Union Budget 2021
Every year, we bring the rundown of the Union Budget from the lens of the startup ecosystem through a mix of pre and post budget coverage showcasing the expectations and impact on the ecosystem.
Finance Minister Nirmala Sitharaman’s latest additions to the One Person Company (OPC) structure, including relaxation for NRIs and removal of threshold requirements for paid-up capital, are unlikely to increase the ease of incorporating a startup in India, contrary to initial reactions from the startup ecosystem.
Several investors, lawyers and experts who have spoken to Inc42 think these relaxations may expedite the time required to incorporate an entity in India. However, they only favour a small group of NRIs and domestic founders who may have hiccups while starting up themselves without a second founder.
The OPC structure was originally envisioned by Dr J.J. Irani Committee in May 2005. The government set up the committee in late 2004 to obtain suggestions from stakeholders and suggest changes to the earlier Companies Act, 1956, to modernise the overall company law structure.
The OPC structure was eventually enacted in the Companies Act, 2013, as a fresh amendment. However, several media reports incorrectly indicated that OPCs came up as a new proposal in Monday’s Budget presentation.
According to the provision of section 2(62) of the Companies Act, 2013, a ‘one person company’ involves a company which has only one person as a member (sic founder). The provision also mandates that the member should be an active Indian resident to qualify for setting up an OPC. But in today’s Budget, the FM did away with this requirement and allowed NRIs to set up OPCs in India.
Additionally, the minister scrapped the minimum capital requirement of INR 1 Lakh for setting up an OPC and also confirmed that an OPC can be converted into a private or a public limited company at any given point of time.
Interestingly, the Companies Act, 2013, also mandated that an OPC should be turned into a private limited company whenever it passes a maximum paid-up capital limit of INR 50 lakh or a turnover of INR 2 Cr in three preceding years. These thresholds were also revised by the FM in Budget 2021.
However, lawyers and other experts point out that these additions do not really raise the bar for easing compliance costs and other mandatory checks while incorporating a company in India. It is still a long and cumbersome process.
“The budget provides for further relaxations to conditions attached for setting up a one-person company. While this is definitely welcome, given the reduction in the time taken for setting up a full-fledged private limited company, it remains to be seen if it will move the needle in terms of preference,” says Akila Agrawal, Head of M&A advisory at the law firm Cyril Amarchand Mangaldas.
A partner at a law firm that advises tech startups on incorporation and fundraising told Inc42 OPCs are not useful for most of the startups which have several cofounders. The lawyer does not wish to be named as he cannot comment on government matters publicly.
“When going down the path of raising institutional funding at an early stage, starting up as an OPC is not going to be helpful. This is because OPCs are limited liability entities meant for companies with a single shareholder or one director. The moment the founder has to raise capital, he or she will have to move to a private limited company,” says the lawyer quoted above.
Nimesh Kampani, president of the angel network platform LetsVenture, says that OPCs were initially created to encourage formal incorporation of sole-proprietorship companies with a limited liability structure. But with the latest amendment, startup founders can also benefit from it.
“The latest amendment will give some impetus to startup founders, especially for NRIs. This also helps startups founders who may not have found a co-founder for hid or her idea, but is looking to raise money, and is at a very early stage. So instead of actively looking for a co-founder you can go and incorporate and focus on the idea and the problem being solved,” adds Kampani.
Many Indian Founders Prefer Foreign Jurisdictions For Ease of Capital Access
In December 2020, Inc42 reported that a majority of startups in India selected for Y Combinator are mandated to shift their headquarters to the US, which essentially ‘flips’ their India-registered entity into a wholly-owned subsidiary of a new US parent. While the flipping of parent entities was done to cut down the time spent in paperwork and regulatory procedures, Indian investors were crying foul over this practice.
However, the partner from the law firm quoted earlier in the article, says that foreign accelerators advise early-stage founders to set up a company abroad in Delaware and other geographies as it helps increase the access to capital. In fact, quite a few startup founders are in favour of setting up their parent entities in foreign jurisdictions due to high compliance cost in India and also because of the large pool of capital abroad.
“There could be a lot more relaxations on licensing and registration requirements at the time of incorporation in India. Those requirements are quite cumbersome and could actually be moved to timeline after incorporation is done,” adds the lawyer mentioned above.