Parliament Question: Rotation of capital by Shell and Dormant Companies

GOVERNMENT OF INDIA MINISTRY OF CORPORATE AFFAIRS LOK SABHA UNSTARRED QUESTION NO. 1585 ANSWERED ON MONDAY, 09TH FEBRUARY 2026 MAGHA 20, 1947 (SAKA) ROTATION OF CAPITAL BY SHELL AND DORMANT COMPANIES QUESTION 1585. SHRI PRAVEEN KHANDELWAL: WILL THE MINISTER OF CORPORATE AFFAIRS BE PLEASED TO STATE: (a) whether the Government has examined the issue of shell and dormant companies being used to rotate capital and evade regulatory scrutiny despite repeated strike-off drives, if so, the details thereof; (b) whether any analytics-based monitoring mechanism is being developed to identify such entities at an early stage, if so, the details thereof; (c) the steps taken by the Government to ensure that genuine start- ups and Micro, Small and Medium Enterprises (MSMEs) are not adversely affected by such compliance actions; (d) whether the Government has reviewed compliance costs imposed on small private companies under the Companies Act, 2013, if so, the details thereof; (e) whether any simplified, digital-first compliance pathway is under consideration; and (f) if so, the expected timeline for its implementation? ANSWER MINISTER OF STATE IN THE MINISTRY OF CORPORATE AFFAIRS; MINISTER OF STATE IN THE MINISTRY OF ROAD TRANSPORT AND HIGHWAYS (SHRI HARSH MALHOTRA) (a) The term Shell Company has not been defined under the Companies Act, 2013. Section 455 of the Companies Act, 2013 provides that where a company is formed and registered under thisAct for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company. This Ministry orders Inquiry, Inspection, Investigation under sections 206(4), 206(5) and section 210/212 of the Companies Act, 2013 respectively on case to case basis depending upon facts of the case. This Ministry also uses Red Flag Indicators including features such as nil /insignificant business, nil/ insignificant assets, company not maintaining registered office, etc. for suitable regulatory actions. (b) Under the MCA-21, a risk profiling rule based analytical system for compliances has been developed. Further, through MCA21 V3 various functionalities like Web filings, Limited Liability Partnership (LLP) Module, Company module, have been implemented. Filings are now being made through this system, which provides for real time validation with pre-filled master data, thereby reducing possibility of falsification of data. (c) and (d) The Government has relaxed the compliance cost of small companies and start-ups, through several measures taken from time to time. Some of the important measures are at Annexure-I. (e) and (f) The service delivery and compliance mechanism is already digitized under the MCA21 system. The important measures taken to further simplify the process are at Annexure-II. *****Annexure-I In reply to Part (c) and (d) of Lok Sabha Unstarred Question No. 1585 Important measures for ease of doing business for small companies Sr. Section Subject Provisions in the Company Act, 2013 to No. support Small Companies 1. 2 (40) Financial Requirement of cash flow statement to be proviso Statement part of financial statement made optional. 2. 92(1) Proviso Annual return (i) Shall be signed by a company secretary or where is there is no company secretary by a Director of the company. (ii) Abridged annual return prescribed for small companies. 3. 92(1)(g) Disclosure in Disclosure as to aggregate of amount of annual return remuneration drawn by directors about adequate for small companies. remuneration of directors 4. 134(3A) Board’s Report Abridged Board Report prescribed for small companies. 5. 139(2) read Rotation of Rotation of auditors in small companies is with rule 5 of auditors not mandatory. Companies (Audit and Auditors) rules, 2014 6. 141(3)(g) Restriction on Restriction w.r.t. maximum auditor-ships auditor-ships not applicable to auditors of small companies. 7. 143(3)(i) Disclosure in These disclosures are not applicable for Auditors report small companies. on internal financial controls8. 173 (5) Meetings of Under Companies Act, 2013, Board of Directors of a company are required to Board. meet at least once in 120 days, 4 board meetings in a year. However, in case of a small company, one board meeting in each half of a calendar year with a gap between two meetings of not less than 90 days is sufficient to comply with the requirement of section 173(5) of the Companies Act. 9. 