The mystifying amnesia of Centre's shell corporation

The Narendra Modi government launched a campaign in 2018 to identify the so-called shell companies operating in the nation that acted as conduits for shady financial transactions between businesses in a fit of righteous zeal to root out black money shortly after its misadventure with the demonetisation.

Cut to 2023. When it comes to investigating a maze of shell firms purportedly connected to Vinod Adani, Gautam Adani's older brother, and located in a number of international tax havens, the Union finance ministry exhibits a remarkable lack of candor. The alleged tendrils of this operation were exposed in the January 24 Hindenburg Research study.

The Modi administration has said that "an offshore shell corporation is not specified under the Acts controlled by the Ministry of Finance," which is a basis for this generosity that is both absurd and appalling.

The government's answer to a pointed query posed by CPM member of the Rajya Sabha John Brittas has once again generated a heated discussion over whether the administration is using a legal loophole to preserve what many see as the country's largest crony capitalist.

Has the government attempted to get information on offshore shell businesses whose ultimate beneficial ownership (UBO) was owned by Indian citizens? Brittas had posed this broad query. Pankaj Chaudhary, the minister of state for finance, said that "particular action did not emerge" since Indian law did not define these dubious corporations.

The distinction between "offshore" shell corporations and domestic ones seems to have been made by the authorities using words that are quite nebulous. How else could the enormous assault on domestic shell corporations that started in 2018 be justified? In the end, a task force on shell businesses established that year had discovered 238,223 alleged shell corporations as of July 2021. Nonetheless, there is still a dilemma since no Indian law, local or foreign, defines a "shell business."

The intriguing thing is that a World Bank study from 2011 recommended that governments work together to reduce the threat of corruption, which it estimated at the time to be "at least a $40 billion-a-year industry," rather than becoming bogged down in a web of legal definitions. But more on that in a moment.

According to Pioneer Legal partner Shoubhik Dasgupta, Indian law does not specifically define a "shell business." The phrase is often used in the business sector to describe a firm that effectively just exists on paper and lacks any operational business or major assets. A shell corporation is described as "a business formed, organized, or registered in the economy but (which) does not take part in the economic activities (other than passthrough capacity)" by the Organisation for Economic Cooperation and Development (OECD). This term has also been used by Indian courts.

This begs the question: How can the Modi administration reconcile the contradictory stance it has taken regarding local and offshore shell businesses, slapping the former with harsh penalties while ignoring the latter that have been accused of smuggling money into the nation? What's sauce for the goose must also be sauce for the gander, as the adage goes. In answer to Brittas's query in the Rajya Sabha, representatives from the finance ministry and the ministry of corporate affairs claimed they had nothing more to offer.

In a sardonic tweet, Congress lawmaker Jairam Ramesh observed: "June 8 2018: Government publishes press statement on actions of Task Force on Shell Corporations labeling them a "menace." In response to a question from the Rajya Sabha on March 21, 2023, the government stated: "Modani Hai Toh Mumkin Hai." Mahua Mitra, a Trinamul MP, tweeted: "The government found 238,223 shell firms without any legal definition. "Blinkers on just when it comes to Adani Group family shells in Mauritius!"

"We have discovered 38 Mauritius shell firms managed by Vinod Adani or his close friends," the Hindenburg Research study had said. We have discovered organizations that Vinod Adani secretly controls in Singapore, the UAE, Cyprus, and a number of Caribbean Islands. Vinod Adani was quickly disassociated from by the Adani family after the publication of the Hindenburg report, which they said was due to his lack of involvement in day-to-day choices and responsibilities in the Gautam Adani business. They said that all of their dealings with the Vinod Adani group were fair and impartial.

When it was discovered that the Adani acquisition of Gujarat Ambuja Cement and ACC, two of the Swiss conglomerate Holcim's cement holdings in India, was carried out via a Mauritius-based company named Endeavour Trade and Investment Ltd, that defense was exposed as a fraud. The laddered holding structure of this firm further indicated that Vinod Shantilal Adani and Mrs. Ranjanben Vinod Adani possessed the ultimate beneficial ownership (UBO) of Endeavour. At this point, the Ahmedabad-based conglomerate was had to reluctantly acknowledge: "Mr. Vinod Adani is part of the 'promoter group' of different listed firms within the Adani group, as per the relevant Indian legislation."

balancing on thin ice

The World Bank used the phrase "how the corrupt use legal structures to hide stolen assets and what to do about it" eloquently in its 2011 report to describe corporate shenanigans involving round-tripping of funds and hiding the identities of the real "puppet masters"; shell companies have proven to be at the center of all such shenanigans.

According to this research, "beneficial ownership should be viewed as a material, substantive idea — referring to the de facto control over a corporate vehicle — and not a merely legal definition," calling for a worldwide crackdown on the evil of money-laundering. A shareholder who owns more than a specific proportion of the business's shares, a director of a corporation or foundation, or a legal entitlement or benefit of a trust are examples of legally defined positions that cannot be used to define beneficial ownership for purposes of effectiveness and meaning.

India is still attempting to grasp an issue of enormous dimensions more than ten years after the World Bank report was published. Over half of the $5.7 billion in foreign direct investment (FDI) received by the Adani group over the previous five years, according to a Financial Times story published last week, came from unidentified foreign firms.

According to a Financial Times examination of India's FDI remittance records, between 2017 and 2022, offshore firms connected to the Adanis invested at least $2.6 billion in the group, accounting for 45.4% of the more than $5.7 billion in total FDI it received during that time. According to the research, Vinod Adani, who is identified as a Cyprus citizen in stock market filings and resides in Dubai, and two entities that are directly or indirectly connected to him made the largest investments. In 2017 and 2018, the UAE-based Emerging Market Investment DMCC, which claims on its website that it solely invests Vinod Adani's capital, invested $631 million in Adani businesses. Subir Mittra, manager of Developing Markets, is in charge of Gardenia Trade and Investment, a Mauritius-registered company that made $782 million in investments into Adani enterprises between 2021 and 2022, according to the study.

The purging

The "shell company" crackdown carried out by the Modi administration was brutal. "Given that what constitutes as a'shell company' has not been defined, the task force collaborated with other agencies (such as ROC, Sebi, ED, RBI, SFIO, etc.) for information-sharing purposes, and focused on companies which had defaulted in filing their annual returns and/or financial statements," says Shantanu Jindel, partner, Indus Law. The Registrar of Companies proceeded to strike down such "shell companies" after discovering them (in accordance with Section.248 of the Companies Act, 2013), and in certain circumstances, even initiated action against their directors.

"Shell corporations are regarded to be enterprises with minor commercial activity," says Abhimanyu Kampani, partner at Luthra & Luthra Law Offices India. Shell corporations may be established for both legal and illegal objectives. Yet, they are often created up to launder illicit funds, commit tax evasion, or hide asset ownership from law authorities. There is a lot of suspicion regarding the Modi government's objectives because of the evident disparity between the treatment of local and foreign shell businesses.