In line with expectations, the government has made public the names of some 55,000 directors who are suspected to be associated with shell companies, says a news report . The development follows the delisting of over 2 lakh companies by Registrar of Companies recently.
The names that have been made public, are unlikely to be eligible for directorship till October 2021, as the period of five years will be calculated from November 2016, when the action against such companies was initiated. “At least 17 registrars of companies (RoCs) of various states have released these names. In some cases, they have released the names of directors in companies that been struck off the RoC list as well. At least six RoCs, including those in Patna, Jaipur and Kolkata, are yet to release a list of such directors” says another report. More names can be expected to be released publicly in the near future, as the government announced recently that it had successfully identified over 1 lakh directors “for their association with shell companies which were deregistered for not carrying business activities for a long period.” It is said to be scrutinizing the data further to single out people with beneficial interests.
The government said last week, “Profiles of directors such as their background, antecedents and their role in the operations/functioning of these companies are also being compiled in collaboration with the enforcement agencies... Money laundering activities under the aegis of these companies are also under the scanner.”
It’s just not the directors that will be under the lens, as the Ministry of Corporate Affairs had recently said, “The Professionals, Chartered Accountants/Company Secretaries/Cost Accountants associated with such defaulting firms and involved in illegal activities have been identified in certain cases and the action by Professional Institutes such as the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India and the Institute of Cost Accountants of India is also being monitored.”
The government is using its powers under the Section 248 of the Companies Act, which says that it is permitted to take action against companies that have failed to start its business within one year of incorporation, or companies that have no carried any business for two financial years, or failed to file its financial statements for three years. Under Section 164 (2), the directors of such companies can be disqualified for re-appointment (for that company or appointed in any other company) for a period of five years from the date of default.
What has generated considerate interest in certain sections of the media and the public are the suspected connections of those disqualified to various political and corporate groups. However, until such links are confirmed, one can only speculate about them, as only names and DINs (Director Identification Numbers) have been made public as of yet. “The names include some that are similar to prominent politicians, from Arunachal Pradesh to Tamil Nadu, and businessmen, including non-resident Indians.”
What makes this exercise so unique, and why is it getting so much attention? For starters, this is the first time that such a naming and shaming method has been applied to directors of companies. Secondly, by consecutively taking steps to deter shell companies from thriving, the government has made its intention of cleaning up the tainted ‘black’ economy clear. Next, this is the first time when punitive action has been taken against the infamous shell companies, for up until now mechanisms for such operations to voluntarily shut down were already in place. “The government in the past had introduced a mechanism to encourage companies to close down voluntarily if their financials did not check out. But the current exercise seems to be of a different magnitude and scale. Apparently, a lot of data analytics and data mining has gone into putting together such voluminous data. It seems like a fallout of demonetization—an integrative, consultative and inter-regulatory action to track black money and instill a culture of compliance,” S.N. Ananthasubramanian, practising company secretary and past president, Institute of Company Secretaries of India, explains in the Mint news report.
One thing is for certain, that this isn’t the last action against companies with their financial dealings all over the place. One way or another, the government is determined to ‘clean’ the economy, and bring everyone into the official record, increase compliance and remove loopholes that are exploited. It would be interesting to see how the strategy, its implementation and impact plays out in the future – considering the strong resistance some of these policies are likely to face.
You can check the entire list of disqualified directors here.