All you need to know about shell companies

January 27, 2020
shell companies

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This article is written by Srishti Kaushal, a first-year student of Rajiv Gandhi National University of Law, Patiala, Punjab, pursuing B.A.LL.B. (Hons.). In this article, she discusses what the shell companies are, how these can be identified, and what the government is doing to tackle issues related to shell companies.


A few years back, while talking about India’s battle against black money, Prime Minister Narendra Modi said that more than 1.75 lakh shell companies had been de-registered under his Government. 

Recently, the Securities and Exchange Board of India also brought 331 shell companies under its radar and put a restriction on all trading activities of these companies.

Such news related to shell companies is a common occurrence. But what are these companies? Why are there constant efforts to put restrictions on their functioning? How successful has the government been in actually putting these restrictions? 

We will answer all these questions in this article.

What is a shell company?

Before answering any other question, let us first understand what exactly a shell company is.

At present, neither Companies Act, 2013 nor Companies Act, 1956 nor any other Act gives a definition for a Shell company. In fact, around three years back, a parliamentary panel asked the Ministry of Corporate Affairs to find a definition for ‘Shell Company’. Efforts to define it are still being made and many recommendations have been considered.

One suggestion was given by the Organisation for Economic Co-operation and Economic Development. The definition given was, “A shell company is a firm that does not conduct any operations in the economy (other than in a pass-through capacity), but it is formally registered, incorporated, or legally organized in the economy.”

Thus, a shell company is a company that exists only on paper. It does not have any actual active business operations nor any significant number of assets. These companies do not engage in any economic activities but have some corporate legal personality.

How to identify a shell company?

Though there is no statutory provision in this regard, The Securities and Exchange Board of India has identified certain parameters for the identification of shell companies. These are:

Besides SEBI, there are many agencies and individuals who have also tried to lay down parameters for identifying these companies. Some parameters laid down are:

Why are shell companies created?

Now that we know how we can identify a shell company, let’s see why these companies are created.

Today, Shell companies are usually associated with the following activities:

Are shell companies always created for illegal purposes?

No, it is not necessary that a shell company is engaging in illegal activities. Though, till now we have only discussed how shell companies can be used illegally, at times, shell companies work within the legal limits as well. Let’s look at an illustration to understand how shell companies can work legally.

Company ‘A’ creates a subsidiary solely for looking after its HR Functions. Now, this subsidiary does not engage in any form of trade or business. Because, it neither has any significant assets, nor does it have real business operations, this subsidiary can be considered as a shell company, but it is not illegal.

In  Assam Co. India Ltd. vs. Union of India, a company owning a substantial number of tea estates, producing millions of kilograms of tea on an annual basis and feeding thousands of families was termed a ‘shell company’. The court held that considering the negative implications of being branded as a shell company, it was not justified to treat the company as a shell company.

The legal reasons for which a shell company can be created are:

As mentioned creation of shell companies is not an offense. However, some issues arise with establishing a shell company. These are as follows:

Laws that a shell company may violate

Now that we know illegal purposes a shell company is created for, let’s have a look at some of the laws it violates when engaging in such illegal activities.

How does the existence of shell companies affect you?

To answer this question, you need to ask another question is whether you are ready to let your money be used for illegal purposes? If you invest in a shell company, or in an entity which has set up a shell company, your money might be used for illegal purposes.

Moreover, since the government has been on a mission to remove these companies from the exchanges, you may lose your invested money completely as well. 

Besides, if you are an honest taxpayer, you are bound to be exasperated by seeing a company or an individual repeatedly escaping the tax liability. Also, repeated tax evasion harms the economy as a whole, as well.

Challenges faced in India in an effort to stop illegal shell companies

The Indian government has been making significant efforts to restrict shell companies from engaging in illegal activities. But, it has faced certain issues. These are:

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What is the government doing to act upon the illegal shell companies?

Task Force 

The task force was headed by the Secretary and Revenue Secretary of the Ministry of Corporate Affairs. Others Members of this task force include the Department of Financial Services, SFIO, CBDT,  RBI, SEBI, CBEC, CBI, ED, FIU-IND, DG GSTI, and DG-CEIBs. Since its incorporation, It has met multiple times.

It has given many suggestions, which have been accepted and followed:

The main achievements of the task force are:


By engaging in tax evasion, money laundering, etc., shell companies engaged in illegal transactions, as they usually are, can be a huge hurdle for the economy. In India, there is a big issue with regards to dealing with these companies. This is because there is no specific provision or law which explicitly deals with Shell companies. Moreover, a legal definition and criteria for recognition is also lacking.

The need for a coherent structure to deal with shell companies is highly felt. Such a structure also needs to ensure that such regulation does not create unnecessary obstacles for legal entities, which appear to be shell companies. 

A careful balanced definition of shell companies is required which should be wide enough to cover all criteria to identify the illegal shell companies, while at the same time leaving all legal companies out of its purview.


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