Chidambaram and shell companies

With the arrest of Mr. P. Chidambaram and the ongoing investigation in his case, the dubious role of shell companies, as a conduit and a platform for corruption and tax evasion is back in focus. It is the Modi government that has unleashed a battle against shell companies, as part of its overall war against black money. If you go by the government figures, over 3.50 lac alleged shell companies have been closed down by the government so far, on allegations of being bogus and benami entities that are used to evade taxes. While such simpliciter closure of entities by the government is not legitimate very often and in thousands of cases, the Income Tax Department itself has appealed to the NCLT to reinstate these entities, the fact yet is that it has helped to curb the menace of shell companies, which were popularly used by tax evaders to evade taxes. This scourge of shell companies particularly came to light during an investigation by the ITD Kolkata, which found that a web of thousands of such bogus entities was being used to evade taxes and launder money running in lacs of crores, by giving bogus entries of sales, purchase, profits, losses, loans and capital. While the Department action rightly led to the closure of these Kolkata entities and their illegal activities, the government extended its battle against shell companies on an all India basis, leading to the indiscriminate closure of lakhs of them. The popularity of shell companies as a means to evade taxes and launder proceeds of crime and corruption, has now collapsed due to the aggressive action by various government departments headed by the ROC, ED and the ITD.

Before we go ahead, let us discuss what is typically a shell company. Interestingly and very surprisingly the law of India, particularly the income tax law and the companies law, does not define as to what constitutes a shell company, and yet lakhs of them have been closed down. A shell company is typically one with huge assets, little share capital, huge loans, huge turnover and poor profits, and little income or income from sources not commensurate with the activities of the company or its manpower and infrastructure. It may have consulting income, but no manpower, or commission or trading income with no infrastructure. The shareholders of such companies are typically not the actual owner, but are a mere front for other powerful and resourceful individuals, to whom these assets and income belongs, but cannot show the same on record. It is like a corrupt neta or babu laundering his ill gotten gains of corruption, through income of a shell company owned by a relative or an employee. So the defining feature of a shell company is that it is a front or a façade for the actual owner and is used to legitimise his illegal assets and gains, by showing income earned and assets owned by such a shell company. Very often a shell entity is a benami entity where the actual owner is the one who truly directs the activities of the entity and is the true beneficiary of its assets and income, such that the directors of the company do what the actual owner directs him to do.

These are also the facts emerging in the case of investigation of an entity called Advantage Strategic Consultancy Pvt. Ltd. (ASCPL), which is alleged to be a shell entity of Karti Chidambaram and it was this company that received money for rendering services, to regularise the blatant FDI violations in the INX Media case. It is worth noting that INX Media retained the services of Karti Chidambaram, such that an illegal approval to its foreign investment was granted by the FIPB headed by P Chidambaram and for which consultancy charges were paid to Advantage Strategic Consultancy. Upon being interrogated, the directors of the company have confessed that the actual owner of the company is Karti Chidambaram and not them. They said that it was Karti who was the actual owner and controller of the company and that they merely signed documents and operated its bank accounts on his instructions. They prepared invoices as directed by Karti and banked its receipts. They also said that all the expensive paintings and artwork owned by the company were displayed in the office and residence of Karti and were thus in his custody. The company also paid the travel bills of Karti and his father and also met their other expenses. The company was thus a conduit for receiving kickbacks for illegal favours granted by P. Chidambaram as the FM of India.

Such shell companies can be formed and operated, not just in India, but in many tax havens abroad, including the likes of Hongkong, Dubai, Mauritius, BVI, Singapore, Switzerland etc. It is alleged by the CBI that the Chidambaram family owned a web of such overseas entities in many territories, through which illegal funds were accepted, routed, laundered and legitimised and huge assets were owned, till the law caught up with them. But the real challenge before the investigation agencies is to build a documentary nexus and a trail between the shell entities and the Chidambarams, which is certainly not easy.

Akhilesh R. Bhargava