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One Person Company: The Wolf Without A Pack

One Person Company: The Wolf Without A Pack

OPC as a concept has been in existence in other countries much before it was recognized under Indian law

Statistics indicate that about 34,446 OPCs have been incorporated in India thus far, of which, at least 7,600 came into existence in the past 12 months

On general compliances, compared to other companies under Indian law, OPCs enjoy some relaxation

A one person company (OPC) in simple words, is a company which has only one shareholder and at least one director. OPC as a concept has been in existence in other countries much before it was recognized under Indian law. This concept was introduced in India in 2013 to empower and provide an opportunity to sole proprietors to carry out their business through a company – a separate entity in the eyes of law and with limited personal liability.

Statistics indicate that about 34,446 OPCs have been incorporated in India thus far, of which, at least 7,600 were incorporated in the last 12 months. Increased usage of OPC to carry out business has also led to laggard amendments to the law on OPC, including to minimise compliances and streamline austere restrictions.

This article analyses the key features, benefits and limitation of an OPC under Indian law, including under the recent amendment notified by the Ministry of Corporate Affairs in February 2021, with effect from April 1, 2021.

Dumbing Down The Bafflegab

 Under Indian law, an OPC is defined as: “a company which has only one person as its member.” Some of the key features of OPC under Indian law, including those under the notification of the Ministry of Corporate Affairs described above, are summarized in the paragraphs below.

  • Shareholder: An OPC must have just one shareholder (also referred to as member). Under Indian law, a shareholder of an OPC must satisfy four key requirements – first, must be a natural person; second, must be an Indian citizen; third, cannot be a shareholder or nominee (explained below) of more than one OPC; and fourth, cannot be a minor. As long as these conditions are met, the sole shareholder does not need to be a resident of India, from April 1, 2021.
  • Nominee: The sole shareholder of an OPC must nominate another natural person as such shareholder’s nominee, with the consent of the nominee – the purpose of this requirement is to enable the nominee to become the shareholder on the death or incapacitation of the shareholder appointing the nominee. The eligibility criteria that apply to a shareholder (as set out in the paragraph above), applies to a nominee as well – however, a nominee has a period of 180 days from the date of becoming a shareholder to comply with the third requirement identified in the paragraph above.
  • Director: An OPC must have at least one director. There is no impediment for the sole shareholder to also be the only director – however, under Indian law, a shareholder who does not reside in India for a total period of at least 182 days in a financial year will not qualify as a director and if the sole shareholder does not meet this criteria, another director who meets the criteria on residency under Indian law will need to be appointed. Non-resident Indians who intend to incorporate an OPC should keep this in mind.
  • Capitalization requirements: There is no minimum capitalization requirement to incorporate an OPC and the requirement of mandatory conversion of OPC into a public company or private company when the paid-up capital exceeds INR 5,000,000 or the annual turnover exceeds INR 20,000,000 is no longer applicable from April 1, 2021.
  • Restricted business activities: An OPC is restricted from carrying out two types of activities as part of its business – first, ‘Non-Banking Financial Investment’ activities including investment in securities of a body corporate. Although the term ‘Non-Banking Financial Investment’ activity is not defined under Indian company law, in normal parlance, it would mean any activity that can be carried out by a Non-Banking Financial Company; and second, an OPC cannot be incorporated as or converted into a company for charitable purposes (under section 8 of The Companies Act, 2013).
  • Conversion: An OPC can be converted to a private or public limited company at any time, subject to meeting the minimum requirement under Indian law for the number of shareholders and directors and compliance with the prescribed procedural requirements – the restriction on voluntary conversion only after completion of a period of two years from the date of incorporation or upon exceeding certain thresholds for paid-up capital and annual turnover is no longer applicable from April 1, 2021 – this means that the sole shareholder does not have to wait for the completion of a period of two years or for the annual turnover to exceed INR 20,000,000 or first put in share capital exceeding INR 5,000,000 before converting the OPC to a private or public limited company. For this reason, in addition to generally being cost efficient, the process for conversion of an OPC to a private or public limited company is far more straightforward from April 1, 2021.
  • Taxation: An OPC is taxed like any other type of domestic company.
  • Incorporation and winding up: The process and the timeline for setting up an OPC is similar to the incorporation of any other type of company with share capital, albeit with simplified charter documents. This said, since the cost of incorporation of a company with share capital under Indian law depends primarily on the authorized share capital, the number of directors and the area in which it is incorporated, incorporating an OPC with share capital that is more than INR 1,600,000 results in sizeable cost saving – otherwise incorporating an OPC is just as costly as incorporating any other type of company with share capital.

 Aye And Nay

The key benefits and limitation of an OPC are explained in the paragraphs below.

  • Limited liability and perpetual succession: Like a traditional company and limited liability partnership, an OPC is a body corporate and is treated as a separate legal entity under law and the liability of the sole shareholder is limited to the subscription amount paid by such shareholder. The purpose of appointing a nominee is to ensure perpetual succession.
  • Reduced compliances: On general compliances, compared to other companies under Indian law, OPCs enjoy some relaxation, although not profuse – key relaxation include, exemption from holding annual general meeting, lesser or no board meetings depending on the number of directors (only two board meetings with a timespan of 90 days between the two meetings are required annually if the number of directors exceed one and no board meetings are required to be held in case of a single director), no requirement of rotation of statutory auditors, exemption from preparation of cash flow statement as part of the financial statements and the leeway provided to auditors to not specify if there are adequate internal financial controls with reference to the OPC’s financial statements together with the operating effectiveness of such controls.
  • Reduced penalties: Under Indian law and based on a recent amendment, an OPC now enjoys the benefit of reduced penalties – penalties for any non-compliance cannot exceed half of the prescribed penalty for such non-compliance, subject to a maximum cap of INR 200,000 for the OPC and INR 100,000 for the officer in default. The maximum cap is not an overall cap, but instead is intended to apply as an individual cap on every non-compliance – in other words the maximum cap only applies where one-half of the prescribed penalty for a non-compliance exceeds INR 200,000 for the OPC and INR 100,000 for the officer in default.
  • Raising investments, employee stock options and sweat equity: Given that an OPC can have only one shareholder, this would mean that funds cannot be raised by way of issuance of shares or convertible instruments, until it converts itself into a private or public limited company – an OPC must limit itself to raising funds through loans or by way of non-convertible debentures. The same principle also applies to issuance of sweat equity shares and employee stock options – there might be some structuring options available for employee stock options with mandatory conversion of OPC, but these options should be evaluated carefully.

An OPC is an excellent option for sole proprietors as it offers them the key benefit of limiting their liability. In addition, with the flexibility on voluntary conversion of OPC into a private or public limited company without any thresholds from April 1, 2021, start-ups, specifically those with single founders (and without co-founders) or those with shoestring budgets (with necessary contractual protection) can consider incorporating an OPC and focus on the business or the idea, till the time they find a co-founder or operations scale up and intend to raise funds, at which time they can convert the OPC into a private limited company.

Srivani Tyarla, Principal Associate; and Anmol Jain, Associate, Lakshmikumaran & Sridharan Attorneys also contributed to this story.

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