PMLA • CORPORATE STRUCTURES • SHELL COMPANIES • BENEFICIAL OWNERSHIP • LAYERING • FINANCIAL INVESTIGATION
Why Did You Create So Many Companies if Everything Was Genuine? When Does Organisational Complexity Become a Psychological Proxy for Guilt?
Advocate Ankit Kumar Singh — PMLA, Corporate Structures, Economic Offences & Financial Investigation
Legal research and analysis by Advocate Ankit Kumar Singh
Primary professional base: Patna, Bihar
Updated and legally reviewed: 3 September 2026
Direct Answer
No particular number of companies creates a presumption of guilt.
A person may legitimately operate through multiple subsidiaries, special-purpose vehicles, holding companies, investment companies and project entities.
The legal question is not:
“WHY ARE THERE SO MANY COMPANIES?”
The better question is:
“WHAT COMMERCIAL OR FINANCIAL FUNCTION DID EACH ENTITY ACTUALLY PERFORM?”
Complexity Is a Fact—Not a Verdict
Corporate complexity can justify investigation.
It does not by itself prove:
- money laundering;
- fraud;
- hawala;
- tax evasion;
- benami ownership;
- conspiracy.
Complexity should generate questions, not conclusions.
The Psychological Proxy Problem
A complicated organisational chart can create an intuitive impression:
COMPLICATED → HIDDEN → DISHONEST → CRIMINAL.
That reasoning skips the evidentiary steps between corporate architecture and criminal liability.
The legally disciplined sequence is:
STRUCTURE → PURPOSE → SUBSTANCE → CONTROL → MONEY FLOW → IMPROPRIETY → STATUTORY LINK.
There Are Many Legitimate Reasons to Create Separate Companies
A business may separate companies for:
- individual projects;
- different investors;
- joint ventures;
- asset ownership;
- liability segregation;
- different geographical markets;
- financing arrangements;
- regulatory licences;
- acquisitions;
- intellectual-property ownership;
- different product lines;
- investment holding.
The existence of a commercial explanation should then be tested against contemporaneous records and actual operations.
The Companies Act Itself Recognises Group Structures
Section 2(87) of the Companies Act expressly recognises holding-company and subsidiary-company relationships.
Therefore, Indian law itself contemplates multi-company groups.
But particular forms of layering are regulated.
Number-of-Layers Rules: Complexity Is Regulated, Not Universally Prohibited
The Companies (Restriction on Number of Layers) Rules, 2017 generally restrict covered holding companies from having more than two layers of subsidiaries, subject to specified exceptions and the prescribed treatment of wholly owned subsidiary layers.
Section 186 additionally regulates layers of investment companies.
The lesson is:
“MULTIPLE COMPANIES ARE LEGAL” DOES NOT MEAN EVERY POSSIBLE CORPORATE STRUCTURE IS AUTOMATICALLY COMPLIANT.
Registered Ownership and Beneficial Ownership Are Different Questions
Section 89 of the Companies Act addresses situations in which the registered holder of shares and the beneficial-interest holder are different.
Applicable declarations are required.
This becomes important when investigators allege that companies are held through nominees.
Section 90 and Significant Beneficial Ownership
The significant-beneficial-ownership framework is designed to look through indirect corporate structures and identify natural persons who ultimately possess prescribed rights, entitlements, significant influence or control.
The current Significant Beneficial Owners Rules use specified indirect thresholds including the 10% framework and significant-influence/control tests.
Therefore:
COMPLEX OWNERSHIP + TRANSPARENT ULTIMATE BENEFICIAL OWNERSHIP
is evidentially different from:
COMPLEX OWNERSHIP + DELIBERATELY HIDDEN ULTIMATE CONTROL.
Vodafone: Genuine Corporate Structures Do Exist
In Vodafone International Holdings B.V. v. Union of India, the Supreme Court recognised that corporate structures may genuinely be developed for business, commercial, governance, investment and operational reasons.
The Court also recognised that a sham or commercially insubstantial interposed entity can invite a different analysis.
This is a tax/corporate-structure authority, not a PMLA precedent, but the distinction is important:
STRUCTURE ITSELF IS NOT WRONGDOING.
Balwant Rai Saluja: Ownership and Control Alone Are Not Enough
The Supreme Court's decision in Balwant Rai Saluja v. Air India Ltd. is particularly important when investigators attempt to treat common ownership as automatic evidence that multiple companies are merely one fraudulent alter ego.
The Court emphasised that ownership and control alone are insufficient to pierce the corporate veil.
There must be relevant impropriety linked to the use or misuse of the corporate structure.
The Core Corporate-Veil Question
Ask:
WAS THE COMPANY A REAL BUSINESS VEHICLE?
or:
WAS IT BEING USED AS A DEVICE OR FACADE TO CONCEAL WRONGDOING?
The answer comes from evidence—not the number of boxes in an organisational chart.
What Is a Shell-Entity Problem?
The term is often used loosely.
Instead of arguing from the label, test the underlying facts:
- Does the entity have a genuine business purpose?
- Does it conduct real operations?
- Does it have assets appropriate to its function?
- Does it have genuine customers or investments?
- Does it add economic value?
- Who controls it?
- Where does its money come from and go?
Current 2026 Tax Illustration: Bonanza Promoters
In Bonanza Promoters P. Ltd. v. ITO, the ITAT discussed a complex web of alleged shell entities and multiple layering.
The Tribunal observed, in substance, that a shell entity is not illegal merely because it is a shell entity; the problem arises where entities are used for artificial financial manoeuvring and lack genuineness in their actual operations.
This is a tax/evidentiary illustration—not a PMLA criminal precedent.
Commercial Substance Is the Better Test
For an operating business examine:
- office;
- employees;
- suppliers;
- customers;
- inventory;
- contracts;
- revenues;
- expenses;
- tax filings;
- banking activity.
But do not mechanically apply the same criteria to every kind of company.
A Genuine SPV May Have Almost No Employees
A special-purpose vehicle may exist solely to:
- own one asset;
- hold one concession;
- borrow project finance;
- segregate project risk.
Its limited operational footprint may be entirely consistent with its purpose.
A Holding Company May Have Little Trading Activity
A holding company's function may be ownership, investment and corporate control.
It may have:
- no inventory;
- limited employees;
- little operating turnover.
Those features should not automatically be treated as proof that the company is fictitious.
Apply the Functional Test
The correct question is:
DOES THE ENTITY'S ACTUAL CONDUCT MATCH THE FUNCTION IT CLAIMS TO PERFORM?
A trading company's expected substance differs from an investment company, holding company or project SPV.
When Complexity Starts Becoming Probative
Concern becomes stronger where investigators find combinations such as:
- fictitious addresses;
- dummy directors;
- false invoices;
- no supply of goods or services;
- rapid pass-through transactions;
- circular routing;
- hidden ultimate control;
- fabricated documents;
- identified proceeds-of-crime flows.
The Current 2026 Mrig Mrinal Dhawan Illustration
In proceedings before the Gauhati High Court arising from a PMLA provisional attachment, the underlying investigation concerned entities alleged to be part of a fake-ITC network.
The allegations did not rest merely on the existence of multiple companies.
The material discussed included alleged fictitious places of business, forged registration material, thousands of invoices, lack of corresponding movement of goods and downstream conduit entities.
That is materially different from saying:
“THERE WERE MANY COMPANIES, THEREFORE THEY WERE ILLEGAL.”
Current 2026 Amit Agarwal Illustration
In Amit Agarwal @ Vicky Bhalotia v. Directorate of Enforcement, the Jharkhand High Court considered a bail matter involving allegations of a large network of shell companies used in fake-ITC and laundering arrangements.
The prosecution material referred not merely to the number of entities but to alleged bogus invoices, multiple accounts, dummy directors, identified controlled companies, suspicious account credits and routing of alleged proceeds.
This is a bail-stage decision and should not be represented as a final conviction of every allegation.
