Stock exchanges in India are sending out notices to more than 500 listed companies across several stock exchanges. The companies receiving notices share directors with suspected shell companies. The directors found to be working with shell companies have been disqualified.
Companies will need to respond to the exchanges explaining when they plan to replace the directors.
India's National Stock Exchange has sent out 307 notices to companies seeking answers on disqualified directors. India's note ban has led to a major crackdown on shell firms that are used for money laundering.
The government states that the shell companies deposited money into multiple accounts during demonetization.
India's Ministry of Finance received a tip that money laundering by 13 banks may be taking place. The information that was handed to the government shows a major company registration scandal involving 13,140 accounts and 5,800 companies.
Some companies had more than 100 accounts.
Banks noticed a major discrepancy after the accounts went from 22.05 crore rupees ($3.367 million) in total to more than 4,573.83 crore in deposits. The Ministry of Finance has openly asked for investigative agencies to investigate the matter further.
Accounts with negative or small balances had huge deposits made following demonetization.
India's government passed Companies Amendment Bill 2017 in an effort to combat "black money" in the country. Companies often registered several subsidiary companies and formed layers to engage in laundering funds and probable diversion.
Directors that have not filed annual returns or financial statements for a period of three years were disqualified under Section 164. The disqualification does not allow a director to be reappointed to a position in any company for a period of five years.
Directors who were disqualified were publicly named by the government.
The government may disqualify an additional 4.5 lakh* directors, according to P.P. Chaudhary, union minister.
* A lakh is a unit in India's numbering system equal to 100,000.
Companies that have bank accounts that have been dormant will also be struck. The practice will eliminate shell company accounts, which often remain dormant until money funneling activities occur. The banks are told not to conduct business with companies that the government strikes.
Reports indicate that the 500 impacted firms are comprised of mainly small companies. Approximately 10% of the companies, or around 50 in total, are considered larger entities. These entitles are within the top 500 companies in the Bombay Stock Exchange.
Company names have not been released at this time. The move is expected to have a negative impact on all publicly traded companies that now remain under scrutiny for disqualified directors.
