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One person company: evolution and efficacy

Editor_4

Introduction

A “one person company” (OPC) is a company which has only one person as a member. Prior to 2021, only a natural person who is an Indian citizen and resident in India can, (i) incorporate an OPC; and (ii) be the nominee for the sole member of an OPC. Resident in India means a person who has stayed in India for a period of not less than 182 days during the immediately preceding financial year.

The concept of OPC was introduced in the Companies Act, 2013[1]. This was the result of the recommendations of the Dr J.J. Irani Committee (Committee) in 2005. In its report[2], the Committee observed:

“With increasing use of information technology and computers, emergence of the service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. Yet it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the marketplace should do it through an association of persons. We feel that it is possible for individuals to operate in the economic domain and contribute effectively. To facilitate this, the Committee recommends that the law should recognise the formation of a single person economic entity in the form of “one person company”. Such an entity may be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters.”

Therefore, the ostensible purpose of introducing an OPC as a form of a company was to encourage entrepreneurial activity in the digital age. This article examines the provisions of the Companies Act, 2013 (Act) and the relevant rules framed thereunder to determine whether this objective has been achieved for OPCs.

Provisions of the Companies Act, 2013 that apply to OPC

The key compliance requirements and relaxations for an OPC under the Act are as follows:

  1. Pursuant to Section 2(40) of the Act[3], an OPC does not need to file a cashflow statement along with its financial statements.
  2. Under the definition of private company in Section 2(68) of the Act the limitation on the number of members need not be mentioned in the articles of association of an OPC.
  3. Under Section 3 of the Act[4], the requirements for incorporation of an OPC have been relaxed.
  4. Under Section 12 of the Act[5], an OPC must state that it is a “one person company” under its name.
  5. Under Section 92 of the Act[6], the annual return of an OPC needs to be signed by one director.
  6. Under Section 96 of the Act[7], there is no requirement for an OPC to hold an annual general meeting.
  7. Pursuant to Section 122 of the Act[8], Section 98[9] and Sections 100-111 would not apply to an OPC:
Sl. No. Provision Subject-Matter
1. Section 98 Power of Tribunal to call meetings of members – NA
2. Section 100 Calling of extraordinary general meeting
3. Section 101 Notice of meeting
4. Section 102 Explanatory statement to be annexed to notice
5. Section 103 Quorum of meeting
6. Section 104 Chairman of meeting
7. Section 105 Proxies
8. Section 106 Restriction on voting rights
9. Section 107 Voting by show of hands
10. Section 108 Voting by electronic means
11. Section 109 Demand for poll
12. Section 110 Postal ballot
13. Section 111 Circulation of member’s resolution
  1. Under Section 137 of the Act[10], an OPC must file a copy of its financial statements duly adopted by its member along with attached documents within 180 days of the closure of the financial year.
  2. The minimum number of directors for an OPC is 1 (one).
  3. The member is the first director if he has not been named as such in the articles of the association of the OPC.
  4. Under Section 173(5) of the Act[11], one meeting of the Board of Directors of the OPC must be held in each half of the calendar year and the gap should not be more than 90 (ninety) days. These provisions are not applicable to an OPC with only one director.
  5. Under Section 193 of the Act[12], where an OPC enters into a contract with the sole member of the OPC, who is also a Director of the OPC, the OPC must unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of meetings of the Board of Directors held after entering into the contract. This does not apply to contracts entered into by the OPC in the ordinary course of business. The Registrar of Companies must be informed of every contract within 15 (fifteen) days of approval of the Board of Directors.
  6. Table A of Schedule I dealing with memorandum of association has special provisions for an OPC.
  7. Table F of Schedule I dealing with articles of association of an OPC, provides for the death of the sole member.

Provision of the Incorporation Rules that apply to an OPC pre-2021

Under the Companies (Incorporation) Rules, 2014[13]:

1. An OPC cannot be incorporated or converted into a company under Section 8 of the Act[14] (not for profit companies).

2. An OPC cannot carry out non-banking financial investment activities including investment in securities of any body corporate.

3. No such company can convert voluntarily into any kind of company unless 2 (two) years have elapsed from the date of incorporation of the OPC, except threshold limit (paid up share capital) is increased beyond Rs 50 lakhs or its average annual turnover during the relevant period exceeds Rs 2 crores (threshold limit).

4. Under Rule 6 an OPC must convert into a public company or a private company in the following cases:

4.1 Where the threshold limit has been breached, the conversion must take place within 6 (six) months of the threshold limit being breached.

4.2 By increasing the number of members to 2 or 7, as the case may be, and by meeting the minimum paid up capital requirements mentioned in the Act.

Conversion must be intimated to the Registrar of Companies within a period of sixty days from the breach of threshold limits in Form INC 5.

5. A private company that has not breached the threshold limit can convert into an OPC by passing a special resolution at a general meeting. The company must also obtain a no objection from its creditors. The company must file an application in Form INC 6 with the Registrar of Companies.

Budget 2021

In her budget speech in 2021, the Finance Minister Ms Nirmala Sitharaman proposed a slew of measures to make an OPC a preferred vehicle for start-ups and other small companies with one member. Paragraph 81 of the speech reads as follows:

  1. As a further measure which directly benefits start-ups and innovators, I propose to incentivise the incorporation of one person companies (OPCs) by allowing OPCs to grow without any restrictions on paid up capital and turnover, allowing their conversion into any other type of company at any time, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allow non-resident Indians (NRIs) to incorporate OPCs in India.

Pursuant to the budget speech the Companies (Incorporation) Second Amendment Rules, 2021[15] were passed. The rules introduced the following:

  1. The threshold limit for converting the OPC to private/public company is not applicable and can be converted anytime.
  2. There is no need of any minimum share capital to incorporate an OPC.
  3. Resident as well as non-resident can incorporate an OPC.
  4. The liability of the owner is limited to his investment in the business, which allows him to take more risk.

Conclusion

The biggest issue for entrepreneurs who form start-ups is the vehicle to use for the start-up. Now this issue has been set to rest with the amendments relating to OPC. As noted above, OPCs have relaxed compliance requirements and are a separate legal entity. The threshold limit no longer applies making it possible for OPCs to function on a larger scale than before. In the circumstances, a number of start-ups will be set up as OPCs rather than private limited companies or LLPs. The incorporation and conversion procedure are also fairly straight forward should the start-up bring in additional investors.

The move by the Government is a step in the right direction but the Government must be cautious to ensure that this form of company is not used as a vehicle for illicit activities.

The fact that non-residents and NRI’s can also incorporate OPCs is also a welcome step which would see an influx of foreign exchange into the country.

† Experienced lawyer with over 20 years of experience at various law firms. Currently, heads Ashwin Mathew & Associates, a commercial law firm in Mumbai.

†† Practicing Advocate in Delhi and other places in India.

[1] <http://www.scconline.com/DocumentLink/A5aqjfDv>.

[2] Para 3.2 and Para 6, Dr J.J. Irani Committee (Committee) Report, 2005

[3] <http://www.scconline.com/DocumentLink/7FC6rv6u>.

[4] <http://www.scconline.com/DocumentLink/v0ADDsN0>.

[5] <http://www.scconline.com/DocumentLink/0Fhu7ueD>.

[6] <http://www.scconline.com/DocumentLink/OwX4tmlq>.

[7] <http://www.scconline.com/DocumentLink/7fuhZdpj>.

[8] <http://www.scconline.com/DocumentLink/4xpA1byP>.

[9] <http://www.scconline.com/DocumentLink/1z82c73l>.

[10] <http://www.scconline.com/DocumentLink/S3aF8m6k>.

[11] <http://www.scconline.com/DocumentLink/K29k57h0>.

[12] <http://www.scconline.com/DocumentLink/eavmOcBs>.

[13] <http://www.scconline.com/DocumentLink/1Pd7Lx3x>.

[14] <http://www.scconline.com/DocumentLink/q5uhl8A8>.

[15] <http://www.scconline.com/DocumentLink/9crnpF7p>.

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