Crackdown of Shell Firms: The Only Short-Term Positive Impact of Demonetization

On 8 November 2016, the Prime Minister unexpectedly scrapped Rs. 500 and Rs. 1,000 notes - accounting for 86% of cash, to what he tagged as the step to scrap-out black money and fake currency in the system. The primary aim was to retrospectively punish the tax evaders, fight counterfeiters, and stop terror financing activities. But unexpectedly almost all the bank notes were deposited in the bank accounts.

The bottom-line is that people have not only managed to convert their non-taxed income at banks through so-called Jan-Dhan accounts but have also managed to buy assets like gold. Another route that the tax defaulters opted was to fly the cash out of India's remote northeast regions where Indian Income Tax exemption is given to a lot of tribes. A few have also taken to transferring the money to the farmers who again are given an income tax exemption.

However, the move succeeded in profiling the difference between the actual flow of money and the undeclared money. The policy of demonetization has served as a measure to smoke out a large chunk of black money that helplessly had to be poured into the mainstream of the melting pot. The authorities noticed a surge in shell companies depositing cash in banks in order to hide who owned that wealth.

What is a Shell Company?

A shell company is defined as a non-trading organization which doesn't engage in any trading activity. Company registration of shell companies is done to operate it as a medium for another organization's business activity. They are often listed on the stock exchange and aren't illegal. Shell companies exist only on papers and have no physical presence. Majority of the shell companies are used as the vehicle to carry out illegal activities like tax evasion, fake services schemes, bankruptcy fraud, money laundering, and market manipulation.

Aftermath of Demonetization on Shell Companies

Post demonetization, the Government canceled 2.24 lakhs suspected shell companies and disqualified 3.09 lakh directors. It was found that as much as Rs 17,000 crore were deposited and withdrawn during the demonetization period. A company had a dubious honor of depositing and post-haste withdrawing of Rs. 2,484 along with another company having as many as 2,134 bank accounts. The shell companies did not spring up all of a sudden post-demonetization. Rather, they have been there since ages. The names of 2,09,032 companies have been struck off from the Register of Companies, failing to fall within the ambit of Section 248(5) of the Companies Act.

Undeniably, demonetization was focussed at fluttering the dovecots of the pilferers. Lack of an activity for a continued period followed by a volcanic eruption of frantic financial moves is an indicator of dubiety as revealed by the investigators of the Ministry of Corporate Affairs.

The excellent and immediate follow-up of this is that all the bank accounts and registration or sale of immovable properties is frozen. The existing directors and authorized signatories of these companies will now become former directors and formerly authorized signatories resulting in unsuccessful bank account operations of these companies leading to the money in the accounts frozen - open to tax probes and out of reach.

According to the government, the companies who could be sitting on the vast amount of unpaid tax are eligible to be restored under Section 252 of the Companies Act through an order of the National Company Law Tribunal. As and when the restoration happens, the changes in the status of the company will reflect from "Struck Off" to "Active".

The Indian Bank Association had been advised to take immediate steps in order to put restrictions on bank accounts of the struck off companies. Apart from this, the banks have also been advised to enter into enhanced diligence while dealing with companies on a regular basis.

The Prime Minister in his hour-long address on July 1 at the foundation day event of the ICAI (Institute of Chartered Accountants of India), sent out a strong message against the chartered accountants helping entities in the dealing of black money by underlying their powers and responsibilities.

Both Modi and his Finance Minister Arun Jaitley must be applauded well for charting out a well-planned attack on the illegal drives of the Shell Companies. The move helped the government to keep a tab on bank officials, launderers, sundry goldsmiths and crooked lawyers who played the handmaiden role during the tense demonetization period.

End of the Line

But it should also be taken into consideration that a jolting move like "Demonetisation" wasn't necessarily required to be undertaken.

Conjointly, the government's policy caused a huge cash shortage among the masses leading to long queues in front of the ATMs and some even dying in the process. It is very unlikely on the part of the government to admit it was a big mistake. Perhaps the biggest proof of the failure has been that the government no longer talks in terms of its initial benefits but in a new tune of a "Cashless economy".

To conclude, none of the healthy economies have ever carried out demonetization. India's demonetization is aberrant in the history of international economy. Amidst normal and political conditions, it is just a combination of secrecy and suddenness. All the other sudden demonetizations in the international economic history have occurred in situations of hyperinflation, political upheavals, wars or other extreme circumstances.

The real costs of this unplanned and bizarre event are only just starting to come out.


“This article has been contributed by Sarubpreet Kaur who is a content writer with LegalRaasta. Legal Raasta is an online portal that assists companies and startups with company registration, GST registration, Food License, Trademark registration.”


Views: 23


You need to be a member of GlobalRisk community to add comments!

Join GlobalRisk community

Our Sponsors

Would you like to reach over 70,000 + Risk Professionals? 



Current Partners Include:



Join GRC Inner Circle - Get Top Risk Resources, Member Support PLUS become our patron

Business Exchange

If your organization delivers products and services that bring value to our members, you are welcome to join our partnership program.

Companies are welcome to setup a business profile page in our Multimedia Business Directory. You will get full control of the page and can include cutting edge possibilities – videos, adverts, presentations, white papers, job offers, Press Releases, product information, company blog, news feeds and more.


Our Knowledge Partners

Request our MEDIA KIT

Our Twitter feed

© 2018   Created by Boris Agranovich.   Powered by

Badges  |  Report an Issue  |  Terms of Service