We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
26 April 2021
The concept of 'one-person companies' ('OPCs') was proposed by the Dr JJ Irani Committee in 2005 and, when the Companies Act 2013 entered into force – completely transforming Indian corporate law by introducing new concepts that previously did not exist – the concept of OPCs was introduced. OPCs aim to provide an alternative and simpler business structure for small entrepreneurs, traders and artisans, which are the backbone of India's microeconomic industry but were lacking a legal business structure that did not waste time, energy and monetary resources. Previously, the only option available to them was to register their business as a sole proprietorship or form a company with at least two people.
Section 2(62) of the Companies Act defines an 'OPC' as "a company which has only one person as a member", where all of the liabilities are limited to the company and not its members. Some of the salient features of OPC include the fact that:
Therefore, unlike private companies, OPCs are not subject to various procedural formalities outlined in the Companies Act, making the operation and functioning of OPCs convenient, less costly and trouble free. In addition, other than smoother operations, OPCs get access to various credit ad loan facilities from banks or financial institutions since they carry the status of a private limited company. Further, from the regulators' point of view, it is beneficial for them to bring the unorganised sector comprising sole proprietorship and local businesses under the ambit of a legal framework. This makes the regulation of these entities effective and easier.
The objective behind introducing the concept of OPCs was to increase economic growth by promoting entrepreneurship and help new-age entrepreneurs to take risks when doing business without damaging their personal assets, which may occur in non-regulated forms of business. However, previously, only natural persons who were Indian citizens and resident in India were allowed to incorporate OPCs in India. The government's restrictive approach barred foreign direct investment by banning foreign companies, non-resident Indians and multinationals from incorporating their subsidiaries or businesses in India under the OPC business structure.
To overcome the lack of foreign investment in OPCs and remove the traditional requirement of having at least two members to form a company, the Companies (Incorporation) Second Amendment Rules 2021 were notified on 1 February 2021 and entered into force on 1 April 2021.
The amended rules provide that natural persons who are Indian citizens, whether resident in India or not, can incorporate OPCs in India. Further, the amended rules have reduced the residency limit to set up an OPC from 182 days to 120 days during the immediately preceding financial year. This move has been highly welcomed by start-ups and innovators as it will boost the entrepreneurial capabilities of non-resident Indians and overseas citizens of India and help them to enter the Indian market.
Previously, in order to convert to any other kind of company, OPCs had to fulfil certain prescribed conditions. Conversely, under the amended rules, OPCs can voluntarily convert themselves to a private or public company (except a not-for-profit company) after increasing the minimum number of members and directors to the limits prescribed under the Companies Act for the concerned form of entity, thereby implying that the government has removed the mandatory conversion requirement on breaching the thresholds. Therefore, enabling early conversion and removing the unnecessary restriction of mandatory conversion, the government has given a push to its 'ease of doing business' motto. Further, the growth of start-ups will be accelerated with the altered provisions, which is imperative in these difficult times due to the COVID-19 pandemic.
For further information on this topic please contact Neetika Ahuja or Tanuja Kaushik at Clasis Law by telephone (+91 11 4213 0000) or email (firstname.lastname@example.org or email@example.com). The Clasis Law website can be accessed at www.clasislaw.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.