The address―9/12 Lal Bazar Street, Kolkata―may sound like any other random address. But, this one address has over 300 companies registered there, according to the Registrar of Companies (ROC) records.
Elsewhere, more than 250 companies were found to be registered at an Hyderabad address.
There are many more such addresses in cities like Kolkata and Delhi NCR where hundreds of companies had the same registered address, according to the ROC.
Legally, nothing stops from multiple companies having one registered address. Many of the companies may be genuine too. But, many times these also turn out to be fictitious entities used to cover up black money, said a tax expert. After the government announced ban of high value currency notes last year, it is believed that lot of such firms may have been used a front to convert black money to white, he added.
But, that is not going unnoticed. Actions by various ministries, regulators and enforcement agencies this year shows there has been a concerted effort to curb the activities of the so called “shell companies”, through measures like de-registering them and banning their trading on stock exchanges.
The ROC this week revealed that over 2.09 lakh such companies have been “struck off” and indications are that the list is only going to grow as more companies are identified. Since these struck off companies cease to exist, action has also been initiated to restrict the operation of their bank accounts, by the finance ministry.
“The Department of Financial Services has, through the Indian Banks Association, advised all banks that they should take immediate steps to put restrictions on bank accounts of such struck off companies,” the ministry of finance ministry said earlier this week.
It is not the corporate affairs ministry alone that is tightening the noose against fictitious companies.
The Bombay Stock Exchange last month delisted 200 companies “compulsorily” from its platform. Additionally, the whole-time directors, promoters and even group companies would be barred from accessing the capital markets for ten years, it said.
A majority of the 200 companies had remained suspended for over 10 years and some were also under liquidation.
Earlier, based on data it received from the corporate affairs ministry, Securities and Exchange Board of India urged stock exchanges to take action against 331 listed firms suspected to be shell companies. These firms were placed in the stage four of the graded surveillance mechanism, as per which trading in these companies would only be allowed once a month.
Many see this crackdown is the latest in a series of measures the government has taken in the last 2-3 years to curb unaccounted income.
“The government’s recent action against shell companies shows its unequivocal commitment to greater transparency in business and commerce and higher probity in public service,” said Sanjeev Prasad, co-head of Kotak Institutional Equities.
The ministry of corporate affairs has not just stopped at de-registering shell companies. It will even take the directors on board of such companies to task and the punishment proposed is harsh.
“In case the director or authorised signatory of any struck off company tries to siphon-off money from its bank account, he/she may attract punishment of imprisonment of not less than six months extendable to 10 years. If it is found that the fraud involves public interest, the punishment shall not be less than three years and fine may also be imposed which would be three times the amount involved,” the ministry said.
The review meeting chaired by P.P. Chaudhary, minister of state for corporate affairs, also decided that the directors of such shell companies, that had not filed returns for three or more years will now be disqualified from being appointed or reappointed a director in any other company.
When implemented, around two-three lakh disqualified directors are estimated will get debarred.
The ministry is also making efforts to identify the actual beneficiaries behind such companies.
All the steps being taken suggest the “crusade” against corruption is “definitely not over,” said Kotak's Prasad, who added that such harsh measures were warranted to clean up the economy.
Eventually, such crackdown will improve corporate governance and thus make India more attractive for foreign investors who are looking to invest more here, say analysts.