ONE MAN SHOW – TAPPING THE UNCHARTERED WATERS

INTRODUCTION:

The Ministry of Corporate Affairs (hereinafter “MCA”) vide notification dated 1^st day of February 2021 introduced the Companies (Incorporation) Second Amendment Rules, 2021 for amending the existing provisions with respect to a One Person Company (hereinafter “OPC”) under the law for time being in force thereby making significant changes in two aspects with respect to such entities:

·        the formation

·    Conversion of such a structure of business into any other category of economic vehicle recognised under the Companies Act, 2013 (hereinafter “the Act”).

ONE PERSON COMPANY – UNDERSTANDING THE CHARACTER:

The concept of OPC found its inception only under the Companies Act, 2013 which was based upon the recommendation of the then expert committee led by Dr.  Jarnshed J. Irani vide their report dated 31st May 2005 and subsequent deliberations thereof. It is widely perceived that the Act technically recognised OPC as a Company on the basis of the number of member involved in bringing such structure into existence. However, the intention of law had never infact been to categorise OPC as a Company. Such a structure was given recognition under the law for individuals to contribute to the economy by doing business in a flexible manner without undertaking much compliances and incurring associated costs therein.

Below stated is an observation of the report by the expert committee dated 31st May 2005 highlighting the need for OPC:

The Committee recommends that the law should recognize the formation of a single person entity in the form of 'One Person Company'. Such an entity may be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters.

DISTINCTION FROM OTHER CHARACTERS OF COMPANIES:

OPC is an economic vehicle bestowed with a distinctive cloak in terms of flexibility of the individual doing business, the deployment of available resources, creativity etc. The erstwhile legislation recognised only private and public limited companies respectively as such structures that could develop the economy and state of business in India. A Company has no technical meaning rather mechanically the Act bestows a character on companies namely public and private limited companies on the basis of members, the deployment / mobilization of funds and the extent of business operations involved.

Company – Meaning:

·        Lindley J. – An Association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. 

·   The Madras Central Urban Bank Ltd. v. The Corporation of Madras (1931): "Company" in its ordinary, nontechnical, non-metaphorical sense means a body of persons associated for a common object for some business or other purpose. 

Meeting of minds – Drawing the line:

It is well established that Company implies a body of persons associated for a common intent which may be for doing business. There is indeed the meeting of minds of different individuals involved therein for the purpose of doing business and making decisions therein. On the other hand, a bare perusal of definition of OPC pursuant to Section 2(62) would outline that the structure of the OPC wherein there is only one member does not contemplate the meeting of minds of people involved in business, though the sole member cum director may consult external individuals for technical and professional advice but yet the aspect of decision making stays concentrated on the hands of the sole member.

An interpretation can be chalked out that OPC is a unique structure of business recognised and governed under the Act and well distinguished from the other forms of economic vehicles.

AMENDMENTS:

FORMATION:

Rule 3 of the Companies (Incorporation) Rules, 2014 embraced that only an Indian Citizen who is resident in India was eligible for incorporating an OPC. An individual to be recognised as a citizen of India ought to satisfy the conditions laid down in Sections 3 to 7 of the Citizenship Act, 1965 as amended from time to time. The law categorically kept NRI’s out of the ambit to incorporate an OPC in India. A Non Resident Indian (NRI) is an Indian Citizen domiciled out of India due to some purpose for more than 182 days in the immediately preceding financial year and the duration of such person outside India stands uncertain.

MEANING OF NRI – CASE SUPPLEMENTS:

·    Shanti Esther Puyravaud v. The Tamil Nadu Veterinary and Ors. (2017): The Madras High Court opined that “Non resident Indian (NRI) is nowhere defined under any of the Act, except in Income Tax Act. As per the Income Tax Act, Non resident Indian (NRI) is an Indian Citizen staying outside India, for more than 182 days in a year.”

·     Rakesh Rishi v. Bakhshish Kaur (2013): The Punjab Haryana High Court contemplated that “The ordinary meaning of the expression 'NRI' is that a person of Indian origin living abroad whether settled permanently or temporarily. The purpose of his living abroad has been amplified either for taking up employment outside India or for carrying on business or vocation outside India or for any other purpose as would indicate his intention to stay outside India for uncertain period.”

PURPOSE – KEEPING NRI’S OUT OF THE PICTURE:

The concept of OPC was embraced to give the individuals a recognised structure and an economic outlet to do business, contribute to the economic development and be governed therein under law by a regulator thereby promoting entrepreneurship in India.