446B Lesser penalties Small companies are entitled for lesser penalties as per section 446B. 10. Rule 8(12)(a) Companies Small companies are exempted from (Registration requirements w.r.t. pre-certification of offices and Fees) forms by professionals. amendment Rules, 2014 11. Annexure- Companies Lesser fees allowed for small companies. (Registration Table of offices and Fees) fees amendment Rules, 2014 12. Clause Companies The Companies (Auditor’s Report) Order 1(2)(iv) (CARO) 2020 is not applicable on small (Auditor's Report) companies Order, 2020 (CARO 2020)Important measures for ease of doing business for Start-ups Sl. Section/ Rules Subject Provisions in the Company Act, 2013 to No. support Start-ups 1. Section 2(40) Financial Requirement of cash flow statement to be Statement part of financial statement is optional for Start-ups. 2. Section 73(2) Acceptance Start-ups were exempted from procedural clause (a) to of deposits compliance at the time of accepting (e) deposits from its members (such as issuance of a circular to its members showing the financial position of company, credit rating, depositing 20% of the maturing deposits, and certification regarding default in repayments). 3. Section 92(1) Annual Directors of a start-up are allowed to sign Return annual returns of the private limited company if the Company does not have Company Secretary. 4. Section 173(5) Meetings of Under Companies Act, 2013, Board of Board Directors of a company are required to meet at least once in 120 days, 4 board meetings in a year. However, Start-ups are exempted from holding quarterly board meetings and are allowed to hold two board meetings in a calendar year, i.e., once every six months. 5. Rule 6 of Conversion The requirement that an OPC must convert Companies of OPCs itself after its paid-up capital exceeds Rs (Incorporation) into Public 50 lakh and its average annual turnover Rules, 2014 and Private exceeds Rs 2 crore was omitted. Since Companies many start-ups are One Person Company, this allows them to retain the status as an OPC.6. Rule 8(4) of Sweat In general, the issuance of sweat equity Companies Equity shares in a company shall not exceed 25% (Share Capital of the paid-up capital of the company at and any time. However, in case of start-ups, Debenture) this limit is up to 50% of its paid-up share Rules, 2014) capital. 7. Rule12(1)(c) of Employee In general, ESOPs are not given to Companies Stock employee who is a promoter or a person (Share Capital Options belonging to the promoter group and a and (ESOPs) director who either himself or through his Debentures) relative or a body corporate, directly or Rules, 2014 indirectly holds more than 10% equity of the company. Start-ups are allowed to issue ESOPs to promoters and directors. 8. Rule 2 (1)(c) Convertible Start-ups can receive an amount of Rs 25 (xvii) Note lakh or more by way of a convertible note Companies (convertible into equity shares or repayable (Acceptance within a period not exceeding ten years of Deposits) from the date of issue) in a single tranche, Rules, 2014 from a person, and such transactions are not considered deposit. 9. Rule 3(3) of Acceptance Companies may ordinarily accept or renew Companies of deposits any deposits from its members not (Acceptance exceeding 35% of the paid-up share of Deposits) capital, free reserves and securities Rules, 2014 premium account of the company. But start-ups have been permitted to accept deposits from members without any restriction on the amount.Annexure-II In reply to Part (e) and (f) of Lok Sabha Unstarred Question No. 1585 1. Conversion of more than 54 forms to Straight Through Process (STP) which earlier required approval of field offices. 2. Setting up of a Centralized Registrar of Companies (CRC) for incorporation to provide uniformity in the incorporation process. 3. Setting up of a Central Scrutiny Centre (CSC) for centralised scrutiny of e-Forms filed under STP. 4. Setting up a Central Processing Centre (CPC) for centralised processing of specified non-STP e-forms. 5. Setting up an e-Adjudication Portal for faceless adjudication of offences related to the Companies Act. 6. Introducing e-Form SPICe+ along with a linked form called AGILE PRO-S for providing different services at one place such as Name Reservation, Incorporation, Allotment of PAN, TAN, DIN, EPFO Registration, ESIC Registration, GST number, opening of Bank Account etc. at the time of incorporation of company to start the business immediately. Similarly, new e-Form FiLLiP (Form for incorporation of Limited Liability Partnership) was introduced for providing the same services in a single application. *****