Auditors come under lens amid crackdown on shell companies

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A multi-agency clampdown has begun on shell companies to tackle the black money menace wherein the role of auditors has come under the scanner for alleged connivance in facilitating illegal transactions.

The auditors’ role is also being looked into for not raising the red flag as several cases have come to the fore, including at listed companies, for alleged mismatch in financial statements, sharp erosion in net worth, siphoning off funds to group and promoter entities, sources said.

Stepping up the vigil, the corporate affairs ministry as well as Sebi and other regulatory authorities are keeping a close tab on activities carried out by shell companies.

Sources said regulatory agencies are examining the role of auditors to ascertain whether they were also involved in suspected illegal activities.

The ministry as well as Sebi are closely looking at the functioning of auditors in various companies, especially those that have not been carrying out business for long. After a detailed analysis, the authorities would decide on the next course of action, sources added.

Auditors, who have greater responsibilities under the Companies Act, 2013, are required to ensure that financial statements of a company are proper and can red flag dubious transactions.

As part of larger efforts to fight illicit fund flows and tax evasion, the ministry has already struck off the names of over two lakh companies from the records and further action is expected.

Besides, Sebi has taken against 331 listed entities that are suspected shell companies. While the watchdog had imposed strict trading restrictions on these scrips, curbs have been eased in some cases after the companies went on appeal against Sebi’s move.

On Tuesday, the government said more than 1.06 lakh directors would be disqualified for their association with shell companies.

The ministry, which is implementing the companies law, has also identified professionals, chartered accountants, company secretaries and cost accountants associated with the defaulting companies.

Besides, such people “involved in illegal activities have been identified in certain cases and the action by professional institutes such as ICAI, ICSI and ICoAI is also being monitored”, an official release said on Tuesday.

Separately, authorities are looking at the possibility of having stricter scrutiny of global auditing firms to make them more accountable with such auditors coming under the lens in various corporate misdoings.

A big area of concern pertains to the big guns seeking to wash off their hands whenever their names crop up in any accounting wrong-doing while their delaying tactics in the name of jurisdiction have also been noticed, an official had said earlier.

While the existing legal framework provides for stringent provisions for auditing activities, there is no specific system in place when it comes to overseas audit firms.

While discussions on having tighter regulations for foreign audit firms are going on, the ministry is already examining the recommendations of the 3-member expert panel on various issues related to audit firms amid concerns over certain practices circumventing regulations.

 The expert panel, headed by Teri Chairman Ashok Chawla, had submitted its report in March this year.
Source: Times of India

Centre asks banks to restrict accounts of 2.09 lakh firms

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The finance ministry has advised all banks to take immediate steps to restrict transactions in bank accounts of more than 2.09 lakh companies, whose names have been struck off the Register of Companies.

Banks have also been advised to step up due diligence while dealing with all firms in general and been alerted that even if a firm is ‘active’ in the corporate affairs ministry database, it should be seen with ‘suspicion’ if it has failed to file statements or returns.

‘Not compliant’

“…Prima facie, the company is not complying with its mandatory statutory obligations to file this vital information for availability to its stakeholders,” the finance ministry has reasoned.

On July 1, Prime Minister Narendra Modi had first revealed the government’s decision to cancel the registrations of one lakh companies that had suspicious and questionable operations, identified on the basis of data mined from the deposit of bank notes following last November’s demonetisation of Rs.500 and Rs.1,000 notes.

The PM had promised more action would follow on two lakh similar firms and 38,000 shell companies. Tuesday’s statement reveals that progress has been made in scrapping another 1,09,032 firms under the Companies Act since then.

‘Directors barred’

“The existing directors and authorised signatories of such struck-off companies will now become ex-directors or ex-authorised signatories. These individuals will therefore not be able to operate bank accounts of such companies till such companies are legally restored under Section 252 of the Companies Act by an order of the National Company Law Tribunal,” the ministry said, disclosing ‘stepped up decisive action’ against errant companies.

“Since such ‘struck off’ companies have ceased to exist, action has been initiated to restrict the operation of [their] bank accounts. The Department of Financial Services has, through the Indian Banks Association, advised all banks … [to] take immediate steps to put restrictions on bank accounts of such struck-off companies,” the ministry said, adding that the list of firms had been put up on the corporate affairs ministry’s website.

In addition, the statement said that banks had been advised to go in for ‘enhanced diligence while dealing with companies in general.’

“A company… even having an active status on the website of the Ministry of Corporate Affairs but defaulting in filing of its due financial statement/s or annual return/s in particular of charges on its assets on the secured loan should be seen with suspicion…” the ministry has told banks.

Source: The Hindu

Directors of Shell firms can’t join other companies’ boards

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Directors of shell companies which have not filed tax returns for three or more years will be barred from taking similar positions elsewhere or getting reappointed, the government said, as it intensified the crackdown on firms that exist only on paper.

The government has struck more than 2 lakh shell companies off the Register of Companies and put restrictions on their bank accounts as part of its clampdown on black money.

Directors of the companies that were struck off the RoC could face up to 10 years in jail if they were found siphoning off funds, the government said on Wednesday.

