"The objective behind making these amendments is economic development, which might not be fulfilled due to the legal requirements the company has to comply with. Merely providing leniency is not sufficient when it does not address the main problem faced by start-up companies."
HEMALATHA P.M
The Companies Act, 2013 brought several changes in the existing company law in the country, one of which is the introduction of One-person Company (OPC), which was recommended to be introduced by the Iranian Committee in 2005. By the time OPCs were introduced in India, several countries had already introduced OPC’s into their Corporate Laws.
One-person company was introduced with an aim to corporatize businesses of a smaller size and to simplify a company. With the introduction of OPC, a company always need not be a complex entity with numerous requirements to be complied with under law from time to time, but it can be a simple one with legal requirements kept at minimum. That is the reason why OPCs have many advantages compared to other kinds of businesses. One of the main advantages is that the liability in an OPC is limited only to the shares, unlike sole proprietorship, where liability is unlimited. Therefore, OPC is considered to be a good option for new businesses.
Sec 2(62) of the Companies Act, 2013 defined an OPC as ‘a company which has only one person as its member’.
The features of an OPC at present are as follows:
- An OPC requires only one member, who will also be its director. It can only be a natural person who is an Indian citizen residing in India, capable of becoming a member as per the requirements of the Companies Act, 2013. Another person will be a nominee, who will become the member in case the member does not continue. A person can be a member or a nominee only in one OPC at a time.
- As per Rule 3 of the Company (Incorporation) Rules, 2014, an OPC should have only member and a person who has stayed for not less than a period of 182 days in India is considered to be a person residing in India.
- As a mandatory requirement under Rule 6(1) of the Companies (Incorporation) Rules, 2014, an OPC cannot convert itself into any other kind of company unless it has completed two years since the date of incorporation. Moreover, its paid up share capital should be higher than Rs. 50 lakhs and annual turnover for the relevant period should not be less than Rs. 2 crores.
The Union Budget of 2021 presented on February 1st, 2021, has proposed to bring several changes to the Companies Act, 2013, which are notified to be implemented from April 1st, 2021. Since these proposals were made during pandemic and a period of economic downfall, the aim would be to improve the economic conditions prevailing in the country. One of the major changes notified to be implemented is the conditions for incorporation and conversion of one person companies, along with a few other changes in Companies Act, 2013.
The proposed amendment would bring the following changes upon enforcement:
- The time requirement to consider residence in India has been reduced to 120 days from 182 days.
- A non-resident Indian is also permitted to start an OPC in the country.
- An OPC can convert itself to any other type of company without complying with the requirements regarding paid up capital and turnover. It can make the necessary amendments in its memorandum and articles and comply with other requirements upon its discretion itself.
- A private company, other than a company under Sec 8 can also convert itself into an OPC without considering the paid up capital and turnover requirements. A special resolution expressing the consent of members is sufficient for conversion.
As stated earlier an OPC has minimum requirements to be complied with under law, due to which it is considered to be beneficial. An OPC is exempted from complying with several mandatory procedures to be followed by other companies due to single membership. That is the reason why an OPC is simple and free from complexities. Another advantage is that it provides for limited liability for its member, unlike other forms where the single owner would have unlimited liability. One of the main disadvantages in an OPC is that it is suitable only for businesses of a smaller size, due to which either it can’t continue as an OPC when it has financial growth, or it has to maintain its turnover at the minimum requirement. But with the introduction of the proposed amendment, this disadvantage will be rectified. Since there are no restrictions in conversion of an OPC into any other type of company, a company can continue to be an OPC upon its choice along with having huge turnovers, or can convert itself without any prerequisites into any type of company. A private company can also convert itself into an OPC without any restrictions.
On the other hand, considering to start an OPC would also be disadvantageous with the current legal set up. OPC’s are considered to be a convenient means to conduct a business, but the problem comes with raising funds for the business. At an initial stage, most probably the member would prefer to go for a private company to easily raise funds for the business. Thus the purpose of relaxing the rules for incorporating an OPC does not help in this regard.
Moreover, the registered new companies in India, prefer to be a subsidiary of a foreign parent company, specifically from a country where regulations are more lenient and easy to comply with. The main reason behind the same is to not follow Indian laws due to their procedural requirements, and therefore by becoming the subsidiary of a foreign company whose procedural requirements are at minimum is considered more beneficial. Thus the establishment and registration are all complied with as per the laws of the foreign country, but other operations like production and human resources are continued to be performed in India. Though becoming the subsidiary of a foreign company is a lengthy process, the companies prefer to do so due to the complex incorporation and taxation regulations in India for start-up companies.
Though OPCs are advantageous considering the recent changes made, it is also a disadvantage for start-ups, considering the requirements to be complied as listed above. The objective behind making these amendments is economic development, which might not be fulfilled due to the legal requirements the company has to comply with. Merely providing leniency is not sufficient when it does not address the main problem faced by start-up companies.
(The Author, Ms. Hemalatha PM is our intern. She is pursuing her final year law in the School Of Excellence in Law, Chennai)
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