Don’t jump the gun

The Centre’s concerted crackdown on shell companies has taken another controversial turn with the ministry of corporate affairs recently commencing the process of disqualifying and ‘naming and shaming’ the directors associated with such firms. With over one lakh directors disqualified and the names of over 55,000 made public as ‘defaulters’, the issue is now stirring up a hornet’s nest at India Inc. A group of high-profile industrialists named in the list have gone to court and obtained a stay on the directive. About 500 listed companies have found their directors in the cross-hairs of this rule change and are vociferously protesting it. The Government’s persistent efforts to put in place strong deterrents against the scourge of money-laundering using the shell company route are welcome, but jumping the gun on penal action without making a cast-iron case against suspected firms, can prove counter-productive.

Post-demonetisation, in its keenness to showcase the success of its anti-black money offensive, the Government has ratcheted up its drive against shell companies that liberally dot India’s corporate landscape. True, shell companies do make up a key cog in the parallel economy — variously used by tax evaders to obscure ownership, siphon off public funds, mis-invoice imports/exports, create dubious transfer pricing arrangements and even launder demonetised notes. But, then, a fair number of shell companies also exist for perfectly legitimate reasons — holding treasury shares or intellectual property, or for projects under implementation. Admittedly, closely held companies from both categories are notoriously lax with their statutory compliance, with only six lakh of the 15 lakh registered companies said to be regular with their financial filings. But the key problem with MCA’s recent crackdown is that it has failed to make a clear case against the identified shell companies for money-laundering, and has only cited company law infractions to initiate penal action. A few listed ‘shell’ companies have even been able to prove viable operations at SAT hearings. Given that investigations seem to be at a preliminary stage, naming and shaming individuals associated with them, without giving them an opportunity to be heard, seem to go against the principles of natural justice.

If the Centre’s intent is to usher in a better compliance culture at corporate India, simplifying the exit policy for corporate entities would be a good step forward. The long-winded procedure prescribed for corporate liquidation has been a key factor behind the growing ranks of zombie companies. There has been a very recent attempt to consolidate fragmented laws and expedite the process through the newly enacted Insolvency and Bankruptcy Code, which took effect from April 1. This rule change allows the NCLT to hear winding up petitions and empowers insolvency professionals to handle all the related processes. It remains to be seen if this offers quick euthanasia to ailing companies seeking to call it quits.

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