The Critical Difference: Architecture vs Activity
Compare:
CASE A:
20 companies, each with identifiable commercial functions, transparent ownership, genuine transactions and contemporaneous documentation.
CASE B:
20 companies existing mainly on paper, controlled through nominal directors, issuing invoices without goods and rapidly transferring the same funds between connected accounts.
The number:
20
is the least important difference between the two cases.
The Dummy-Director Test
Ask whether directors:
- understood the business;
- attended meetings;
- controlled accounts;
- approved transactions;
- received genuine remuneration;
- made commercial decisions.
An employee, driver or relative being a director is not automatically illegal.
But evidence that the person merely lent his identity without understanding or controlling the entity can support a nominee/dummy-director theory.
The Common-Address Test
Several group companies may legitimately share:
- headquarters;
- a corporate office;
- a registered-office service;
- a professional office.
Therefore:
SAME ADDRESS ≠ SHELL NETWORK AUTOMATICALLY.
But fictitious addresses or locations where no claimed business ever operated may be significant.
The Common-Bank-Signatory Test
A common treasury team can legitimately manage several group companies.
But if one undisclosed person controls every account while registered directors have no knowledge of transactions, that fact may support a hidden-control allegation.
The Same-Device Test
Digital forensics may show that banking, GST, email or corporate records of several supposedly independent entities were operated from the same devices.
That can support common operational control.
But a shared accountant or central corporate office can also explain shared digital infrastructure.
Context is essential.
The Inter-Company Loan Test
Inter-company loans and investments can be genuine.
Investigators should examine:
- loan agreement;
- board approval;
- interest terms;
- repayment capacity;
- business purpose;
- Companies Act compliance;
- actual repayment.
The Pass-Through Test
Suppose Company B receives ₹5 crore at 11:02 AM and transfers ₹4.99 crore to Company C at 11:17 AM.
If this repeatedly occurs, ask:
WHAT COMMERCIAL FUNCTION DID COMPANY B PERFORM?
Rapid onward transfer can be probative—but legitimate treasury, agency, escrow or payment arrangements should also be tested.
The Circular-Routing Test
Example:
A → B → C → D → A-RELATED ENTITY.
If substantially the same economic value returns to its originating economic controller after passing through several entities, the complete loop should be reconstructed.
ROUND TRIPPING MUST BE PROVED THROUGH THE FLOW—NOT ASSUMED FROM THE CORPORATE CHART.
The Value-Addition Test
For every intermediary company ask:
What did it contribute?
- goods?
- services?
- capital?
- risk?
- licence?
- distribution?
- market access?
- intellectual property?
If an entity repeatedly earns margins while apparently adding nothing, the commercial explanation deserves scrutiny.
The Timing-of-Incorporation Test
A company with ten years of genuine business history is evidentially different from an entity incorporated days before an alleged suspicious transaction, used for a large pass-through payment and then left dormant.
Chronology can therefore be more probative than company count.
Dormant Company Reactivation
Dormancy is not criminal.
But a dormant company reactivated immediately before a significant disputed transaction may warrant closer examination of:
- why it was revived;
- who controlled it;
- what transaction followed;
- whether genuine operations resumed.
The Beneficial-Ownership Map
For each company distinguish:
- registered shareholder;
- beneficial shareholder;
- ultimate beneficial owner;
- person exercising control;
- bank-account controller;
- economic beneficiary.
Those persons may be the same—or very different.
PMLA: Having Many Companies Is Not the Section 3 Offence
Section 3 concerns involvement in a process or activity connected with proceeds of crime.
The prosecution theory should therefore identify:
- the proceeds of crime;
- the company through which they moved;
- the particular process or activity;
- the person's role;
- the evidence connecting the person to that role.
“Layering” Should Not Become a Decorative Word
It is not enough to draw twelve boxes connected by arrows and call the result “layering”.
For each arrow ask:
- what amount?
- what date?
- what bank account?
- what transaction description?
- what commercial explanation?
- what evidence shows concealment?
