or in other capacities as employees of
influential people who are interested in laundering illegal funds. According to Section 89(1) and
Section 89(2) of the Companies Act, 2013, individuals are obligated to report whether or not they
have a “beneficial interest” in the company's shares. In accordance with the provisions of paragraph
(4) of Section 89, the Central Government is obligated to devise rules that detail the processes that
must be adhered to when holding and disclosing beneficial interest and beneficial ownership. It's
possible that such rules will be developed for the first time by the Ministry of Company Affairs.
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Dissertation - Legality of Shell Companies As Per Company's Law

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Legality Of Shell Companies As Per Companies Act

Maharashtra National Law University Mumbai

1. Anti-Money Laundering - AML

2. Central Board of Direct Taxes - CBDT

3. Companies Act 2013 - CA 2013

4. Financial Action Task Force - FATF

5. Foreign Contribution (Regulation) Act - FCRA

6. Foreign Direct Investment - FDI

7. Goods and Services Tax - GST

8. Income Tax Act - ITA

9. Indian Penal Code - IPC

10. Know Your Customer - KYC

11. Ministry of Corporate Affairs - MCA

12. Money Laundering - ML

13. Prevention of Money Laundering Act - PMLA

14. Registrar of Companies - ROC

15. Reserve Bank of India - RBI

16. Securities and Exchange Board of India - SEBI

17. Serious Fraud Investigation Office - SFIO

18. Shell Company - SC

19. Tax Evasion - TE

20. Transfer Pricing - TP

OBJECTIVE OF THE STUDY.................................................................................................................2

SCOPE AND LIMITATIONS....................................................................................................................2

CHAPTER-2 THEORETICAL FRAMEWORK/LITERATURE REVIEW.............................................................5

NOT COMMENCING BUSINESS...........................................................................................................14

NOT CARRYING ANY BUSINESS OR OPERATION...............................................................................15

NON-PAYMENT OF SUBSCRIPTION BY SUBSCRIBERS.......................................................................15

DEFAULT IN HAVING A REGISTERED OFFICE AFTER INCORPORATION.............................................16

CHAPTER- 5 EXAMINING THE LEGALITY OF SHELL COMPANIES & JUDICIAL DECISIONS..................20

COMPANIES ACT AND SHELL COMPANIES........................................................................................21

SEBI AND OTHER REGULATIONS.......................................................................................................22

JUDICIAL AND REGULATORY DEBATES.............................................................................................24

CHAPTER- 6 REGULATORY MEASURES AND CHALLENGES..................................................................27

REGULATORY MEASURES TO LEGALLY TACKLE SHELL COMPANIES...............................................27

CHALLENGES RELATING TO SHELL COMPANIES...............................................................................30

CHAPTER- 7 RECOMMENDATIONS AND FUTURE DIRECTIONS ON LEGALITY OF SHELL COMPANIES. 33

OBJECTIVE OF THE STUDY

SCOPE AND LIMITATIONS

THE IMPORTANCE OF EXAMINING LEGALITY:

NOT COMMENCING BUSINESS

NOT CARRYING ANY BUSINESS OR OPERATION

NON-PAYMENT OF SUBSCRIPTION BY SUBSCRIBERS

DEFAULT IN HAVING A REGISTERED OFFICE AFTER INCORPORATION

COMPANIES ACT AND SHELL COMPANIES

SEBI AND OTHER REGULATIONS

JUDICIAL AND REGULATORY DEBATES

REGULATORY MEASURES TO LEGALLY TACKLE SHELL COMPANIES

a. Task Force on Shell Companies

b. Section 24847 and 25248 of the Companies Act, 2013

e. Operation Clean Money

g. “Office of Serious Fraud Investigations”

i. Stringent KYC Requirements

CHALLENGES RELATING TO SHELL COMPANIES

a. Lack of Legal Definition

b. Difficulty in differentiating between legitimate and criminal shell companies

d. Corruption and bribery

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