The OPC Revamp
Vinay Butani (Partner, Economic Laws Practice)
Aasim Syed (Associate Manager)
The Government of India had constituted an expert committee under the chairmanship of Dr. Jamshed J. Irani to inter alia make recommendations on simplifying the governance of company law in India. The committee submitted its report on May 31, 2005. One of the recommendations made by the committee was enabling the formation of a single person entity in the form of One Person Company (“OPC”) to provide a simpler governance through exemptions from certain provisions of the Companies Act, 1956 so that the sole entrepreneur does not spend his time, energy and resources on administrative matters thereby enabling him/her to focus on business. The recommendation for OPC finally fructified and took a legislative form when the Companies Act, 2013 (“Act”) was enacted.
What is an OPC?
Under the Act, companies are categorized into public and private companies. A public company is a company in which the minimum number of members is seven whereas in case of a private company the minimum number of members is two. OPC, as the name suggests is a company which has only one person as a member. OPCs are generally incorporated by entrepreneurs who do not have a co-founder.
Benefits available to OPC:
Since the rationale for permitting individuals to incorporate a legal entity in the form of a company is to simplify the compliance and enable ease of business, the Act has further provided for various exemptions to OPCs, the significant ones being:
Sr. No. | Provision under the Companies Act, 2013 | Applicability for Private Companies | Applicability for OPCs |
Minimum number of Board meetings | At least four meetings in a year with a maximum gap between two meetings not being more than one hundred and twenty (120) days | Only one board meeting in each half of a calendar year with a maximum gap of ninety (90) days between two board meetings and in case there is only one director in the OPC, there is no requirement of conducting board meetings | |
Holding shareholders meetings | Applicable | Not applicable | |
Restriction on appointing or reappointing an individual as an auditor for more than one term of five consecutive years and an audit firm as an auditor for more than two terms of five consecutive years | Applicable if the paid-up share capital is rupees fifty crores or more | Not applicable |
Amendments under the Budget 2021-2022:
The Honorable Finance Minister Nirmala Sitharaman in her budget speech announced several measures to promote ease of doing business. As a measure to benefit the start-ups and innovators, the minister announced certain amendments to the laws governing OPCs which included:
(a) No mandatory conversions:
Prior to the amendment OPCs were required to mandatorily convert into public or private company if the paid-up share capital of the OPC exceeded fifty lakh rupees or its average annual turnover during the immediately preceding three consecutive financial years exceeded two crore rupees. However, with the amendment, the mandatory conversion has been done away with, which means, if the OPC crosses the thresholds it would still continue to be an OPC.
(b) Anytime conversion:
Prior to the amendment, OPCs could be voluntarily converted into public or private company only after two years from the date of incorporation. The amendment has removed this two year waiting period, thus enabling early conversions.
(b) Reduced residency limit:
Prior to the amendment, in order to incorporate an OPC, a citizen of India in order to be considered ‘resident in India’ should have stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding financial year. The amendment has now reduced the residency limit from one hundred and eighty two (182) days to one hundred and twenty (120) days. It would be interesting to note if similar changes would be made in the foreign direct investment policy.
The above amendments have been notified by the Ministry of Corporate Affairs on February 1, 2021 and will come into force from April 1, 2021.
Impact and Benefits of the Amendments:
The amendments will impact the start-up ecosystem in a positive manner to a certain extent. The amendments seem to be forward looking with focus on making the benefits of an OPC available to single founders and Indian citizens who have stayed in India for less than one hundred and twenty days. It will encourage more solo entrepreneurs to adopt the structure of OPC who were earlier deterred by the mandatory conversion requirements and the minimum residency period in India.
Limitations:
While there are no limitations in the proposed announcements, the OPC structure overall faces certain limitations. The OPC would still not be the preferred choice for entrepreneurs who plan to fundraise in the future since the investors look at an equity stake in the company in lieu of their investments and an OPC is a company that can have only one shareholder.
Another option for early-stage solo entrepreneurs is to consider converting the OPC into a private company near to the fund raise, however, it would deprive them of the benefits that were otherwise available to an OPC.