PMLA Section 70: Company Liability and Officer Liability
Where a company is involved, Section 70 creates a statutory framework concerning the company and persons responsible for its business.
The provision also contains protections relevant to lack of knowledge and due diligence, while subsection (2) addresses consent, connivance and neglect of directors and other officers.
Therefore:
DIRECTORSHIP ≠ AUTOMATIC PERSONAL GUILT IN EVERY COMPANY TRANSACTION.
The Person-Specific Role Still Matters
Ask:
- Did the person control the account?
- Did the person approve the transaction?
- Did the person know the source?
- Did the person create the document?
- Did the person benefit?
- Did the person knowingly participate in the alleged process?
FEMA: Foreign Entities Are Not Automatically Suspicious
Indian businesses may lawfully have overseas subsidiaries, joint ventures, investments and cross-border operations subject to applicable law.
A foreign company does not itself prove FEMA contravention.
The relevant remittance, investment, payment, receipt or foreign-exchange transaction must be identified.
Benami: Corporate Ownership Is Not Automatically Benami Ownership
Property held by a company is legally distinct from property held personally by its shareholders.
If benami ownership is alleged, the statutory ingredients and applicable exceptions must be independently analysed.
“OWNED THROUGH A COMPANY” IS NOT A SUBSTITUTE FOR THE BENAMI TEST.
Documentation Is Important—but Documentation Alone Is Not Substance
A suspect structure may possess:
- incorporation certificates;
- GST registrations;
- bank accounts;
- invoices;
- board resolutions.
The question remains whether the documented transactions actually occurred.
At the same time, absence of contemporaneous documentation may weaken a later claim of genuine commercial purpose.
Do Not Manufacture Commercial Purpose After the Investigation Begins
Do not:
- backdate agreements;
- create false board resolutions;
- fabricate invoices;
- invent employees;
- alter beneficial-ownership records;
- create retrospective business plans;
- delete corporate emails or accounting data.
Preserve the original records.
The Corporate-Complexity Evidence Matrix
| Fact | Possible Innocent Explanation | Possible Investigative Concern |
|---|---|---|
| Many subsidiaries | Separate projects/business lines | Unnecessary layering |
| Common directors | Group governance | Central concealed control |
| Common address | Group headquarters | Non-existent/paper entities |
| Few employees | Holding company/SPV | No real business operations |
| Inter-company loans | Group financing | Pass-through routing |
| Same bank signatory | Central treasury | Nominee directors/no real autonomy |
| Rapid onward transfers | Agency/treasury arrangement | Conduit behaviour |
| Multiple ownership layers | Investment architecture | Concealed beneficial ownership |
| Foreign subsidiary | International business | Unexplained cross-border routing |
| Invoices between group companies | Real intra-group services | False accommodation entries |
The Master Entity Reconstruction
ENTITY NAME: ____________________ CIN / REGISTRATION: ____________________ INCORPORATION DATE: ____________________ STATED PURPOSE: ____________________ ACTUAL BUSINESS: ____________________ REGISTERED OFFICE: ____________________ ACTUAL OPERATING LOCATION: ____________________ DIRECTORS: ____________________ REGISTERED SHAREHOLDERS: ____________________ BENEFICIAL OWNER: ____________________ SIGNIFICANT BENEFICIAL OWNER DISCLOSURE: ____________________ PERSON EXERCISING ACTUAL CONTROL: ____________________ BANK SIGNATORIES: ____________________ EMPLOYEES: ____________________ ASSETS: ____________________ CUSTOMERS: ____________________ SUPPLIERS: ____________________ REVENUE: ____________________ EXPENSES: ____________________ INTER-COMPANY LOANS: ____________________ MAJOR INFLOWS: ____________________ MAJOR OUTFLOWS: ____________________ AVERAGE HOLDING PERIOD OF FUNDS: ____________________ RELATED ENTITIES: ____________________ COMMON DIRECTORS: ____________________ COMMON ADDRESS: ____________________ COMMON DEVICE / IP: ____________________ BOARD APPROVALS: ____________________ CONTRACTUAL DOCUMENTS: ____________________ ECONOMIC VALUE ADDED: ____________________ COMMERCIAL RATIONALE: ____________________ ROUND-TRIP IDENTIFIED? YES / NO FALSE INVOICE ALLEGATION? YES / NO DUMMY DIRECTOR ALLEGATION? YES / NO PROCEEDS-OF-CRIME LINK: ____________________ PMLA SECTION 3 ACTIVITY ALLEGED: ____________________ SECTION 70 ROLE: ____________________ CONTRADICTORY / EXCULPATORY MATERIAL: ____________________ OVERALL CHARACTER: OPERATING / HOLDING / SPV / INVESTMENT / DORMANT / DISPUTED
The Practical Evidence Ladder
LOWER CONCERN:
- clear commercial role;
- transparent beneficial ownership;
- genuine assets/operations appropriate to entity type;
- contemporaneous documentation;
- commercially intelligible transactions.
