The Ministry of Corporate Affairs recently amended the One Person Companies Rules after the announcement was made in this regard by the Finance Minister. The MCA has amended the Companies Incorporation Rules 2014. The amendments to the rules governing One Person Companies will come into force from the 1st day of April. In this article, we shall look at the key changes brought in by this amendment.
What are One Person Companies, and how many such companies are there in India?
As per section 2 (62) of the Companies Act, 2013, One Person Company is a company which has only 1 person as part of its members. This type of company was introduced by the government to encourage self-employment opportunities.
As per the data compiled by the Monthly Information Bulletin on Corporate Sector, there were more than 34,000 one person companies out of the total number of about 1.3 million active companies in India. This record is as of 31st December 2020. The number of OPC was just over 2000 as on 31st March 2015 out of a total of about 1 million companies. Data also signifies that more than half of the OPCs are in business services.
What is the objective of amending the One Person Companies Rules?
MCA has stated the following objective behind amending the OPC Rules, and they are as follows:
To directly benefit start-ups and innovators in the country, especially those who supply products and services on e-commerce platforms ;
To bring in more unincorporated businesses into the organized corporate sector;
To allow OPCs to grow without any restrictions on paid up capital and turnover;
Allowing their conversion into any other type of company at any moment; and
To allow Non-resident Indians to incorporate One Person Companies in India.
With the above mentioned points in mind, the Ministry of Corporate Affairs has amended the OPCs Rules.
Key highlights of the amendment made in One Person Companies Rules
One person company shall alter its memorandum of association and articles of association by passing a resolution according to sub-section (3) of section 122 of the Act to give effect to the conversion and also to make necessary changes.
Previously Non-Resident Indians were not allowed to start OPCs, but now the changes allow Non-Resident Indians to incorporate OPCs in India.
As per the changes, the residency period to be considered as Indian Resident has been reduced to 120 days from 182 days for Non-Resident Indians.
The rules pertaining to voluntary conversion of OPCs unless they have completed 2 years from the inception date has been omitted. The changes have now allowed OPCs to be converted into public or private company at any time as per section 8 of the Act.
A One Person Company can be converted into a Private or Public Company other than a company registered under section 8 of the Act after raising the minimum number of members and directors to 2 or minimum 7 members and 3 directors, depending upon case to case.
The limitation pertaining to paid up capital and turnover applicable to OPCs currently that is paid up share capital of 50 lakh rupees, and the average annual turnover during the relevant period of 2 crore rupees is now done away with. This is done so that there are no restrictions on the OPCs growth with respect to their paid-up capital and turnover.
Change in thresholds of paid up capital and turnover
The Ministry of Corporate Affairs has revised the limit of paid-up capital and turnover of small companies under the Companies Act 2013.
The threshold for paid-up capital has been changed to “not exceeding 2 crore rupees” from “not exceeding 50 lakh rupees”;
The threshold for turnover has been changed to “not exceeding 20 crore rupees” from “not exceeding 2 crore rupees”.
Fast track process for mergers and amalgamations of start-ups
The companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 is amended with a view to ensure fast track process of mergers and amalgamations among start-ups and small companies under the Companies Act 2013. The new rules will now be called Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2021.
With this change it is expected to fasten the mergers and amalgamations between two or more start-up companies, one or more start-up companies with one or more small companies.
What are the benefits of reduction in compliance burden for companies?
Some of the benefits in such case are as under:
No requirement of preparing cash flow statement as part of financial statement;
Other companies are required to provide details of remuneration to directors and key managerial personnel, but in case of small companies they are required to provide details of only the aggregate amount of remuneration drawn by directors in its annual return;
There is no mandatory requirement of rotation of auditor;
Auditor of small companies is not required to report on the adequacy of the internal financial controls and its operating effectiveness in his report;
Hold only two board meetings in a year;
Annual return of the company can be signed by the Company Secretary or in case of no company secretary, by a single director of the company;
Lesser penalties for small companies and also lesser filing fees.
As stated at the beginning of this article, the amendments to the rules governing One Person Companies will come into force from the 1st day of April 2021. In her budget speech, Finance Minister Nirmala Sitharaman expressed that allowing OPCs to grow without any restrictions on paid-up capital and turnover will benefit start-ups and innovators.
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.