Modi government crackdown on illegal firms- from a legal perspective

Prime Minister Narendra Modi

Time for another impressive step taken by Modi government! The government plans to catch hold of the deregistered companies, which through its officials try to siphon off money from the firms’ bank accounts. The government plans to punish them for 10 years.

The government suspects 331 shell companies and has banned them from trading. Shell companies are those which are without active business operations and are kept in operation in order to build incorporation history or to raise bills upon active operating companies in order to create expense in operational companies, these methods are often used to siphon off money from operational companies in gab of spending expenditures. Shell companies are non-traded companies, meaning that they are not listed on any stock exchanges for buying and selling by investors. Most exist in name only, other than as a mailing address, and on paper as a registered financial entity. Although it is not necessary that all the shell companies are illegal ones ,but most of them use it to fulfill their illegitimate purposes, such as to protect their business from law governance.

Some of the legitimate purposes for which Shell companies are used are to hold stock or intangible assets of another business entity, or to facilitate domestic and cross-border currency and asset transfers and corporate mergers. However, all too often shell companies are involved in illegal activities as well. These companies have the essential characteristic of being able to obscure the true ownership of an asset. A commonly cited abuse of the shell company model is money laundering. When money is obtained through an illegal means, it is critically important that there are significant buffers to prevent the funds from discovery. A shell company is ideal for this purpose. By obscuring both the ownership of the shell company and its activities, it is relatively simple to conceal the true origin and intent of large amounts of funds. Not that we would know, of course.

Tax evasion policies by the shell companies

The shell companies are well known for their gray market activities or / and black money. These shell companies evade taxes through tax haven abroad. Personal gain of the director/shareholders of an active company is the only motive for which usually shell companies are formed.

But everything is not so black pitchy, some shell companies definitely perform legal activities, some are formed to promote startups by raising funds. So all the shell companies, on the face of it should not be barred from trading activities. A proper scrutiny needs to be done by the government before any strict action is taken.


Analysis of the action taken up by the Mr. Prime Minister

Post demonetization and GST enactment, Prime Minister’s office has been meaning to gauge lens of scrutiny over the shell companies and have tried to formulate various measures in order to tighten up the noose on companies which are not operational and are used for tax heavens or for parking illicit funds of another company. PM Modi addressed the nation and enlighted that in the due process of demonetization, 300,000 shell companies were detected, 175,000 of which have already been shut down.

Thinking on a legal prospective, we realize that this initiative brings further stress on his government’s drive to hunt down illegitimate wealth; the crackdown of the shell companies is a result of the fight of the Prime Minister against the black money, according to the independence day speech of Mr. Narendra Modi, the number of new tax payers (filing returns) has more than doubled to 5.6 million this year. The number of tax payers shall further increase with the help of crackdown of these shell companies. People who hide their wealth under these shell companies cannot have an upper hand now.

Effects of the crackdown

Due to crackdown 7,000 crore rupees of public money stuck in the shell companies which have been barred from trading by the SEBI on Prime Minister’s demand, the investors are irked by the decision as of now. But the action has been taken after keeping in mind, a longer benefit of the investors. SEBI aims to protect the interest of the investors, some of these shell companies whose only purpose is money laundering, can cause heartburn to investors. The reports have suggested that in the past, many investors have had major losses with the companies that have suddenly vanished without even a clue. Many companies that were listed during the IPO boom in 1994-95 vanished without any information.



Shell companies are used for many purposes, some legal and others not so much. Shell companies play an important role in markets around the world. Given their international stature and prospects for growth, rigorous regulation strategies must be employed to ensure economic stability and investor safety within the space.

The government has put pedal to make efforts to edge down the unlawful fund flows.

Besides, the directors of these shell companies that have not filed their returns in the last three or more years would be disqualified from holding such position in any other company. The government has also identified chartered accountants, company secretaries and cost accountants associated with shell firms in certain cases. The government plans to punish them as well, which is a positive step towards the growth of a better economy as people engaged in any profession, supporting such illicit actions shall be refrained from practicing any such activities.

This step is a step towards improving corporate governance and removing the culture of non-compliance. Blotting out shell companies would not only help in checking the black money but also would promote an enhanced investors confidence in the present government.

About Author:

About Advocate Kanishk Agarwal, Founder, CriTaxCorp & ‘Indian Bare Acts Pack’ application. The Founder of CriTaxCorp, Mr. Kanishk Agarwal has many years of rich and diverse experience in the fields of Criminal, Taxation and Corporate law. During his career he has worked under the flagship of renowned CA Ashok Batra and thereafter with PricewaterhouseCoopers (PwC) – an esteemed international Tax Consultants  company – and subsequently with Senior Advocate Mr. Ramesh Gupta.  After gaining an extensive exposure and being a technology enthusiast, Mr. Agarwal created a unique application ‘Indian Bare Acts Pack’.


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