Siphoning off money from accounts of struck off companies to invite jail time

In a meeting chaired by the Minister of State for Corporate Affairs on 6 September 2017 (Meeting), the Government of India (GoI) has decided that in the event a director or authorised signatory of any struck off company (i.e. a company whose name has been struck off the registers of the registrar of companies in India) tries to siphon off money from its bank account without authorisation, such a person may be punished with imprisonment for a term ranging from 6 months to a maximum of 10 years. In the event the siphoning involves public interest, the minimum jail time for such a person upon conviction shall be a minimum term of 3 years along with fine amounting to three times the money siphoned off.

The decision of the GoI was compiled in a press release issued by the Press Information Bureau (Release). The move is pursuant to the ‘ease of doing business’ reforms undertaken by the GoI recently, and the Release reveals that the GoI hopes that the striking off of shell companies will help in curbing the flow of black money in India. The Release clarifies that the interest of stakeholders will be fully protected.

The Release comes shortly after the GoI had recently struck off and cancelled registration of about 209,032 (two hundred and nine thousand and thirty two) shell companies, following which the Department of Financial Services (DoFS) had accordingly on 5 September 2017 issued instructions to all banks specifying that directors or authorised signatories of struck off companies had been restricted from operating the bank accounts. The instructions issued by the DoFS had also said that even in instances where siphoning off had been done prior to the instructions, strict action would be taken against those erring.

It was also decided in the Meeting that directors of shell companies that had not filed annual returns for three or more years would be disqualified from being appointed in any other company as a director, and would also not be eligible for reappointment as director in any of the companies where they had been directors. The Release mentions that between 200,000 (two hundred thousand) to 300,000 (three hundred thousand) directors may get disbarred, pursuant to such disqualification.

The Release reveals that in addition to restrictions in operating bank accounts, efforts are being made along with enforcement agencies to identify the actual beneficiaries and persons behind such shell companies, profiles of directors including their background, antecedents and role in the operations and functioning of these companies. The role of chartered accountants, company secretaries and cost accountants associated with such shell companies have been identified in certain cases, and action has been taken against them by the professional bodies they are affiliated with.

The full text of the Release may be accessed through the following link: