In a blaze of righteous zeal to stamp out black money soon after its misadventure with the demonetisation, the Narendra Modi government had launched a campaign in 2018 to ferret out the so-called shell companies in the country that served as conduits for dodgy financial transactions between companies.
Cut to 2023. The Union finance ministry turns remarkably coy when it is time to go after a labyrinth of shell companies allegedly linked to Vinod Adani, elder brother of Gautam Adani, and housed in a variety of global tax havens. The Hindenburg Research report of January 24 had revealed the purported tentacles of this operation.
The reason for this benevolence is as bizarre as it is shocking: the Modi government has claimed that “an offshore shell company is not defined in the Acts administered by the ministry of finance”.
The government’s response to a pointed question raised by John Brittas, a Rajya Sabha member from the CPM, has again sparked a big debate whether the government is hiding behind a fig leaf spawned by a lacuna in legislation to protect what many view as the nation’s biggest crony capitalist.
Brittas had asked a broad question: Had the government tried to seek details of offshore shell companies whose ultimate beneficial ownership (UBO) was held by Indian citizens? Minister of state for finance Pankaj Chaudhary replied that “specific action did not arise” because there was no definition for these shady entities in Indian law.
It would seem that the government was relying on hair-splitting semantics between “offshore” shell companies and domestic ones. How else could it justify the massive crackdown on the domestic shell companies that began in 2018? A task force on shell companies formed that year had after all identified 238,223 so-called shell firms till July 2021. But even here, there is a problem: there is no definition of a “shell company” in any Indian law, whether domestic or offshore.
The interesting thing is that a World Bank report had in 2011 said there was no need to get lost in a maze of legal definitions and called for a firm resolve among nations to act unitedly to eradicate the menace of corruption, which it estimated at that time to be “at least a $40-billion-a-year business”. But more of that later.
Says Shoubhik Dasgupta, partner, Pioneer Legal: “There is no specific definition of a ‘shell company’ under Indian law. In the corporate world, the term is typically used for a company that does not have any business operations or significant assets and essentially exists only on paper. The Organisation for Economic Cooperation and Development (OECD) defines a shell company as ‘a firm incorporated or organised or registered in the economy but (which) does not take part in the economic operations (other than passthrough capacity)’. The Indian courts have also referred to this definition.”
This invites the question: How can the Modi government reconcile the conflicting position it has adopted between domestic and offshore shell companies – cracking down on the former with a heavy hand but turning a blind eye to the offshore entities that have been accused of funnelling funds into the country? As the saying goes, what is sauce for the goose must be sauce for the gander as well. Officials in the finance ministry and the ministry of corporate affairs said they had nothing to add to what had been stated in response to Brittas’s question in the Rajya Sabha.
Congress leader Jairam Ramesh remarked tartly in a tweet: “June 8 2018: Govt issues press release on activities of Task Force on Shell Companies calling them a ‘menace’. March 21 2023: Govt answers in Rajya Sabha that there is no definition of shell company & that it has no information…. Modani Hai Toh Mumkin Hai.” Trinamul MP Mahua Mitra tweeted: “The government identified 238,223 shell companies without any specific definition in law. Blinkers on only when it comes to Adani group family shells in Mauritius!”
The Hindenburg Research report had said: “We have identified 38 Mauritius shell entities controlled by Vinod Adani or close associates. We have identified entities that are also surreptitiously controlled by Vinod Adani in Cyprus, the UAE, Singapore, and several Caribbean Islands.” When the Hindenburg report came out, the Adanis scrambled to distance themselves from Vinod Adani, claiming that he had no role to play in the Gautam Adani group and wasn’t involved in day-to-day decisions within the group. All transactions with the Vinod Adani group were at arm’s length, they claimed.
That defence crumbled when it was revealed that the Adani takeover of Swiss conglomerate Holcim’s cement assets in India – Gujarat Ambuja Cement and ACC – were routed through a Mauritius-based entity called Endeavour Trade and Investment Ltd. The laddered holding structure of this entity further revealed that the ultimate beneficial ownership (UBO) of Endeavour was “held by Vinod Shantilal Adani and Mrs Ranjanben Vinod Adani”. At this point, the Ahmedabad-based conglomerate was forced to grudgingly admit: “As per the applicable Indian regulations, Mr Vinod Adani is part of the ‘promoter group’ of various listed entities within the Adani group.”
Walking on eggshells
Shell companies have proved to be at the heart of all corporate shenanigans involving round-tripping of funds and masking the identities of the real “puppet masters” – a term that the World Bank eloquently used in its 2011 report to describe “how the corrupt use legal structures to hide stolen assets and what to do about it”.
This report, which called for a global crackdown against the scourge of money-laundering, argued that “beneficial ownership should be understood as a material, substantive concept — referring to the de facto control over a corporate vehicle — and not a purely legal definition. To be effective and meaningful, beneficial ownership must not be reduced to a legally defined position, such as a director of a company or foundation or a shareholder who owns more than a certain percentage of shares or legal entitlement/ benefit of a trust.”
More than a decade after the World Bank report came out, India is still struggling to wrap its hands around a problem that has attained mammoth proportions. Last week, a Financial Times report said that almost half of the Adani group’s $5.7 billion in foreign direct investment (FDI) over the past five years came from opaque overseas entities.
“A Financial Times analysis of India’s FDI remittance statistics shows offshore companies linked to the Adanis invested at least $2.6 billion in the group between 2017 and 2022, 45.4 per cent of the more than $5.7 billion it received in total FDI over the period,” the report said. The report added that the biggest investments came from two companies directly or indirectly linked to Vinod Adani, who is listed in stock exchange filings as a Cypriot national and lives in Dubai. UAE-based Emerging Market Investment DMCC, which states on its website that it only invests Vinod Adani’s funds, ploughed $631 million into Adani companies between 2017 and 2018. Mauritius-registered Gardenia Trade and Investment, which invested $782 million into Adani companies between 2021 and 2022, is directed by Emerging Market’s manager Subir Mittra, the report said.
The crackdown
The Modi government’s crackdown on domestic “shell companies” was ruthless. Says Shantanu Jindel, partner, Indus Law: “Given that what classifies 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. Once such ‘shell companies’ were identified, the Registrar of Companies (under Section.248 of the Companies Act, 2013) proceeded to strike them off and, in some cases, took actions against their directors as well.”
Adds Abhimanyu Kampani, partner, Luthra and Luthra Law Offices India: “Shell companies are understood to be firms with minimal business activities. Shell companies can be set up for both legitimate and illegitimate purposes. But most often, they are set up to conceal ownership of assets from law-enforcement agencies, laundering of black money or tax evasion.” The glaring difference between the treatments meted out to domestic and overseas shell companies generates a great deal of mistrust about the Modi government’s intentions.
