Diagnosing The Increasing Shell Companies By CS G. Sriram

In a clean-up exercise in 2017-18, the Ministry of Corporate Affairs had struck-off more than 2,00,000 shell companies out of 15 Lakhs Registered Companies from their records for not filing Annual Returns and Balance Sheet.
During this financial year 2018-19, a total of 2,25,910 companies have been identified for action under Section 248 of the Act and after following due process of law, names of 1,00,150 companies have been struck-off from the Register of Companies.
(News Source: Click here)
The concept of a ‘shell company’ is not defined under the Companies Act, 2013.
Shell companies are created primarily for tax evasion or money laundering activities. 
In the last year, the Ministry had carried out Know Your Customer (KYC) initiative for directors to ascertain their identities as part of larger efforts to clamp down on entities that are suspected to be conduits for illicit fund flows.
Against 33 lakhs individuals who had Director Identification Numbers (DINs), little over 16 lakhs Directors have complied with the KYC requirement. DIN is a unique number allotted to individuals who are eligible to have directorship on the boards of registered companies.
The idea for KYC is part of the government’s initiative to rid the corporate sector of shell companies and corporate structure is not abused by fly-by-night operators.
In an effort to weed out the Shell Companies, another initiative taken by the Ministry of Corporate Affairs is KYC for companies. The Ministry plans to collect the KYC details of companies is an exercise which will help them to have a “sanitised list" of companies.
Now the government has made it mandatory for over 12 lakhs active registered companies in India to upload all their particulars including details of their registered offices through an e-filing to the government.

*The Ministry of Corporate Affairs has notified the Companies (Incorporation) Amendment Rules, 2019 on 21st February 2019 under which all the companies registered on or before December 31, 2017, are required to file e Form ACTIVE (Active Company Tagging Identities and Verification)-INC22A on or before April 25, 2019.
Through this eform INC-22A, the company must attach the photo of external Building of the Company as well as the photo showing one of the directors in its registered office whose Digital Signature is to be attached in the aforesaid e- form.
Further, the Company has to provide longitude and latitude details about the location of the Company in e-form INC-22A.
This information is called as Geo-Tagged information.
Purpose of Geo-tagging

The key objective of geo-tagging is to track the exact location of the building or office premises.
It is the process of adding geographical identification like latitude and longitude to various media such as a photo or video. Geo-tagging can help users find a wide variety of location-specific information from a device. It provides users the location of the content of a given picture.
A visual representation of the geographical location of geo-tagged assets layered on top of map or satellite imagery.

Geo-tagged information collected by other Government Department/ Agencies
Collecting Geo-tagged information is a recent initiative by the Government. This geo-tagged information is collected by the other government agencies also.
This has already proved to be a powerful tool in monitoring housing projects in some of the mission implementing states, such as Andhra Pradesh, Karnataka, and Kerala.

The Ministry of Rural Development
**The Ministry of Rural development has collected the geo-tagged images for about 20 lakh rural assets created by rural local bodies from their share of the 14th Finance Commission funds in the last three years.
The Ministry of Rural Development has public images of over one lakh assets, with everything from sewage drainage pipes and bore-wells to water tanks and street-lights. This geo-tagged information helps the Ministry for Rural finance Monitoring.
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***Collection of Geo-tagged Information under Swachh Bharat Mission-(SBM)
To accelerate the efforts to achieve universal sanitation coverage and to put the focus on sanitation, Prime Minister of India, Shri Narendra Modiji, launched the Swachh Bharat Mission on 2nd October, 2014. The Mission aims to achieve a Swachh Bharat by 2019, as a fitting tribute to Mahatma Gandhi on his 150th birth anniversary.
Under this Mission, the Central government will provide an incentive for the construction of household toilets for each identified beneficiary household. The Central Government shall provide incentives in two Installments. The Second Installment will be released by the Central Government to the identified beneficiary household along with the State Government’s incentives upon verification of physical progress of construction of the household toilet.
The actual process of verification will be as per the directions of the respective State Government.
Final Verification of the construction of the household toilet is to be supported by location-based technologies, wherein self-attested geo-tagged photographs of the construction, along with the applicant are taken out. These photographs must be uploaded to the SBM (Urban) MIS and be monitored by the Urban Local Bodies (ULBs) and the States.
 *** News Source:  Click Here
Rashtriya Krishi VikasYojana (RKVY)
The assets created under the Rashtriya Krishi Vikas Yojana(RKVY) are monitored by using the Geo tagged information.
News source: Click Here