The government said it is compiling the profiles of the directors at such companies in collaboration with enforcement agencies and expects the move to cover 2-3 lakh people.

 Professionals such as chartered accountants, company secretaries and cost accountants associated with shell companies and involved in illegal activities have also been identified, according to a statement.

The decisions were made at a review meeting chaired by the minister of state for corporate affairs, PP Chaudhary, to strengthen the rules and procedures of corporate governance, it said.

The move “would not only help in checking the menace of black money but also would promote an ecosystem of ‘ease of doing business’ and enhancing investors’ confidence”, Chaudhary said.

Enforcement agencies are compiling profiles of directors, including their background, antecedents and role in the operations and functioning of these companies.

“All efforts are also being made to identify the actual beneficiaries and persons behind such shell companies,” the government statement said.
The government is also monitoring action being taken by professional institutes such as the Institute of Chartered Accountants of India and Institute of Company Secretaries of India.

Over 2.09 lakh firms struck off, bank accounts frozen: Govt

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In a major clampdown against black money, the government on Tuesday directed freezing bank accounts of more than 2.09 lakh companies whose names have been struck off from the records and said action would be taken against more such firms.

Banks have also been asked to step up their vigil against those companies that are non-compliant with various regulations and not carrying out business activities for long, a senior finance ministry official said as authorities continue their crackdown against shell entities The official said banks have been directed to freeze the bank accounts of these deregistered companies.

While warning that action would be taken against erring firms, the official said the efforts would help in enhancing corporate governance standards as well as clean up the system that otherwise is prone to be misused.

The names of over 2.09 lakh firms have been struck off from register of companies for failing to comply with regulatory requirements

“The names of 2,09,032 companies have been struck off from the register of companies under Section 248 (5) of the Act. The existing directors and authorised signatories of such struck-off companies will now become ex-directors or ex- authorised signatories,” an official release said

Section 248 of the Companies Act – which is implemented by the corporate affairs ministry – provides powers to strike off names of companies from the register on various grounds including for being inactive for long.

According to the official, since these companies had ceased to be legal entities, there was no reason having active bank accounts which could be prone to misuse.

Once these companies become compliant, banks would activate their accounts, the official added. “Furthering our war against #BlackMoney, banks have been advised to immediately restrict bank accounts of struck-off companies,” Minister of State for Corporate Affairs P P Chaudhary said in a tweet.

The official said a detailed analysis has been initiated to check whether these deregistered companies were used as conduits for channelising unaccounted money into the system, especially during demonetisation.

Amid efforts against shell companies which are allegedly used as conduits for illicit fund flows and tax evasion, the government said the directors of deregistered firms would not be able to operate the bank accounts till these entities are legally restored

About the directors and signatories of the over 2.09 lakh firms, the government said they would not be able to operate bank accounts of such companies till these entities are legally restored. The restoration, as and when it happens, would be reflected in the official records by way of change in the status from ‘struck off’ to ‘active’. “Since such ‘struck off’ companies have ceased to exist, action has been initiated to restrict the operation of bank accounts of such companies,” the release said.

The Department of Financial Services, through the Indian Banks Association, has advised banks that they should take immediate steps to put restrictions on bank accounts of such struck-off companies. “In addition to such struck-off companies, banks have also been advised to go in for enhanced diligence while dealing with companies in general,” the release said.

A company even having an active status on the corporate affairs ministry website but defaulting in filing of its due financial statements or annual returns, among others, “should be seen with suspicion as, prima facie, the company is not complying with its mandatory statutory obligations”. In another tweet, Chaudhary said the ministry is committed “in attaining @narendramodi ji’s vision of eliminating black money”.

Source:DD News

SEBI crackdown on trading in 331 shell companies blocks investors’ Rs 9,000 cr

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The government crackdown against 331 “suspected shell companies” has hit several investors, including mutual funds and small investors, who hold shares worth nearly Rs 9,000 crore in these companies.

 

In a late circular on Monday, market regulator Securities and Exchange Board of India (Sebi) directed stock exchanges to immediately restrict trading in 331 companies identified as “shell companies” by the Ministry of Corporate Affairs in consultation with the Serious Fraud Investigation Office (SFIO) and the income-tax (I-T) department.

 

While, by definition, a shell company is one without any business operations or assets, several companies with active business dealings too were part of the  list with 331 names. At least five companies in the list have market capitalisation (m-cap) of over Rs 500 crore each, with diverse shareholding from institutional as well as retail investors.

 

These companies have been placed in the so-called graded surveillance measure (GSM) stage VI, where trading in the security is allowed only once a month with “surveillance deposit” of three times the trade value.

 

Companies, including J Kumar Infraprojects (m-cap of Rs 2,150 crore), Prakash Industries (Rs 2,124 crore), Parsvnath Developers (Rs 1,036 crore), and multinational company SQS India BFSI (Rs 535 crore), termed the “shell company” classification as wrongful and urged Sebi and exchanges to reconsider the directions.

