Companies Act changes to make structuring of shell companies difficult

The amendments to the Companies (amendment) Bill, 2016 would provide for tighter regulation of the structuring of companies even as the government as a whole is working to tighten regulations governing the structuring of companies in order to weed out the illegitimate ones.

The Companies (Amendment) Bill 2016, approved by the Lok sabha on Thursday, drops rules that remove restrictions on the number of layers of subsidiaries of a company.

The amendments to the Companies (amendment) Bill 2016 were approved by a voice vote in the Lok Sabha on Thursday, and the amended Bill is expected to be taken up for passage in the Rajya Sabha.

While the government was earlier willing to give corporate the freedom to design the structure of their companies in the most efficient manner, it has now realised that the structuring mostly aims at skirting rules.

In the process these companies also see to undermine the oversight mechanism of market regulator Securities and Exchange Board of India (Sebi). It is exactly why the government is stepping in to clamp down on corporate structures.

Even major corporates such as the Tatas, Reliance and the Vedanta Group, are controlled through an ingeniously constructed pyramid of ownership, where on the outside, the percentage of equity investments in the holding company is very small.

This freedom has led to a surge in the number of shell companies, especially after demonetisation. The government's move is intended to keep a lid on the layering of companies and thereby tackle the menace of shell companies.