Reason for Notification of (Active Company Tagging Identities and Verification)-INC22A and related rules by Ministry of Corporate Affairs
The Ministry of Corporate Affairs had notified the Companies (Incorporation) Amendment Rules, 2019 for the reasons:

114 Companies Operate from One Room
Last year, the Ministry of Corporate Affairs made a search in various locations of the country to verify the registered office address of the companies and they found that 114 Companies Operate from One Room.
The firms, most of them believed to be shell companies.
These raids had have revealed that not one or two but more than 114 companies operating out of a single room, complete with balance-sheets, directors and their salaries.
At least 50 of the 114 companies have no business operations and many of them are showing losses of Rs.8 crore to Rs.15 crore.
These companies were lending to each other and have been created to circulate money. The companies, hold assets like agricultural land and also file returns.

The directors are also drawing salaries; there are directors who are "managing" 25-30 companies each.

One address, 75 firms, no employees
According to the one newspaper report, published in 2017, the 75 Firms in a major city have the same office address where there is no employees, no assets and, in fact, no real business.
The news report further reveals that there are 133,256 dropbox companies out of that, 16,634 drop box addresses are there in two major cities alone. A majority of these companies are registered in the Eastern Region.
In the first case of organised money laundering registered after demonetisation against one of the Bank’s Branch, the Enforcement Directorate (ED) found that “huge monies were transferred through RTGS transfers (online transfer) to some shell companies including a case where the director of such a firm was a ‘petty labourer”.
Books of shell companies are well maintained. They have their accounts audited, tax returns filed regularly and a functioning bank account. In most cases, directors and shareholders are unrelated persons and often untraceable. Except for their identities, they have no direct stake.
To address many such issues, the Ministry of Corporate Affairs has issued the Companies (Incorporation) Amendment Rules, 2019.
The Main object of this notification is to identify every active company and have a complete database of it.

The Companies (Incorporation) Amendment Rules, 2019
The details of this notification are explained below:-
1. What is the date of this notification?

The date of this Notification is 21st February 2019.
2. When this notification will come in effect?
This notification has come into effect from 25th February 2019.
3. What is the heading of this new rule?
The heading of this rule is called as Active Company Tagging Identities and Verification-(Rule 25A).
4. To which companies these rules will be Applicable?
This rule is applicable to all the Companies which are incorporated on or before 31stof December 2017.
5. What is the Last Date for filing this form?
The last date for filing this form as per the notification is on or before 25th April 2019.
6. Which Companies are not allowed to file this e-form Active?
Any company which has not filed the due Annual Financial Statement under section 137 or due annual accounts under section 92 or both is restricted from filing E-form active unless such company is in a Management dispute and the Registrar has recorded the same on the Register.
7. Which Companies are not required to file this eform Active?
The following categories of Companies are not required to file this eform Active:

  1. Company which is struck-off
  2. Companies which are under the process of striking off
  3. Companies which are under liquidation or amalgamation or dissolved as recorded under the Registrar of Companies.
8. What will be the consequences if the companies which are required to file the e-form Active, is not filed within the due date 25th April 2019?
The Company will be marked as “Active Non-Compliant” on or after 26th April 2019 and the name of the Company will be removed by the Registrar of Companies as per section 12(9) of the Companies Act, 2013.
Further, the Company will not be allowed to file the following event based forms until it files the e-form Active:

