What do you mean by Shell Companies?

Recently, since SEBI took action against 331 Shell Companies, the word Shell Company is in the news more often and while it is used by many news channels and government officials alike, surprisingly, there is no proper definition of Shell Company is available or in other word there are no particular way a Shell Company is classified. What does it mean? It means that a Company which is Shell Company as per SEBI may not be Shell Company per se if proven in court of law. 
So what is Shell Company after all?
Shell Company is not a legally defined word but it is generally used to describe a Company which has no business activity. Shell Company may not necessarily used for Money Laundering or illegal activities per se. 
Shell company is not a word defined under Companies Act, 2013. However, in general team it means a Company which does not have any business or a business which is different from what it is apparently visible. These are generally a non-trading company used as a vehicle for various financial manoeuvres or kept dormant for future use in some other capacity.
Eg; A Company formed as a subsidiary for bidding a project and the Company does not able to win bid. The newly formed subsidiary will be a shell company till the time it starts another activity. While ROC/MCA has no problem with such shell companies but there are certain companies which are not having a business and are not filing statutory documents with ROC/MCA and in case if Government is willing to take action against such companies, promoters/directors are either long gone or they do not have current status as the filing is not done. In such scenario it makes a dangerous proposition for Government as in case of any fraud they will not be able to hold on the person who is primarily responsible for such fraud and all person linked as Promoter/Director will have no business in such entity.

Therefore, in a recent initiative, MCA has struck off more than 160,000 Shell Companies which are not regular in filing of its statutory documents and have laid down a process by which promoter can revive the struck off company, if aggrieved by ROC order. Further, SEBI has also acted against such companies, recently.

Since, there are no definition or no specif way to define Shell Companies, different authorities take different interpretation to classify a company as a Shell Company but the primary object of such classification is to avoid fraud before happening as a preventive measure instead of corrective action.



MCA in order to take action against such inactive companies, classified shell companies as a Company which has not done its Annual Filings (which is mandatory for all Companies) for past few years.  So technically it is not a defined term but mainly used to define inactive companies which are irregular in its statutory compliance.


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