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Aug 18, 2017

Here's why PM could be wrong about his claim about closure of 'shell' companies

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In his Independence Day address, prime minister Narendra Modi has said that after demonetisation, the government has identified 3 lakh shell companies dealing in Hawala transactions and cancelled registration of 1.75 lakh of them.

He also said they have been able to accomplish this task despite the fact that even if five companies shut shop in India, there is huge public outcry. Let us see if these claims made by the prime minister are correct.

1) Identification of 3 lakh shell companies: We could not find any official (finance ministry or income tax department) statement or release verifying the prime minister's claim. All that we have is a response to a query in Lok Sabha, where the government has claimed that from 2013-14 to 2015-16, investigations by the Income-tax Department have led to detection of more than 1,155 shell companies/entities which were used as conduits by over 22,000 beneficiaries.

The 3 lakh 'shell' companies that the prime minister is referring to could be dormant companies and not necessarily shell companies.

2) Deregistration of 1.75 lakh shell companies post-demonetisation: Answering a question in Lok Sabha, minister of state Santosh Gangwar has informed the house that as on 12 July 2017, Ministry of Corporate Affairs has removed 1.63 companies from the Register of Companies by following the due process under Section 248 of the Companies Act, 2013. Probably, the PM's claim of closing 1.75 lakh companies comes from here.

However, we do not know if registration of all these companies' were cancelled after demonetisation. The Lok Sabha response only says cancellation till 12 July 2017.

Besides, such closure of companies are common and they are in no way all shell companies. Closure of companies can happen for many reasons -- liquidation, merger and amalgamation, deregistration of inactive and defunct companies.

Section 248 of the Companies Act 2013 gives the Registrar of the Companies the power to deregister inactive and defunct companies. However, these dormant or inactive companies are not necessarily shell companies.

"Some of these defunct and dormant companies are being loosely termed as shell companies because there is by law no definition of shell companies," says Pavan Kumar Vijay, founder, Corporate Professional, a corporate law advisory firm.