Legal experts split hairs on definition of shell companies

Legal and corporate governance experts are having a tough time fleshing out the ambiguities in the definition of a shell company, following the Securities and Exchange Board of India’s (Sebi’s) decision to restrict trading in 331 of them. Many say it is important to separate genuine shell companies from the rouges. A view that is gathering momentum in the legal fraternity is to give the promoters of suspect shell companies a chance to defend themselves before any action is taken against them.

Experts say using shell companies is a legitimate global practice and does not signify illegality of abuse of tax and regulatory provisions.

However, in India shell companies have not been defined statutorily or in the judicial sense, notes Sandeep Parekh, founder, Finsec Law Advisors.

Hetal Dalal, chief operating officer, Institutional Investor Advisory Services, a proxy advisory firm, points out that simply having a shell company cannot denote any wrongdoing. She is of the view that the capital markets regulator must consider having a more rigorous approach to discern those (shell companies) that are genuine and those that are being used for money laundering or other nefarious activities. However, the challenge lies in gathering data on transactions and being able to distinguish between genuine business transactions and transactions that lack substance, say experts.

Soumya Dash, an associate with InGovern Research, a corporate governance and advisory firm, suggests that either Sebi or the Ministry of Corporate Affairs should come up with a notification listing the criteria to be applied to classify any company as a shell company.

The affected firms should be allowed to communicate to the exchange, clarifying their position on why they should not be classified as a shell company, he adds.

Link: Business Standard – 10 Aug 2017