India moves to act on widespread financial deceit

Tackling shell companies that use operations for nefarious reasons now a government priority

epa06241789 Indian Prime Minister, Narendra Modi waves towards supporters during Bharatiya Janata Party's (BJP) 'Abhar Rally' at Bilaspur, India, 03 October 2017. The rally has been organized by the BJP, ahead of assembly elections in the state in 2017. The Indian Prime Minister also laid the foundation stone for All India Institute Of Medical Sciences (AIIMS) at Bilaspur during his visit.  EPA/SANJAY BAID

Sangeeta Lakhi, a senior partner at Rajani Associates, a law firm based in Mumbai, talks to The National about the problems caused by shell companies in India.

Why is the Indian government is moving to crack down on shell companies?

Over the past 12 months, the regulators have highlighted the issue of  shell companies. The regulators fear that left unchecked, shell companies may be utilised for various illegal purposes, including money laundering.

Has India already done a lot to target this issue?

India has taken effective steps to prevent money laundering, counterfeiting, hoarding and tax evasion. Last year, a special investigations team on black money reported that large amounts of unaccounted wealth was stored and used in the form of cash by listed shell companies, using the stock exchange platform, helping the tax evaders convert black money into white while taking the advantage of exemptions available for long-term capital gains.

What about demonetisation?

While, on the one hand, the government thought that demonetisation will curb tax evasion, on the other hand, there was a surge in deposits of cash amounts by shell companies, seemingly in a bid to hide who owned that wealth. The exercise of demonetisation was somewhere brought to a nought. The government then decided to monitor and crack down on such shell companies.

Why are there so may shell companies in India?

Owning a shell company does not necessarily imply any wrongdoing and such shell corporations are not illegal per se. Until recently, Indian companies were permitted to incorporate multiple layers of companies to operate their business. Some of these companies are used for various business and tax purpose, more particularly, between the companies themselves. What is not ethical is using such companies to the disadvantage of the revenue department and gaining unjust advantage from transactions by such shell companies. Shell companies are used to evade tax and undertake nefarious activities, more so at time such as demonetisation.

How effective are the steps that are being taken?

It will take years, maybe a decade, before the government may be able to control and ring fence such nefarious activities. To achieve this, the government must gather financial data and sync several databases, including data from the tax department, registrar of companies, and banks to detect unusual financial transactions. Additionally, litigation by way of appeals, writ petitions and public interest litigation - more particularly after the Supreme Court recently declared right to privacy to be a fundamental right by the affected parties - may also delay or frustrate the efforts of the government in dealing with black money and tax evasion.

Could the steps to crack down on shell companies help boost confidence among investors?

On the contrary, investors will be confused as to whether to believe in the companies that they have invested in or believe in the Indian government, which throws up such surprises on a regular basis.