Shell companies are used as vehicle by several large companies to either hideaway business title details from public or law enforcement. As a general conception, Shell company deemed as an illegal entity has a legal framework which though engages in illegitimate activities such as tax avoidance, tax evasion, money laundering, terror financing etc.
Such companies on their own do not have significant assets and also do not carry out any active business operations.
Legitimate reasons for floating a shell company
Shell company for a Startup: As an only legitimate reason, shell companies support functioning of start-ups, who use them as vehicles to finace or raise funds.
How Shell companies function?
For money laundering or conversion of black money or unaccounted-for money into white, entry operators act as an intermediary who in a case when suppose Rs. 1 crore black money needs to be converted into white get Rs. 1 lakh from the individual concerned.
This sum is then divided into 10,000 shares of Rs. 10 and is sold to directors of shell companies at a substantial high premium of Rs. 1000. The move raises the value of the company by 100 times to Rs. 1 crore. Through a number of illegitimate companies, this money is then transferred to the original owner as white money.
How government and other agencies identify Shell companies?
Basis the data such as huge reserves and surplus owing to high share premiums received, huge cash in hand, investment in unlisted companies, nominal paid-up capital, zero dividend, majority shareholders as private companies, least fixed assets, nominal expenses and lower operating margins as well as turnover.
Kolkata: Hot destination for Shell Companies
Kolkata with a designated network of professionals engaging in the activity is said to be host to 90% of shell companies in India.
Government's serious act on Shell companies post demonetisation
As part of the Benami Transactions (Prohibition) Amendment Act, 2016, government after the notification of scrapping of high-value currency called for a severe crackdown on such shell companies used for money laundering. The Benami Prohibitions Act enables government to take over any of the benami assets in the name of a fictitious concern for engaging in tax avoidance or hiding unaccounted wealth.
Also to curb the practice of tax avoidance and the resultant incidence of tax evasion, such companies are increasingly coming under the governments lens.