The Centre, as part of its war against black money, has banned more than two lakh shell companies and their bank accounts. With the move, the government aims to find the trail of funds that were siphoned off after the note ban, boost transparency in corporate finances, crack down on tax evaders and boost trust and transparency in corporate governance. The government action is in line with its macro operations for a clean India. After clean money, the government is now focusing on cleaner banking, finances and markets.
Last month, market regulator Securities and Exchanges Board of India (SEBI) had imposed trading ban on 331 shell companies. The government, on Wednesday, also barred three lakh directors of companies that defaulted on laws related to their functioning, from serving on boards of other firms.
There are a total of 15 lakh companies registered with the ministry of corporate affairs. Only six lakh companies file their annual returns regularly. Remaining nine lakh companies do not, which may be termed as financial irregularities as per the latest governmental norms.
Such a massive crack down, if it materialises, could trigger a short-term cash crunch, fund crisis and may trigger some overreaction in stock markets and performances of banks, as well. Meanwhile, the government has urged banks to step up diligence while dealing with companies in general.
Shell companies, it stated, are characterised by nominal paid-up capital, high reserves and surplus on account of receipt of high share premium, investments in unlisted companies, lack of dividend income, high cash-in-hand, have private companies as majority shareholders, low turnover and operating income, nominal expenses, nominal statutory payments and stock-in trade and minimum fixed asset.
Clean India
Demonetisation, the Goods and Services Tax, tough stance against wilful defaulters and measuring risk by classifying systemically important banks—and now, the government is turning towards corporate tax evaders, money launderers and fraudulent business entities.
It's a loud and clear signal of 'mera desh badal raha hai' and will be a major sentimental booster for foreign capital, offering them a more transparent regime and better level-playing field with their peers. The recent moves, if seen in totality, might be a part of a grand agenda of the G20 countries' crack down on terror-financing, money-laundering, siphoning off of funds and tax evasions.
Bullion traders who have done transactions worth more than Rs 2 crore are already under taxmen's radar, with a slew of I-T mail bombardments already underway. It is an ongoing, low-scale, undeclared but determined initiative to clean the markets. The government is taking various steps to strengthen commodity derivatives, physical markets and agriculture ecosystem. Capital markets are booming and primary market revival is a major hope for the government's divestment programme through follow-on public offer (FPO) and exchange-traded fund (ETF).
Although foreign investors are selling stocks, retail investors, mutual funds and domestic institutions are the net buyers. Many rogue promoters, tipsters and ponzy punters are active to rob gullible and naive investors. Surveillance is robust and Sebi is prudently watching markets. However, still some tipsters and penny stock operators are working through social media, undertaking predatory selling and resorting to unscrupulous activities.
Commodity derivatives industries, especially agricultural commodity derivatives markets, are grappled with periodic scams or controversies and manipulative practices. Repeated bans, coupled with delisting, have shattered investors and market participants, and have affected logistics and warehousing, resulting in a fragile commodity ecosystem.
Physical markets are highly inefficient and the government is keen to bring integration in the above area. The Centre wants to create a common market place for agricultural produces, thus creating linkages between derivatives and spot markets.
India has vast household deposits valued at nearly $1 trillion. It is also the largest gold consumer and second-largest gold importer after China, but still lacks a robust physical and unified market place for physical trade. The government plans to set up a national bullion bourse and wants to reform bullion trade, to unleash bullion banking, temple gold deposits and reduce dependence on gold imports.
The Centre is on the move—the next phase of current clean India initiative might be clean markets and a cleaner ecosystem. Demonetisation has created vast wealth, which has to be saved from rogues and ponzi stars and needs access to clean markets.
(Author is CEO of Paradigm Commodity Advisors, a research boutique in Ahmedabad)
