Not all ‘shell companies’ have shady business

Not all ‘shell companies’ have shady business

The threat of arbitrariness and excess hangs over Indian business today, after the Finance Bill has armed junior taxmen with discretionary powers of search and seizure and with the ongoing crackdown on shell companies.
The term shell companies is loaded: some nefarious intent or the other is implied by its very nomenclature. All companies without an operational business are not meant for ulterior purposes. One company’s purpose, for example, could be to accumulate shares in a takeover target, without triggering an open offer till the relevant threshold is reached, fully in compliance with the law.
Another could be used to hold intellectual property licensed to companies around the world. Yet another’s purpose might be to hold a company meant to be spun off after meeting some financial targets. There are any number of legitimate purposes for creating and operating socalled shell companies.
The reform that is required to prevent such companies from being used to anonymise undesirable transactions is a mandatory requirement for companies to declare their beneficial owner, on the lines of the reform brought about by the David Cameron government in Britain.
The G20 has been trying to get member countries and other jurisdictions to adopt the requirement of a unique legal entity identifier. If all companies and persons have a unique identifier, like Aadhaar for Indian residents, the beneficial ownership can be traced along a hierarchy of holding and cross-holding companies.
If a company is identified as carrying out money laundering, say, the beneficiary of that activity would become apparent, if such a reform is carried out. The point is to separate illegal transactions from the corporate structure in which it is carried out and to penalise illegality, not damn the corporate structure that has a great many legitimate uses. Paradoxically, the twin reforms of anonymous electoral bonds and removing an existing cap on corporate donations to political parties encourages the setting up of shell companies for the specific purpose of funding parties.