‘Unpaid shares’ in Dubai, BVI companies may come back to haunt many Indians

Mumbai: An old, handy practice popularised by tax havens and sold by leading European banks is coming back to haunt many Indian businessmen.

Hundreds of them may be in for a nasty surprise for ‘owning’ companies in Dubai and other jurisdictions like the British Virgin Islands (BVI) by subscribing to shares without paying for the stocks.

Under the Indian Companies Act, a person is allotted shares only after full payment. While UAE Free Trade Zone (FTZ) rules require a minimum share capital of 50,000 dirhams (about ₹11 lakh at the current exchange rate), the authorities do not insist on the payment of the subscription amount.

Many chartered accountants and consultants practising in the UAE don’t advise investors to chip in the amount using banking channels. However, the records of the UAE authorities show investment by  ..

For incorporating and owning such companies all an investor needs to do is pay a few thousand dollars in fees to professional advisors and authorities in UAE. It is quick, cheap, and investors believe it’s all kosher. But many to their dismay are today realising that ignorance of the law, wrong advice, and a cavalier attitude towards ‘fancy’ financial structures can exact a heavy price.

“This trend of being a shareholder without having subscribed to the share capital (and without comply ..

For incorporating and owning such companies all an investor needs to do is pay a few thousand dollars in fees to professional advisors and authorities in UAE. It is quick, cheap, and investors believe it’s all kosher. But many to their dismay are today realising that ignorance of the law, wrong advice, and a cavalier attitude towards ‘fancy’ financial structures can exact a heavy price.

This trend of being a shareholder without having subscribed to the share capital (and without complying with FEMA procedures) when detected, would lead to a lot of questioning both by the tax and exchange control regulators. A negative inference would be drawn of the arrangement which would be more difficult to disprove,” said Bijal Ajinkya, partner at the law firm Khaitan & Co.

The Indian Income tax (I-T) department, which may have got a whiff of these deals – with the UAE sharing information on investments and assets of Indian passport-holders there – would immediately conclude that the shares in Dubai FTZ firms were either acquired through hawala fund transfers from India or out of undisclosed cash lying in UAE.

This is because there is no record of fund remittance (from India to UAE) through official banking channels against the allotment of shares in Dubai. The officers of the Enforcement Directorate (ED), who typically snoop around for evidence of forex violations by residents, may also assume that such firms were set up to carry out investments not allowed under the Reserve