Action against Black money - DEMAT OF SHARES OF PUBLIC Company.

As posted earlier, government has taken various steps with the help of Ministry of Corporate Affairs (MCA) to take action against Shell Companies and companies which might be used as a vehicle to launder money.

MCA, recently on its website, has announced that :

"Any person disqualified  under section 164(2) of the Companies Act, 2013 [the Act] is advised not to  act as director during the  period  of the disqualification and not to file any document or application with MCA as the same shall be summarily  rejected. However, this shall be without prejudice to the  liability of the said person for violation of section 164(2) read with section 167 of the Act including the action under section 448 r/w 447 of the wherever warranted."

Which was followed by a Press Release by MCA about Stricter Norms for Corporate Governance: Punishment for Siphoning off Money from Bank Accounts of “Struck Off” Companies; Disqualifation of Directors from Being Appointed or Reappointed in Companies 

As these measures are not enough, it is already reported in many business leading daily that Government may ask Public Unlisted Companies to convert shares into Demat form.

While these measures in isolation may not look a bigger initiative but what it seems like Government is trying is simply isolating all Shell Companies in all possible ways. It is like an open secret that Private and Public Companies are used in a way to launder the Money.

While, Companies enjoys benefit like a Separate Legal entity, limited liability etc. Shell Companies (As per MCA recent action means companies which has not filed its annual accounts and annual returns on time) are the best way to hide identity of a person benefiting from transactions. As shell companies which has not filed its return on time can easily avoid disclosing the ultimate beneficiary behind the Company while company taking action and transferring money from one account to another account.

After striking at Shell Companies, next move of Demat of shares is important to identify beneficiary on real time. As in case of Physical shareholding, the intimation by Company to MCA is made in terms of Annual Filing (by filing Annual Return) which is a yearly event. Any transfer happened during the year is reported once in a year. In cases, where company has not filed its Annual Return for 1 year can easily hide the ultimate beneficiary detail for 2 years without any fuss. While ultimate beneficiary can take shelter of corporate veil during the period. However, with DEMAT of shares, the share transfer and holding will be reported on real time basis making it difficult for the beneficiary to hide behind the corporate veil.

 While the steps have few advantages, it is not an easy one considering the cost as well as some legal hurdle. As reported in Livemint:

“The government will need to see the cost benefit analysis of such a large exercise covering tens of thousands of public unlisted companies. If the purpose is that of catching tax evasion, then perhaps they can narrow the number of companies rather than ask all public limited companies to demat their shares. The government could consider a classification of these companies that would catch the maximum number of potential players who could commit mischief,” 

Lets see where it is heading, as of now, it is visible that government is determine to take action. The time will tell the success of such actions.