Shell companies are in focus in India today. Given this context, what a shell company means is very different from what is generally understood, especially as there is no legal definition for it in India. US Security Exchange Commission (SEC) provides a narrow definition of the shell company as a publicly held company in which there is no assets or nominal assets other than money, which captures the essence of a shell company.
The broader definition is in line with the popular understanding of shell companies, which is reflected in Webster’s New World Finance and Investment Dictionary as ‘A company that has legal status but provides no service or products and has few, if any, assets. Shell companies may be set up for illegal purposes, such as tax evasion, or formed in anticipation of attracting funding. A shell corporation may also come into existence when a company has failed and operations have ceased, but the “shell” of the company remains.’
Given this wide and multi-faceted definition of shell companies, there is a need to identify and name its different variants, which is listed below:
- Front companies: is a non-trading company used as a vehicle for various financial manoeuvres like money laundering or tax evasion
- Mail box companies: companies used to give owners anonymity. More prevalent in tax heavens.
- Structured Investment Vehicles: companies used to avoid taxes as a means of legitimate tax planning
- Dormant company: companies created for future use in some capacity not yet identified
- Special Purpose Vehicle: a vehicle for financing or business transaction without having any significant assets or operations
- Companies in default: companies which have not complied with the legal requirements like filing annual returns or other mandatory compliances.
Given this nuanced understanding, the nomenclature shell company that is used in India today, is an inappropriate substitute for Companies in default, on the tacit belief the company in default could be a front company.
Considering the importance of ‘shell’ companies in shaping the Indian regulatory world, we have initiated a short survey of 5 questions to get the pulse of professionals who deal with companies. If you have not yet participated in our survey please Click Here.