Below reproduced are observations signifying the growth of OPC’s in India:

The Lok Sabha debate (December 18, 2012):

This is a new concept to have a one-person company. It will give a lot of opportunity for young people to show their entrepreneurial spirit to come forward and invest in our economy.

Randstad Workmonitor survey (2017):

Around 83 per cent of the Indian workforce would like to be an entrepreneur, higher than the global average of 53 per cent.

NRI’s were specifically kept out of the purview from formation of an OPC to provide opportunity to the domestic entrepreneurs, to stimulate the usage of technology and resources available domestically, embrace and enhance the abundant creativity available in India and to foster the domestic growth. It was felt that allowing NRI’s at an early stage would exploit the domestic growth and therefore to enhance the Indian market, NRI’s were not allowed to incorporate an OPC in India.

PROPOSED CHANGE:

The Indian Union Budget and subsequent notification by MCA permitted NRI’s to incorporate an OPC in India. There is a need felt for influx of technology, creativity, capital infusion, bringing into existence diverse business prospects and development of the Indian economy and that is recognised as a prime reason for stimulating NRI’s to incorporate an OPC in India. The law stipulates that Indian residents who reside in India for a period of more than 182 days are allowed to incorporate an OPC. The proposed change reduces the period of residency for residents in India from 182 days to 120 days in the immediately preceding financial year.

CONVERSION FROM OPC TO OTHER RECOGNISED STRUCTURES:

An OPC is constricted or restrained from voluntary conversion to other economic vehicles such as private or public limited company and the same is at present embodied under Rule 3 of the Companies (Incorporation) Rules, 2014 as amended from time to time. The reason for such a restriction could be attributed to the legal character of such entity. Private and Public Limited Companies are recognised under the Act in terms of the mobilization and deployment of capital / funds in the business, the scale of business operations etc. and that is why paid up capital and turnover are the yardstick for distinguishing OPC from other kinds of companies.

However, the law also embarks an exceptional situation wherein an OPC can voluntarily convert itself into a private or public limited company only when the following conditions are met with:

·         Such OPC should be legally in existence for at least two years and

·         The paid up capital of OPC is more than fifty lakh rupees or

·         The turnover of OPC exceeds two crore rupees.

The law also embraces the fact that if the paid up capital and turnover of the OPC exceeds fifty lakh rupees and two crore rupees respectively, then such entity shall cease to operate as an OPC and shall mandatorily convert itself.

PROPOSED CHANGE:

The Indian Union Budget and subsequent notification by MCA removed existing sub rule 7 to Rule 3 of Companies (Incorporation) Rules, 2014 that placed the restriction on OPC’s with respect to voluntary conversion into other forms of economic vehicles thereby permitting such entities to voluntarily convert itself into any other class of companies at any point of time. The proposed amendment outline that such OPC’s intending to convert itself to private or public limited companies upon alteration of the memorandum and articles of such entity, increasing the number of members to 2 and 7 in case of private and public limited companies, increasing the number of directors to 2 and 3 in case of private and public limited companies and complying with the conversion process as enshrined under the other applicable provisions of the Act. Such OPC’s are required to file e-Form No.INC-6 for its conversion into Private or Public Company along with the following documents:

·         Altered MOA and AOA

·         Certified true copy of resolution passed

·         The list of proposed directors and members along with their consent

·         List of creditors

·         the latest audited balance sheet and profit and loss account

At present, Rule 7 of the Companies (Incorporation) rules, 2014 as amended from time to time enlists that a private company having paid up capital of less than fifty lakh rupees or turnover of two crore rupees may convert itself into an OPC subject to the compliance of other aspects mentioned therein. The amendments seek to remove the threshold limits mentioned above and give a free hand to the private limited companies to convert itself into an OPC to reduce compliance under the Act and associated cost thereof. The aftermath of this proposed change can be perceived to give a hand to the OPC’s to expand their nature of business with lesser compliance aspect.

APPLICABILITY:

The proposed amendments shall take effect from the commencement of first day of financial year 2021–22 (i.e. 1^st Day of April 2021).

EFFECT:

The amendments proposed by the Union Government seeks to employ a liberal and constructed view to the character of an OPC in contrast to those of private and public limited companies.

The notification by MCA can be accessed at:

http://www.mca.gov.in/Ministry/pdf/SecondAmndtRules_02022021.pdf

 

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