Incorporating with fraudulent intentions. A study of various differentiating attributes of shell companies in India
| Date | 12 October 2010 |
| Published date | 12 October 2010 |
| DOI | https://doi.org/10.1108/13590791011082805 |
| Pages | 459-484 |
| Author | Dharmvir Singh |
| Subject Matter | Accounting & finance |
Incorporating with fraudulent
intentions
A study of various differentiating attributes
of shell companies in India
Dharmvir Singh
School of Public Policy and Governance,
Management Development Institute, Gurgaon, India
Abstract
Purpose – The objective of this research paper is to identify specific attributes associated with the
shell companies, so that the frauds committed by misuse of the corporate vehicle are curbed. The
presence of an identified attribute increases the fraud risk the company poses to the economic system.
The efficient allocation of limited investigative resources may accordingly be made by the regulator.
Design/methodology/app roach – The research was designed as a cas e study involving
documentary evidence corroborated by archival records and semi-structured interview. The paper
discusses the identification of attributes associated with shell companies and suggests
recommendations for corporate regulatory machinery in India.
Findings – The research paper has identified a few attributes associated with the shell companies.
These attributes are directly related to the fraud risk an incorporated entity may pose to the economic
system. Limited resources may be efficiently deployed on the basis of the risk an entity poses to the
system.
Research limitations/implications – The findings of the research are yet to be verified and
authenticated by an independent study. However, the findings have a wider implication with respect to
more efficient deployment of investigative resources dependent on the risk parameters.
Originality/value – The research paper is a pioneer effort in the field of frauds by misuse of a
corporate vehicle.
Keywords Companies, Fraud,Equity capital, India
Paper type Research paper
Corporate form of business structure[1] is considered to be one of the best and most
efficient forms of business organization today. However, it was not the case in the past.
The single owner (or a few owners) idea of a business entity served very well in the
ancient times of trade and commerce, when the trade was but a simple exchange of
things, or money, with little regulation of the state. Small businesses with low capital
entailed direct control of the owners on the business, quick and easy decision making by
them, and easy appropriation of profits. With the renaissance and industrial revolution
setting in, businesses no more remained confined to the state boundaries. The advent of
more efficient means of communication and transportation boosted the growth of trade
and business. The state, too, pitched in with more stringent controls and regulations
The current issue and full text archive of this journal is available at
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The theme of this paper is drawn from the research conducted by the author in partial fulfillment
of PG diploma in Public Policy and Management, School of Public Policy and Governance,
Management Development Institute, Gurgaon, with reference to which the author gratefully
acknowledges the supervision provided by Professor Sanjay Dhamija.
Incorporating
with fraudulent
intentions
459
Journal of Financial Crime
Vol. 17 No. 4, 2010
pp. 459-484
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791011082805
in the form of taxation, etc. The need of higher capital was felt to do profitable business.
So, the equity by the “promoters” was considered insufficient to sustain the business
needs, and reaching the public for capital also necessitated regulation on part of the state
to safeguard public interest. As also, the growing size and complexities of trade and
business, the proprietorships and partnerships (the two types of firms) seemed to fail as
they could not cope-up with the pace of development. Thus, rose the “corporate
structure” of business – where the owners of business were different from the managers
of business, where the “firm” qualified to be a separate legal entity on “incorporation”,
where garnering huge capital for the business was no more a limitation, and importantly,
where the owners of business were not responsible for any liability more than the
capital they have invested. This proved to be the best and most efficient business
structure for big businesses even today, though it is also not free from weaknesses.
As has long been recognized, the corporate form entailed costs as well as benefits.
The combination of concentrated management and lock-in of capital that made the form
so useful for large-scale enterprises enabled those in control of the firm to behave
opportunistically toward minority shareholders and creditors. There is a large literature
on corporate governance that addresses this problem. Focusing for the most part on
protecting outside investors in corporations that raise funds from the general public,
it examines a variety of potential solutions, including government regulation, private
oversight by exchanges, monitoring by block holders (of shares), and compensation
schemes that align managers’ incentives with those of owners (Guinnane et al., 2007).
Although the corporation had important advantages over the main alternative form
of organization (partnerships), it also had disadvantages that limited its appeal to
small- and medium-sized enterprises (SMEs). As a result, when businesses were
provided with an intermediate choice, the private limited liability company (PLLC) that
combined the advantages of legal personhood and joint stock with a flexib le internal
organizational structure, most chose not to organize as corporations[2].
However, the trend in the other Western developed nations differed from that of
India, at least in a few cases, wherein private limited companies were incorporated with
fraudulent intentions. The Indian corporate history has seen some of the “more
entrepreneurial” types, whose greed for money did not remain confined to the accepted
business practices, and who incorporated companies with fraudulent intentions.
These companies were used by such promoters/managers of bigger corporate
houses/corporations to commit financial frauds, against the creditors,
shareholders/investors including banks and financial institutions, and the public at
large. These companies served as veils to cover their faceless “promoters” and created a
legal existence to represent their business. These anonymous promoters represented a
separate class of corporate criminals with academic and financial standing much abov e
the other types of criminals seen in the society. They represented the “wealthy” strata of
society, so certainly they were in a position to engage best “intellectual” brains to
circumvent the laws and regulations. Since, they were the “respected lot” in the society,
they seldom like to be identified as “criminals”, or even “alleged criminals”. Hence, they
preferred working under the veil of a corporate entity. The “corporate structure”
provided them anonymity and a faceless legal entity to perpetrate frauds on the public
as a whole.
Over the last few decades, we have seen a rise in the number, and complexity, of the
corporate financial crimes. The presence of incorporated entities in such crimes
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