Insights on How do Shell Companies hinder economic growth and what is the government doing to track such companies.
Shell entities are created to hide illegal activities and mostly do offshore trade following tax evasion, fraud, and the act of money laundering. As these companies act in a veil of secrecy and divert funds to illegal activities by representing the legal existence of their business, it is difficult for the authorities to detect such companies as they hinder economic growth.
Shell companies are usually created by Individuals or a group of people who can find vulnerabilities in the regulatory system concerning the creation of entities to operate their illegal business that has no real network or assets. Shell companies with no legitimate business exist only on paper and find success in registering themselves with the Registrar of Companies by entering fake or misleading information about directors, subscriptions, and office space of the company.
In 2021, the Government created a special task force to dig such entities out of which more than 2 lakh companies were indicated for a red flag as shell companies and stuck off their names with a ruling under Section 248 of the Companies Act, 2016.
How do Shell Companies hinder country growth?
In India, Shell companies have a negative impact on the economy as they are engaged in corrupt practices to take away money from legit businesses and reduce the tax revenue of the government. It hinders the ability of the government to fund the needed infrastructural projects, social programs, and empowerment schemes.
Also, such companies create an uneven space in the economy where they operate a business with those entities which are revenue generating or working as legit entities paying their taxes on time.
Shell companies also erode the trust of foreign investors in the Indian economy as such companies deter such foreign investments and use them for illegal activities.
Steps were taken by MCA to Curb the formation of Shell Companies
MCA in recent years made several modifications in its business regulatory measures and compliance system to early detect the formation and operations of Shell companies. Some of these measures include :
- Insertion of a two-factor authentication mechanism to the current incorporation and statutory filling system of companies to early identify the application of directors, professionals, and associates to become a member of the company.
- Digital linking of Email Ids, Digital Signatures, and User IDs shall be done with the company fillings along with the submission of PAN(Permanent Account Number ) associated with the company.
- More disclosure requirements through mandatory forms for special forms of companies (Nidhi Companies ) or more disclosures are required in the statutory fillings of the company.
- For compliance filing or access to different services of the revamped MCA portal, authentication in a way of a One-time password shall be done.
- Enhancement measures shall be taken to protect the data of companies requiring multiple authentication checkpoints which were earlier available on a single Captcha verification.
- To avoid filings with fake or misleading information, the pre-population or auto-population feature is being introduced to fill the needy information on various forms through Artificial Intelligence.
- Use of Artificial Intelligence to create a Compliance Management System, to early detect non-compliant companies / LLPs and generate alerts for internal members of MCA for such companies.
Several policy measures and steps have been taken by the government to early detect the formation of Shell companies. These measures are much focussed on tightening regulations and improving enforcement on these companies.
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