 

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“It is hereby clarified J Kumar is not a shell company and the suspicion of the regulator is uncalled for. Our company’s compliance track record, both with the exchanges and Registrar of Companies, has been impeccable,” said the Mumbai-based infra developer, highlighting the various projects it currently working on, including some government contracts.

 

Sebi sources said over three dozen companies in the list technically don’t fall under the definition of a shell company and the circular maybe revised to correct the nomenclature.  “The regulator is verifying the companies who have raised grievances. However, a rectification may take some time as the exchange needs to conduct an audit and submit a report to Sebi. If there is an all-clear given by the auditors and the regulatory authorities involved, Sebi can lift the ban,” said a source.
Another source said the Ministry of Corporate Affairs has widened the scope of shell companies. Those with cases against them in the SFIO or those that have evaded taxes are part of the list. A finance ministry official said concerns of investors in these companies will be looked into.
Several companies made detailed representations to Sebi and corporate affairs ministry, stating they can’t be termed as shell companies. “There could be a possibility that companies who are listed in the shell categories are genuine. In that case, they can always approach Sebi and stock exchanges to remove the ban. This is more of a preventive action and could be rectified if an entity is not found guilty,” said J N Gupta, managing director at Stakeholders Empowerment Services (SES).

 

Experts said the while all companies may not be shell companies, it is possible that the enforcement agencies may have found some dubious links and decided to take action.

 

“This is in continuation of strong messages being sent to corporate entities that frauds of any nature will face strong action. Greater vigil and networking of several databases would throw up more malpractices and stricter action,” said Prithvi Haldea, founder-chairman at Prime Database.

 

Government’s fight against market manipulation to evade LTCG

 

Several probes by the I-T department and Sebi have shown that listed shell companies were being used to launder money by using the stock exchange route. The typical modus operandi has been to buy shares of shell firms, jack up the prices and sell shares after a year to claim long-term capital gains (LTCG) exemption.

 

The government decided to crack down on such sham transactions after the Special investigation teams (SIT) on black money suggested a mechanism to detect shell companies and put in place checks and balances to curb stock market abuse.

 

In the last three years, the I-T department has identified over 1,155 shell companies which were used as conduits by over 22,000 beneficiaries. The amount involved in non-genuine transactions of such beneficiaries was over Rs 13,300 crore.  So far, the I-T department has launched criminal prosecution complaints against 47 persons. The SFIO, too, has undertaken the exercise of preparing comprehensive digital database of shell companies and their associates. Based on the SFIO report, the MCA has removed 162,618 companies from the Registrar of Companies.

Government draws up checklists for GST audits

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In the past week, the government has reached out to tax commissioners on the audit process, highlighting the risk areas.

The Centre has created a detailed road map for goods and services tax (GST) audits barely 20 days after the levy’s rollout, listing risks, target industries and even potential auditees for officials examining corporate India’s transition to the new regime.

In the past week, the government has reached out to tax commissioners on the audit process, highlighting the risk areas. Beginning next week, therefore, officials could visit companies to assess whether the transition from the multiple to the single producer levy from July 1 stuck to the rule book.

Their mode of inspection will also be very different from the traditional script. “They would focus on credit transfer or transition from the old tax regime to GST. The government already has the requisite sets of data in place for this,” a tax official told ET on the condition of anonymity.

The government has shared sector-wise “risk factors” companies might exploit to avoid paying GST. According to the tax official quoted above, categorisation or risk evaluation for these audits has been created by using Big Data analytics.

The government has used statistics of the last two financial years to create the audit checklist.

In the internal government note shared with middle-rung tax officials, they have also been told to cause the “least inconvenience” to auditees and to even educate the taxpayers, especially small and medium enterprises (SMEs).

Industry experts, however, pointed out that a granular scrutiny could mean additional tax-related effort at many companies, as the GST audits would also take earlier taxes into account while evaluating the transition.

‘Extra book-keeping effort’

“The decision to focus on risk-based parameters in determining the audit plan is good. However, since the audits to be undertaken now would focus on earlier legislation such as excise and service tax, taxpayers will grapple with both the earlier legislation and the new legislation (GST) simultaneously,” said MS Mani, partner, GST, Deloitte India. “It would significantly increase the focus and time taken to attend to tax matters.”

A list of auditees, made up of large, medium, and small-scale companies across the country, was also shared with the tax commissioners. “Most of the companies have manipulated the system while transitioning credits from excise and service tax to GST. This is what would be the focus of the tax audits initially,” a senior tax official told ET.

Tax officials have been asked to first examine a specific list of companies. This was disclosed in an official communication by the director general of  audit, central taxes, on July 12, with several mid-level tax officials being informed this week.
Big Data analytics are being used by the tax departments since 2016. The tool is deployed to find outliers in any industry, and the gap from industry based average taxes is used to determine targets for further scrutiny.

 

“The government would have comparables. Say, if 10 consumer goods companies of a particular size pay Rs 50 crore in taxes, it is unlikely that one company, of the same revenue size, would pay Rs 1 crore. Data analytics could easily point out such anomalies, and the lens would then be on such companies,” a person in the know said.