Understanding Shell and Non-Functional Companies Under the Companies Act, 2013

Overview of Shell and Non-Functional Companies Under the Companies Act, 2013

The Government of India does not currently plan to define "shell companies" within the Companies Act, 2013. Instead, "dormant companies" are defined under Section 455 as entities established for anticipated future projects or as those inactive for two years. According to Section 248, the Registrar of Companies (ROC) has the authority to strike off companies that do not commence business within one year or remain inactive for two consecutive financial years.

In 2024, a total of 16,798 companies were removed through voluntary applications under Section 248(2). Notably, there were no government-led strike-off operations during this period. The government actively monitors non-functional companies per Sections 206 and 210, initiating inquiries, inspections, and investigations as required. Due to the absence of a formal definition for shell companies, specific data related to such entities, including those in the Saharanpur district, is not collected.

Inquiry into Non-Functional and Shell Companies

The Minister of Corporate Affairs provided clarity on the following:

1. Is there a plan to introduce a formal definition of shell companies under the Companies Act, 2013 for better enforcement?
2. What are the latest actions taken on non-functional companies, including the number of entities affected under Section 248 in 2024?
3. What measures are being implemented to enhance the monitoring and compliance processes to prevent the misuse of non-functional firms for illicit financial activities?
4. How many shell companies have been identified and what actions have been taken against them under Section 248 in Saharanpur district?

(a) There is currently no proposal from the Central Government to define "shell companies." However, the term "dormant company" is defined under Section 455 of the Companies Act, 2013 as any company that is formed for future projects or assets, which has no significant accounting transactions or any inactive company that has not engaged in business for the preceding two financial years without filing financial statements or annual returns. Such companies must receive "dormant status" from the Registrar of Companies (ROC) while complying with the Companies (Miscellaneous) Rules, 2014.

(b) Under Section 248, alongside the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016, the ROC can remove the name of a company from the register if it has not commenced business within one year of incorporation or has been inactive for two consecutive financial years without applying for dormant status. Companies may also request removal voluntarily after clearing their liabilities in accordance with established procedures.

The Ministry conducts strike-off drives under Section 248(1) for companies that have not commenced business or operated during the specified timespan; however, no such drives occurred in 2024. In that year, 16,798 companies were struck off based on voluntary applications under Section 248(2).

(c) Under Sections 206(4), 206(5), and 210 of the Companies Act, 2013, the Central Government mandates inquiries, inspections, and investigations in response to complaints and information concerning non-compliance, which includes actions under Section 248(1). Follow-up actions for non-compliance, including potential strike-offs, are monitored regularly.

(d) Since the term "shell company" lacks an official definition in the Companies Act, 2013, the requisite information on such entities is not maintained.