Registrar of Companies strikes off more than 3.8 lakh companies

“Under the special drives taken by the Registrar of Companies, 3,82,875 companies were struck off under Section 248 (1) of the Companies Act till the financial year 2020-21,” Inderjit Singh told the Rajya Sabha members.

New Delhi: In order to deal with the problem of shell companies that may engage in illegal activities such as money laundering and tax evasion, more than 3.82 lakh companies have so far been closed by the Registrar of Companies, the nodal agency for registration of companies and Limited Liability Partnership firms (LLPs) in the country, the government informed the Rajya Sabha on Tuesday.

According to the information given by the minister of state for corporate affairs, Rao Inderjit Singh, in the Rajya Sabha today, these companies were struck off from the register of companies as per a special drive launched by the registrar of companies (RoC).

“Under the special drives taken by the Registrar of Companies, 3,82,875 companies were struck off under Section 248 (1) of the Companies Act till the financial year 2020-21,” Inderjit Singh told the Rajya Sabha members.

What is a shell company?

The term shell company gained prominence in the wake of demonetization carried out by the Prime Minister Narendra Modi during his first term in November 2016 when a sizable number of such companies were found to be involved in illegal activities such as money laundering, benami transactions and other financial irregularities. A shell company is an inactive company used as a platform for conducting various financial manoeuvres or it is kept dormant for future use in some other capacity.

Though shell companies have existed in almost all countries and jurisdictions for several decades, the term shell company has not been defined in the Companies Act of 2013 which was passed during the second term of Prime Minister Manmohan Singh. Rao Inderjit Singh told the Rajya Sabha that the term shell company usually refers to a company without active business operation or significant assets.

“In some cases, these companies are used for illegal purposes such as tax evasion, money laundering, obscuring ownership, benami properties, among other things,” said the minister.

How to identify shell companies

Singh said a special task force set up by the government to look into the issue of shell companies recommended use of certain red flag indicators for identification of suspected shell companies, among other things. One of the ways to identify such shell companies is when the Registrar of Companies finds out or has a reasonable cause to believe that these companies have not been doing any business or operation for the last two financial years.

How does RoC decide to strike off a company?

However, the RoC does not initiate the closure procedure unless it verifies that a company, which has not been doing any significant business for the last two financial years, has applied for the dormant status or not. Once the RoC verifies that a company which has not been doing any significant business in the last two financial years, immediately preceding the current financial year, and has also not applied for the dormant status under section 455 of the companies act of 2013 then it invokes its powers under section 248 (1) of the act.

The minister informed the upper house that the government has undertaken special drives for the identification and closure of such companies. “The Registrar of Companies (RoC) strikes off these companies after following the due process of law,” said the minister.