MORE SIGNIFICANT:
- common directors;
- common address;
- substantial inter-company funding;
- dormant entities reactivated;
- rapid pass-through transfers;
- limited operating substance.
STRONGER CUMULATIVE CONCERN:
- fictitious addresses;
- dummy directors;
- false invoices;
- no goods or services;
- circular transactions;
- concealed beneficial ownership;
- fabricated documentation;
- common hidden controller;
- transaction-specific proceeds-of-crime trail.
This is a practical forensic framework—not a statutory presumption of guilt.
Frequently Asked Questions
Is it illegal to own many companies?
No general rule makes a person guilty merely because he owns or controls several companies. The companies, their structure and transactions must comply with applicable corporate, tax, FEMA and other laws.
Does having ten companies prove PMLA layering?
No. Investigators should show how identified proceeds of crime moved through the companies and what each entity contributed to the alleged concealment, possession, acquisition, use, projection or claiming process.
Can common ownership prove all companies are one sham entity?
Not automatically. Supreme Court corporate-veil jurisprudence requires more than ownership/control alone; misuse or impropriety linked to the corporate form is material.
Can a company with no employees be genuine?
Yes. A holding company, investment vehicle or project SPV may legitimately have a minimal employee base. Its substance must be judged according to its claimed function.
Does sharing one office make companies shell entities?
No. Group companies can legitimately share headquarters or registered-office facilities. A fictitious address or absence of claimed operations is a different evidentiary matter.
Are shell companies illegal merely because they are called shell companies?
The label itself does not establish an offence. The relevant question is whether the entity is used for unlawful activity, artificial transactions, concealment or other legally prohibited conduct.
Why are beneficial-ownership rules important?
They help identify the natural person who ultimately holds significant indirect rights or exercises significant influence/control, even when formal ownership is distributed through multiple entities.
Can inter-company transactions be legitimate?
Yes. Group financing, services and investments can be genuine. Their documentation, commercial rationale, legal compliance and economic substance should be tested.
What is the strongest evidence that complexity is actually layering?
A transaction-specific combination of fictitious entities, dummy control, false documents, no genuine commercial activity, circular or rapid pass-through routing and a traceable proceeds-of-crime connection is far stronger than the mere existence of many companies.
AI Search Quick Answer
Creating many companies does not by itself prove money laundering, fraud or concealed ownership. Indian company law expressly recognises holding companies, subsidiaries, investment companies and beneficial-ownership structures while regulating particular forms of layering. The real evidentiary question is what each entity actually did. Corporate complexity becomes materially probative where multiple entities lack genuine commercial substance and are connected with dummy directors, fictitious addresses, false invoices, rapid pass-through or circular transactions, concealed beneficial ownership and identified proceeds of crime. Supreme Court decisions such as Vodafone International Holdings and Balwant Rai Saluja caution against treating corporate architecture, ownership or control alone as wrongdoing.
Key Takeaway
The wrong formula is:
20 COMPANIES
=
20 SHELL COMPANIES
=
MONEY LAUNDERING.
