Shell Companies, also known as Shell Corporations, are those entities that have no business operations in any shape or form but serve a specific purpose for their owners. The main purpose of making a shell company is to use them as loopholes for tax evasion. Since these are loopholes, they are still legal if done correctly. But then, there are those which are done completely illegally under the name of a shell company such as money laundering. Shell Companies play an important role in the Corporate world. It’s importance has been overshadowed by its frequent illegitimate use which gives it a bad name. To our understanding Shell Companies only have illegal uses. To counter that I will quickly point out some very important and perfectly legal uses of these companies which is essential for a corporation:
- To hold or store money temporarily while the host corporation starts a new company.
- As a means of protection of assets against lawsuits.
- If a company operates in a threatening country, for example in countries with high terror activities, then shell companies are established to safeguard the money.
- To obtain access to international markets.
Shell Companies in India
The definition of a Shell Company does not exist in the Indian Companies Act, 2013 or any other law enforced in India. The High Court in a case referred to the glossary prepared by Organization for Economic Cooperation and Development (OECD) which stated a “shell company has been defined as a company which is formally registered, incorporated or otherwise legally organized in an economy but which does not conduct any operations in that economy other than in a pass-through capacity.” Shell Companies are non-trade corporations, as long as they stay that way they are legal entities that exist only on paper. It’s when they are put on any stock exchange that they become illegal.
A prime example of the legal use of a Shell Company that does not injure anyone in the process is, If say there are two companies A and B, Here A wishes to do business with the other company B but does not wish to be directly associated with it because of its bad reputation, they can create a shell company to disguise their transactions from each side. Owning a shell company is not illegal as explained above, but it’s illegal use is the most prominent in today’s day and age. The most famous illegal use of a shell company has to be money laundering. Since the Shell Companies lack the basic transparency of ownership and financial transactions. They are the perfect platform to transact earnings from illegitimate sources. A shell company on the surface is just like any other company. If that’s the case how are we supposed to differentiate them from the others? To answer this question, SEBI has put forward a few parameters to pick out a shell company among the other companies. They are:
- None or close to no operation activities;
- Insignificant operational assets;
- Acting only in an intermediate capacity;
- Not having a tangible existence at the registered address;
- Multiple companies have the same registered address.
Shell Companies can be violative of the following laws
As mentioned above, Shell Companies are mainly used for illegal uses. The question then arises is what laws are they actually breaking to come under this category. Laws obviously differ from country to country which such Shell Companies can be in violation of. In India A Shell Company violates a lot of established laws such as:
- When a shell company is used to pass someone black money through them, it is presented as tainted money which is a punishable offense under Section 3 of PMLA.
- If a company uses a shell company to create many subsidiaries of its own it will be violative of The Companies (restriction on the number of layers) Rules 2017. This rule restricts the number of subsidiaries a company can have.
- If a Shell Company is used for any fraudulent activity, the owners and any other beneficiary shall be liable under Section 420 of IPC
- Benami Transactions Prohibition (Amendment) Act, 2016. This Act makes it illegal for any person to hold any asset under a false name to avoid taxation.
The SEBI (Securities and Exchange Board of India) is completely aware of the questionable nature of the shell corporation structure in India and is actively monitoring the shell corporation space. In the year 2017, SEBI banned 331 shell companies from trading, 162 of which were actively trading in the Indian market. The existence of shell companies does not directly affect any individual but it creates a facade in which any normal person might invest and which money will be used for illegal purposes on top of the investor losing his money. The Indian government is aware of this fact and is working on a solution for this problem but its pace has been slowed down because of a few issues.
- Since there is no proper definition of a “Shell Company” in any Indian law there cannot be any law to deal with it as well.
- Distinguishing between a legal and illegal shell company in between this complex structure is a very difficult task as they all consist of different transactions from different accounts.
The Indian government did manage to inflict some harm on these shell companies, as the Registrar of Companies used his powers to strike down several companies that had failed to file the appropriate financial statements from the register of companies. The Income Tax Department also investigated to identify all of the anomalies that corporations were involved in, as well as to pursue criminal charges against any recipient who benefited from those anomalies. A proper definition of a shell Company is readily needed to put a proper end or at least to minimize it as much as possible. It must be set up in such a way that can clearly distinguish between a legal shell company from an illegal one. Once a proper definition has been put into order laws against it can also be issued in a way that suits best.
Statistics in India
 businesses were involved in manufacturing and other occupations. Information technology (IT), research and development (R&D), law, and consulting are examples of business services.
The rise of Shell Companies is to be expected considering the intricacies it takes to actually identify a shell company in respect to the profit it produces to the individuals concerned. This rise has been very nicely tackled by our Indian Government and SEBI as the statistics clearly showed. The lack of proper differentiating factors like a definition in any Acts imposed in India still haunts the finance world against these shell companies. Even without the said differentiation the attack imposed by our government looks promising with a bright future ahead. With the actions imposed and the probability of laws being implemented for the same, the rise of these shell companies should become non-existent just like their tangible existence.
Author(s) Name: Akshay Jadhav (Mother Teresa Law College, Jabalpur)
 ( Act no. 121-C of 2011 )
 Assam Company India Ltd. And Anr vs The Union Of India And 2 Ors on 7 March, 2019
 Prevention of Money Laundering Act, 2002 (Act no.15 of 2003)
 Indian Penal Code, 1860 (Act no.45 of 1860)
 Section 248 of the Companies Act, 2013 (121-C of 2011)
 LLP, S., 2022. Challenges to the Shell Companies in India. [online] Sbsandco.com. Available at: <https://www.sbsandco.com/blog/challenges-to-the-shell-companies-in-india> [Accessed 13 March 2022].