Opinion | Shell cracking
1 min read . Updated: 21 Jun 2019, 06:10 PM IST- The scale of the problem is evident from the fact that only about 60% of the nearly 1.9 million companies registered in India on 1 April were active
The ministry of corporate affairs has begun a crackdown on companies that failed to file their geo-tag details by the middle of this month. It had asked every company to file information, including photographs of its office, directors and key officials, to help identify shell companies that exist only on paper for such dubious purposes as money laundering. After demonetization, dummy firms came into handy for people to shunt black money around. There are also suspicions that terrorists could use them to route funds. The scale of the problem is evident from the fact that only about 60% of the nearly 1.9 million companies registered in India on 1 April were active. Why do the rest even exist?
To the extent the government’s action uncovers fraud, it is welcome. But the authorities should remember that not all such companies are engaged in illegal activities, a presumption that overzealous officials could be prone to make. There can be companies that look hollow but are legitimately set up to hold certain assets, say intellectual property rights or treasury shares, or to quarantine high-value assets in the event of a hostile takeover, or for other reasons. Any penal action, therefore, should be preceded by a fair opportunity to such firms to justify their operations. In addition, easing our liquidation rules would help zombie companies shut down. Many exist on paper only because closing is too much of a headache or costly. Any action without such regulatory overhaul would be an incomplete solution.