  1. Form SH-7 (Change in Authorised Share Capital)
  2. PAS-03(Change in paid-up Capital)
  3. Dir-12(Changes in Director except for cessation)
  4. Inc-22(Change in Registered Office)
  5. Inc-28(Amalgamation, Demerger, Orders etc.)
9. How to bring the company status as “Active Compliant” when it has not filed the e-form Active within the due date?
After the due date for filing, the Company must file the E Form Active INC-22A along with the fees of Rs.10,000.00 Once the form is filed, the company’s status will be changed into “Active Compliant”.
10. What are the details required for filing the eform Inc-22A?
  1. Details regarding exact location such as latitude and longitude, of the Company.
  2. Photographs of external Building of the Company as well as the photo of the inside of the office, showing one of the directors in its registered office who is digitally signing the eform INC-22A
  3. Details of the Stock exchange, if the Company is a Listed Company
  4. Number of Directors in the Company
  5. Details of a resolution passed by the Company and SRN no. of Form MGT-14 filed with Registrar of Companies, in case the number of Directors appointed in the Company exceeds the Maximum Limit prescribed under the Companies Act 2013
  6. List of Directors of the Company having the approved DIN status as on date of filing this form
  7. Name of the Individual Auditor/Audit firm
  8. Pan Number of the Individual Auditor/Audit firm
  9. Membership number of the Auditor
  10. Registration Number –In case of an Audit firm
  11. Period for which the Auditor or Audit firm is appointed
In case the Company is required to appoint the Cost Auditor under the Companies Act, 2013 then the following details are required for filling the form:
  1. Number of Cost Auditor appointed in the Company
  2. Membership number of the Cost Auditor
  3. Name of the Cost Auditor or Member representing the Firm or LLP
  4. Firm Registration Number in case of Cost Audit Firm/LLP
  5. Name of the Cost Auditor’s Firm /LLP
  6. Period for which the Cost Auditor is appointed
11. If the Company has appointed the Managing Director or  Chief Executive Officer or Manager, Whole-Time Director, then the Company should provide the following details in the form:
  1. Number of roles or position held by the above personnel
  2. DIN number
  3. PAN
  4. Name
  5. Designation etc.
12. If the Company has a Company Secretary, then the following details are required to be filled in the form-
  1. PAN, Name and Membership Number of the Company Secretary.
13. If the Company is required to appoint a Company Secretary as per the Companies Act and Rules but it has not appointed the Company Secretary. Will the Company be allowed to file this eform without furnishing the details of the Company Secretary?
No, the Company is not allowed to file this e-form until the company has appointed the Company Secretary (CS) and furnish the details of the Company Secretary in the e-form. Therefore, Company should first appoint the Company Secretary on or before 25th April 2019(due date) and only then the system will allow it to file this e-form. Until then, if the Company proceeds to file this e form the system will show the error message.
The following picture is an example for that error message:

14. If the Company had appointed the Chief Finance Officer then the following details are required to be filled in the form:
  • PAN and name of the Chief Finance Officer.
  • Details of the Annual filing Forms AOC-4, AOC-4 XBRL, and MGT-7 filed with Registrar of Companies along with their Service Request Number SRN details filed for the Financial Year 2017-2018.
15. What are the documents to be attached with the e-form?
  1. Photographs of the external building of the company as well as the photo of the inside office showing one of the directors in its registered office and that director have to be the one who will be digitally signing the e-form INC-22A
16. Who is required to verify, digitally sign and submit the e-form with Registrar of Companies?
  1. One Director in case of One Person Company
  2. One Director and one Key Managerial Personnel or two Directors in case of other than One Person Company.
17. Whether the Form is required to be certified by a Practicing Professional?
Yes, the form is required to be certified by a Practicing Professionals of ICSI or ICAI or ICoAI.
18. When the One Time Password will be generated?
When the form is duly filled up and complete, then it should be digitally signed by the Directors and Certified by the Practicing Professionals as per the rules and then the form must be pre-scrutinized. If there are no prescrutiny errors then the OTP button will be enabled automatically in the e-form. The user has to click the OTP button and after clicking that OTP button the system will generate the one-time password which will be sent to the Company email id which is filled in the form. Then the user has to fill that OTP password in the form and save and submit the e-form with the Ministry of Corporate Affairs Portal.

Companies (Second Amendment) Ordinance 2019
The Ministry of Corporate Affairs has also amended the Companies Act 2013 by way of Companies (Second Amendment) Ordinance 2019 which was notified on 21st of February 2019.
Under the amended law, non-maintenance of registered office would be one of the grounds for striking off the name of a company from the register by the Registrar of Companies.
The new sections 12(9) and Section 248(1)(e) is inserted in the Ordinance which is reproduced below:

Section 12(9)
Under section 12(9) If the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may cause a physical verification of the registered office of the company in such manner as may be prescribed and if any default is found to be made in complying with the requirements of sub-section (1), he may without prejudice to the provisions of sub-section (8), initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.

Power of Registrar to Remove Name of Company from Register of Companies
  1. (1) Where the Registrar has reasonable cause to believe that—
“(e) The company is not carrying on any business or operations, as revealed after the physical verification carried out under sub-section (9) of section 12.”

The Registrar may, strike-off the name of the Company from the register of companies, and shall publish notice thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the company shall stand dissolved.

Geo-tagging, or attaching data of the exact location of the office, will allow the online return filing system to alert government officials wherever it detects far too many companies are registered in the same premises.
This will help the Government to identify instances of one building being used by hundreds of shell companies as their registered office or of companies citing vacant plots as their registered office address. It will help the Government to weed out the shell companies which are used for Black Money and Money Laundering activities. Therefore, every company which is required to file this e-form under these rules should not take this exercise a burden and they must cooperate with Government of India in fighting against the Black Money and money laundering Activities.

The Author  (CS G. Sriram) is Partner at Mamta Binani & Associates, 
Company Secretaries.

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