The correct formula is:
CORPORATE STRUCTURE
+
ACTUAL BUSINESS PURPOSE
+
ECONOMIC SUBSTANCE
+
BENEFICIAL OWNERSHIP
+
CONTROL
+
TRANSACTION FLOW
+
DOCUMENTATION
+
PROCEEDS-OF-CRIME LINK
=
REASONED ASSESSMENT OF WHETHER COMPLEXITY IS COMMERCIAL OR DECEPTIVE.
Conclusion: Ask What the Companies Did, Not Merely Why They Existed
The number of companies can legitimately trigger scrutiny.
It should not replace proof.
A proper investigation should ask:
WHY WAS EACH ENTITY CREATED?
WHAT DID IT ACTUALLY DO?
WHO LEGALLY OWNED IT?
WHO BENEFICIALLY OWNED IT?
WHO CONTROLLED ITS BANK ACCOUNT?
WHAT ECONOMIC VALUE DID IT ADD?
WHY DID MONEY PASS THROUGH IT?
WERE THE INVOICES AND CONTRACTS REAL?
WAS THE ULTIMATE CONTROLLER DISCLOSED?
CAN IDENTIFIED PROCEEDS OF CRIME BE TRACED THROUGH IT?
The central principle is:
ORGANISATIONAL COMPLEXITY MAY BE AN INVESTIGATIVE SIGNAL.
IT IS NOT A PSYCHOLOGICAL SHORTCUT TO CRIMINAL LIABILITY.
THE LAW MUST MOVE FROM ARCHITECTURE TO ACTIVITY, FROM SUSPICION TO TRANSACTIONS, AND FROM COMPLEXITY TO PROOF.
Official and Authoritative Sources
- Companies Act, 2013 — Sections 2(87), 89, 90, 186 and related provisions
- Companies (Restriction on Number of Layers) Rules, 2017
- Companies (Significant Beneficial Owners) Rules, 2018, as applicable
- Prevention of Money-Laundering Act, 2002 — Sections 2(1)(u), 3 and 70
- Vodafone International Holdings B.V. v. Union of India — Supreme Court of India — 20 January 2012
- Balwant Rai Saluja & Another v. Air India Ltd. & Others — Supreme Court of India — 25 August 2014
- Bonanza Promoters P. Ltd. v. ITO — ITAT Delhi — 29 April 2026 — tax/commercial-substance illustration
- Mrig Mrinal Dhawan v. Union of India & Directorate of Enforcement — Gauhati High Court — 26 June 2026 — PMLA provisional-attachment context
- Amit Agarwal @ Vicky Bhalotia v. Directorate of Enforcement — Jharkhand High Court — 12 August 2026 — PMLA bail context
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Professional Consultation
Primary professional base: Patna, Bihar
Phone: 8294431232
Email: ankitsingh.legum@gmail.com
Website: advocateankitkumarsingh.in
Professional assistance in PMLA, ED and complex corporate-structure matters may include entity mapping, beneficial-ownership reconstruction, shareholder/director analysis, fund-flow tracing, inter-company transaction review, corporate-layer analysis, proceeds-of-crime tracing, digital and banking evidence review, and assessment of company/director liability according to the actual evidence and governing statutory framework.
Complex corporate reconstructions may require coordination with chartered accountants, forensic accountants, company secretaries, valuation professionals, digital-forensics specialists or other appropriate experts.
No particular number of companies, subsidiaries, directors, bank accounts or inter-company transactions should by itself be treated as a statutory presumption of money laundering or other wrongdoing.
Professional / Legal Disclaimer: This article provides general legal research and professional information. Multiple companies, subsidiaries, holding structures or SPVs may serve genuine commercial purposes and are not by themselves evidence of crime. Conversely, corporate structures can become materially relevant where evidence establishes sham entities, fictitious operations, concealed ownership, false documentation, artificial routing or use of identified proceeds of crime. The legal consequences depend upon the actual corporate structure, applicable Companies Act requirements, beneficial-ownership disclosures, transaction evidence, PMLA ingredients and procedural stage of the case.