A marathon exercise initiated by the ministry of corporate affairs [MCA] early this year which got consummated on September 15, 2018 on KYC [know your customer] norms for company directors has thrown up results that tell a lot about the existence of a monstrous ghost economy and the manner in which the present dispensation led by Modi is endeavoring to stem the rot.
The exercise reveals that a total of 5000,000 DINs [director identification number] were issued by the authorities. On records, these were the number of directors serving on the companies. Out of these, only 3300,000 were ‘active directors’ implying that the balance 1700,000 were inactive or ‘defunct’.
Put in simple terms, an inactive/defunct director is a person who did not attend meetings of the company board of directors [or any of its committees] for the prescribed period – as per law. This may even point to a possibility of the person mentioned in the records as being either a non-entity such as driver/servant/mail/peon etc or even non-existent, shall we say, a ‘ghost’ director.
Furthermore, out of the active directors 3300,000, only 1200,000 have complied with the KYC requirements – as mandated by the MCA – by the deadline of September 15, 2018. The remaining 2100,000 who did not come forward to identify themselves [and preferred to remain anonymous] can also be put in the category of non-entity or ghost directors. Add to this the defunct/inactive directors, the total number of non-entity/ghost directors comes to a whopping 3800,000 or 75% of the 5000,000 DINs issued.
If, a majority of the directors are found to be ghost, then the companies on which they serve can only be dubious. Of about 1100,000 registered companies, nearly half have been found to be inactive. Those companies were not involved in any business; that they existed merely on paper. The MCA has already de-registered 300,000 of these companies and their accounts frozen.
Why should someone feel the need for setting up a ghost or ‘shell’ company [as it is commonly understood in the corporate world]? This is because its ‘beneficial’ owner is doing something horribly wrong in complete violation of the law of the land and is therefore, ever keen to hide these activities.
There could be the likes of Nirav Modi/Mehul Choksi/Vijay Mallya who took loans worth thousands of crore from the banks purportedly to run businesses but diverted the money to shell companies or corrupt politicians/bureaucrats who used such companies to launder the proceeds of the bribe money or criminals who use these entities to park the proceeds of crime. Then, there are businessmen whose sole interest is in evading payment of tax and look for shell companies to hide their income from the taxman.
Such a mammoth number of shell companies and ghost directors point towards the scale of wrongdoings/irregularities and the corresponding loss they would be inflicting on the economy and bringing miseries to the people at large.
Look at the hundreds of thousand crore of bank money turning into non-performing assets [NPAs] [a euphemism for loan not returned] due to fund diversion by defaulting borrowers and consequential inability of the banks to lend thereby choking a major engine of growth. Also, look at the monumental sums siphoned off by corrupt politicians/bureaucrats from the subsidies and welfare schemes for the poor and resultant inability of the government to improve their living.
Then, there are hundreds of thousand crore in taxes remaining unpaid thereby increasing fiscal deficit [and concomitant problems such as inflation, high interest rates etc] which hamper government’s ability to fund development programs and build infrastructure viz. roads, highways, rails, ports etc. The high tax rates on petroleum products in particular, could be avoided if only businessmen were honestly paying taxes.
Likewise, the government is forced to spend huge amounts on combating activities of criminals [including terrorists], providing safety to the people and maintaining law and order leaving less resources for development.
Without doubt, these ghost operators had never allowed the Indian economy to achieve its potential and move on a high growth trajectory on a sustained basis. Modi has adopted a two-pronged strategy to deal with them.
First, he has struck at the very foundation of the systems and procedures that led to the wrongdoings/irregularities. Thus, by implementing direct benefit transfer [DBT] and use of technology to transfer subsidy/financial assistance directly into the account of the beneficiary, he has ensured that there is no pilferage of funds. Besides, his focus on a ‘policy driven’ state and ‘transparency’ in governance has substantially reduced corruption. The administrative machinery is also being geared to root out criminals and terrorists.
The government took the ‘unusual’ and ‘unprecedented’ step of demonetization [November 8, 2016] to flush out black money forcing hoarders to deposit it in the bank. It also led to formalization of the economy in a big way. The launch of Goods and Services Tax [GST] [July 1, 2017] made sure that businesses could no longer hide their operations and come clean by paying taxes.
The second part of the strategy is to smash and demolish the very platforms which were being used to park/launder the proceeds of corruption, crime, funds siphoned off from welfare schemes, taxes evaded and income generated from all other illegitimate activities. If, these platforms cease to exist, then, where will the dubious operators hide their illicit wealth? The onslaught on shell companies and ghost directors needs to be viewed in this light.
The massive cleansing being done under this strategy is already yielding results by way of surge in the number of assesses and direct tax collections and manifold increase in search and seizures. This in turn, is helping GDP grow at a faster pace and adequately fund welfare schemes for the poor.
The war against shell companies/ghost directors must go co-terminus with onslaught on corruption as they feed on each other and both need to be exterminated for sustainable results.