29 Jul 2017 13:04 IST

Govt to tighten structuring of companies as shell firms surge

Centre to impose a cap on layers of subsidiaries too

The Centre is working to tighten regulations governing the layers of subsidiaries that a company can have, in much the same way that it did with investment companies. Reflecting this intent, a key proposal in the Companies (Amendment) Bill 2016, which sought to remove restrictions on the number of layers of subsidiaries of a company, has been dropped.

The amendments to the Companies (amendment) Bill 2016 were approved by a voice vote in the Lok Sabha on Thursday, and the amended Bill is expected to be taken up for passage in the Rajya Sabha.

Change in stance

The move to rein in the layering of both investment companies and subsidiaries is a pointer to a change in the government’s earlier perceived willingness to give corporates complete flexibility in designing efficient structures.

It is also clear that the government is not confident about the efficacy of the oversight mechanism of SEBI and the stock exchanges. Company law experts say this is why the government is stepping in to clamp down on corporate structures.

A maze of structures

In India, most large corporate empires, including the Tatas, Reliance and the Vedanta Group, are controlled through an ingeniously constructed pyramid of ownership. Typically, the percentage of equity investments in the holding company is very small.

Shell companies

The reason for the government’s reversal from its earlier proposal to give complete flexibility is not hard to see. There has been a surge in the number of shell companies, especially after demonetisation; keeping a lid on the layering of companies could help tackle the menace of shell companies, it is believed.

Encouraging corporate houses to have a maze of subsidiaries is often problematic for law-enforcement agencies. There are corporate houses with, in some cases, hundreds of subsidiaries.

Task force

In February, the Centre constituted a ‘task force on shell companies’ under the joint chairmanship of the Revenue Secretary and Secretary, Ministry of Corporate Affairs. The task force was told to effectively tackle the malpractices of shell companies in a comprehensive manner.

During the past three years (2013-14 to 2015-16), investigations by the Income-Tax department have led to detection of more than 1,155 shell companies that were used as conduits by over 22,000 beneficiaries. The amount involved in non-genuine transactions of such beneficiaries was more than ₹13,300 crore.