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An attempt to boost one person company

Vinala Keswani 
on 17 February 2021

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The concept of One Person Company ('OPC') was proposed by JJ Irani Committee in 2005 classifying the Company on the basis of numbers of members and it was introduced in India under the Companies Act, 2013. However, it is widely popular in various countries like Singapore, Europe, China, U.S.A. It was introduced in order to enable a sole proprietorship to carry on the business with the benefits of a registered entity and limited liability without worrying about Statutory Compliance. Finally, for the first time in the legislative history, the concept of OPC was introduced under the Companies Act, 2013 which was a new wave for innovative minds to start their Business.

Under the Companies Act, 2013, OPC entitles various exemptions in respect of holding Annual General Meeting, allowing two Board Meeting in a calendar year with a gap of not less than 90 days between the dates of two meetings. But along with these exemptions, this type of entity also carries some hiccups with it.

The flaws were that only a person who is resident in India for a period of 182 days can incorporate the OPC. For converting OPC into Private or Public Company, it needs to wait for the period of 2 years from the date of Incorporation. Further, in case an OPC crosses their paid-up capital of Rs. 50 Lakhs or their average turnover of Rs. 2 crores, it needs to mandatorily convert into Private or Public Company. These Limits didn't get well the stakeholders and hence this concept deems to doomed its essence.

Finally, through budget 2021-22, Finance Minister tried to redress the grievances and made a major amendment under the Act:

An attempt to boost one person company

After the budget, Ministry of Corporate Affairs vide notification dated 1st February 2021 made following amendments in Companies (Incorporation) Rules, 2014 ('Incorporation Rules') which will be effective from 1st April 2021:

  • In Rule 3 (1) the words 'resident in India', the words 'resident in India or otherwise in substituted'
  • In Explanation I, for the words 182 days, the words 120 days shall be substituted.

This amendment allows that the Person residing in India for the period 120 days during the immediately preceding financial year is now eligible to Incorporate the OPC or can be a nominee for the sole member of a One Person Company.

  • In Rule 3(7) an OPC can be voluntarily converted into any other type of Company only after the expiry of two years from the date of incorporation except if the paid up capital is in excess of Rs. 50 Lakhs or turnover exceeds 2 crores.

Under the amendment, Rule 3(7) of Incorporation Rules is omitted. Thus, now OPC can be converted into any other type of Company anytime without waiting for the period of 2 years from the date of Incorporation. This is again a favourable amendment in respect of OPC.

  • Rule 6 of the Incorporation Rules, 2014 provides that One Person Company shall be mandatorily converted into Private Company or Public Company if the paid up capital exceeds 50 lakhs or average annual turnover exceed 2 crores. This Rule is completely substituted with the following Rule:
 

Conversion of One Person Company into A Public Company or A Private Company Is Completely Substituted

  1. The One Person Company shall alter its memorandum and articles by passing a resolution in accordance with sub-section (3) of section 122 of the Act to give effect to the conversion and to make necessary changes incidental thereto.
  1. A One Person company may be converted into a Private or Public Company, other than a company registered under section 8 of the Act, after increasing the minimum number of members and directors to two or seven members and two or three directors, as the case may be, and maintaining the minimum paid-up capital as per the requirements of the Act for such class of company and by making due compliance of section 18 of the Act for conversion.
  1. The company shall file an application in E-form No.INC-6 for its conversion into Private or Public Company, other than under section 8 of the Act, along with fees as provided in the Companies (Registration offices and fees) Rules, 2014 by attaching documents, namely: -

(a) Altered MOA and AOA;
(b) copy of resolution;
(c) the list of proposed members and its directors along with consent;
(d) list of creditors; and
(e) the latest audited balance sheet and profit and loss account.

  1. On being satisfied that the requirements stated herein have been complied with, the Registrar shall approve the form and issue the Certificate.

From the above substitution, it can be concluded that an OPC can continue its status as One Person Company without any statutory obligation to convert it on crossing threshold limit of paid up capital of Rs. 50 lakhs and an average annual turnover of Rs. 2 crores. An Entrepreneur always used to face the turmoil to incorporate an OPC as they can conveniently manage an OPC without any co-founder, however, on crossing the limits they need to take dummy on the Board and offer them a stake, just to comply with the legal obligations. Now, this amendment is again very much favourable for the small entrepreneur as the incorporation of OPC was not very much promoted as it requires mandatory conversion on crossing its limit.

 
  • In Rule 7, A private Company can be converted into OPC if the paid up capital is less than 50 Lakhs or turnover is less than 2 crore.

Under the amendment, the threshold limit of 50 lakhs or 2 crores is omitted. Thus, now a Private Company can be converted into OPC without considering the limits of Paid up capital and turnover.

CONCLUSION

The amendment will definitely boost the incorporation of OPC in our country. It will give an innovative mind an opportunity to focus on the business without worrying to find co-worker. It will reduce their statutory obligations and also the cost of compliances. The only issue is that the Act still allows only an Indian citizen residing in India for the period of 120 days to incorporate the OPC which again restricts foreign individuals to set up the entity.

Disclaimer: Kindly note that the entire content of this article has been developed on the basis of relevant statutory provisions and as per the information existing at the time of preparation of i.e Act, Rules, notification, clarification, circulars, issued by MCA, SEBI or any other statutory authority. Though I have made utmost efforts to provide authentic information, however, I do not undertake any liability in any way whatsoever, to any person in respect of anything arising by reliance upon the content of this article. It shall not be used as a legal opinion and not be used for rendering any professional advice.


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