A big broom — on crackdown on shell companies

A big broom — on crackdown on shell companies

The decision by the Ministry of Corporate Affairs to crack down on so-called ‘shell companies’, disqualify select directors in these entities and debar them from taking board positions for a specified period of time cannot be faulted. This would begin the clean-up of the Augean stables of firms set up in many cases with less than bona fide intent and having virtually no business operations. However, the Union government’s move to publicise the identities of some of these individuals with a view to ‘naming and shaming’ them is fraught with risk; the devil, as always, is in the detail. While the underlying motive for this action, as cited by the ministry, of “breaking the network of shell companies” in the government’s fight against black money is laudable, there is a real danger of inadvertently tainting genuine firms and individuals. This was in evidence when the Securities Appellate Tribunal recently gave relief to some entities over trading curbs hastily imposed on them by SEBI. Also, given the sheer scale of the task at hand, with the ministry identifying more than 1.06 lakh directors for disqualification, it is imperative that there be great care and diligence to ensure that the authorities do not penalise anyone who for non-mala fide reasons failed to comply with the relevant provisions of the Companies Act. After all, when the intention is to create “an atmosphere of confidence and faith in the system” as part of improving the climate for ease of doing business, the onus must be on taking to task only those who intend to subvert the law.

At a broader level, the Centre and the regulatory arms need to address the underlying systemic shortcomings that have allowed so many companies, both listed and unlisted, to become vehicles of malfeasance. For one, as so many entrepreneurs establishing medium, small or micro enterprises have found to their chagrin, it is far easier to register a firm than it is to dissolve or wind it up. Similarly, in the case of public limited companies, a major portion of the extralegal activities including price rigging of shares, insider trading and other questionable practices have been found to occur in the large mass of smaller companies. The problems of acute illiquidity, weak governance and regulatory oversight have combined with the difficulty in delisting to make these firms prime targets for financial fraudsters and money launderers. The solutions, therefore, need to be targeted at addressing the deep-rooted maladies rather than just the symptoms, making it easier for entrepreneurs to deregister and/or delist a company. The government has already shown it is prepared to act in terms of enacting the necessary legislation to address banking sector stress by adopting the Insolvency and Bankruptcy Code. A simplified process, possibly online, to dissolve or delist would usher in significant benefits, including improved governance, and ensure that all stakeholders from small retail investors to corporate promoters have an enabling atmosphere to operate freely by remaining compliant with the law or risk facing stringent penal action.