India: Unique Identifier for Companies

October 10, 2017


Unique Identifier of Companies or Legal Entity Identifier, as brought forth by G20 is the alphanumeric code that distinguishes the legal entities engaged in financial affairs. It serves to redress the inability of the financial institutions to be clearly identified and fully tracked. In pursuance to the G20 compliance, United Kingdom has also adopted the unique identifier mechanism for legal entities. Just as the Aadhaar number issued in India has bestowed a distinctive identification to each individual, the Unique Identifier for companies would determine the integrity of a company independent from that of others.

A number of challenges arise as consequences of uncertainty with regards to the ownership of the Companies. Due to the absence of stringent measures requiring compulsory disclosure of beneficial ownership till now, the formation of shell companies became an easy escape route to avoid meeting with the legal compliances. Having no active operational aspect, these companies began serving as a media to promulgate diversion of funds via Benami transactions as have been witnessed in the recent past.

In the pursuit of delimiting the companies with non-operational business, the Government has placed a cap to the number of subsidiary companies. The restriction has been imposed on the layering of the subsidiary companies to prevent probable diversion and laundering of funds.

It is essential that during formulation and framing of the policies for governance, all aspects are to be covered. While laying consideration on the fact that shell companies may be used as an instrument for illegal deeds, it cannot be denied that not all shell companies have been incorporated to carry out unlawful negotiations. Some shell companies may be involved in accumulation of shares or may be used to hold licensed intellectual property. The generalized notion of barring the layering of subsidiaries would hinder the genuine, lawful transactions essential to be carried out by the parent company in their usual course of business.

A pragmatic approach towards this, is the adoption of the unique identifier for companies which has been proposed by G20. This would facilitate transparency in tracking the ultimate ownership thereby identifying the ultimate beneficiaries of the financial system being run through subsidiaries. Through the unique identifier the information of the real owners would fall in public domain thereby helping the investors to have complete knowledge before entering into any engagement with a company. By appropriate regulations and guidelines, it should ensure mandatory disclosures to enable clear identification of the beneficiaries so that the miscreants do not misuse the shell companies using chain of subsidiary companies. The present system lacks efficient mechanisms to establish proper disclosures of the ownership so that the true owners could be tracked even through the catena of subsidiaries.

Thus, the embracement of the unique identifier for companies serves a more suitable and adequate solution to prevent abuse through subsidiary companies rather than curbing them which may create a deadlock for bona-fide business.

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