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One Person Companies: A useful tool of ring-fencing and corporatisation
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Ms. Aditi Jhunjhunwala
company secretary
Guest Profile
Aditi Jhunjhunwala, a Company Secretary is currently working as a Senior Associate at Vinod Kothari & Company, Practising Company Secretaries, Kolkata. She is avid writer and regular contributes to various magazines and online platforms like Chartered Secretary, Corporate Law Journal, moneylife etc. She is also a regular speaker at various events organized by ICAI & ICSI. Her area of expertise is Company Law, SEBI and related Corporate Law


One persona company

Posted on December 9, 2013

With the Companies Act, 2013 (New Act) now being notified in phasesthere areseveral new provisions which have been introduced. The new provisions may not be novel in itself in as much as the Indian Companies Act is concerned as much of the concepts have been bought from International Laws as well. In this write up we discuss the concept of One Person Company, its benefits and provisions applicable line with the Rules introduced in that regard by Ministry of Corporate Affairs (MCA) on September 09, 2013. The concept was first recommended in India by an expert committee in 2005 and was subsequently inserted in the Companies Bill so as to provide an option to persons operating under the sole proprietorship model to operate as a company.

The JJ Irani Committee (the Committee)

The Committee in its report in 2005 recognized the need for small and private Companies to be provided greater flexibility and freedom of operation while enabling compliance at low cost. Therefore, to unleash the entrepreneurial talent of the people in the information and technology driven environment, the Committee recommended that law should recognize One Person Company (OPC).

Provision under the New Act

 “OPC” means a company with only a single member as defined in section 2(62) of the Act. The Company is a private company and all the provisions as may be applicable to private companies will become applicable to OPC except the provision of minimum number of members, unless a provision is specifically exempted.

Provisions in the Rules, 2013

Natural Person

Only a natural person, being a resident in India can incorporate an OPC. The term "resident in India" means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one financial year.Further, the nominee for the sole member also has to satisfy the said criterias.


Further, the New Act defines an OPC as consisting of one person as a member. A person means any person – whether natural or artificial. The residential status is relevant only at the time of incorporation. Residential status may surely change after incorporation and the same applies in case of nominee as well, i.e. a person once nominated as nominee may become non-resident thereafter.

Shares held by holding company in an OPC

With the above requirements, apparently a company cannot form OPC. Currently, in case of Wholly Owned Subsidiaries (WOS), where the holding company holds shares in the WOS and only for the purpose of meeting the requirements of minimum number of members, i.e. 2 in case of private limited and 7 in case of public limited, is done by way of nominees. This could have been very well eradicated by means of OPC. However, not sure what is the intent of the law makers behind calling for only a natural person to form OPC though what flows from record is that the Committee had only recognised the need of OPC for small entrepreneurs. The European law recognises formation of OPC by companies. However, below we discuss, if at all there is a possibility of a holding company holding shares in an OPC through a natural person.

Trust in the Register of Members

Unlike the 1956 Act, which under section 153 provides that no trust can be entered in the register of members or debenture holders, the new Act does not provide such on notice of a trust being entered in the register of members or debenture holders. Instead, the mandatory provision of law has now been moved to Articles under Table F. Para 4 of Table F reads as:

“Except as required by law, no person shall be recognised by the company as holding any share upon any trust, and the company shall not be bound by, or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share, or any interest in any fractional part of a share, or (except only as by these regulations or by law otherwise provided) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder.”

The above provision provides for a bar on notice of trust being entered in the register of members. Therefore, as discussed above that OPC would have been much more of relevance to holding companies, but the new Act only requires a natural person to form an OPC. With the new Act not putting any restriction on notice of trust being entered in the register of members, a holding company can hold shares in an OPC through a natural person unless there is no provision in the Articles of the Company as stated in Para 4 of Table F of the new Act. The holding company can declare the natural person as a trustee for the holding company and therefore, hold shares in the OPC for its WOS.

Other conditions and provisions for OPC

Maximum number of Companies one can incorporate

A person can incorporate a maximum of 5 (five) companies. For the purpose of this limit, in case of a nominee becoming a member (by virtue of death or incapacity), the rule provides for opting out of one OPC, so as to comply with the limit of 5. [Rule 2.2]

Consent of the nominee

Pursuant to first proviso of section 3 (1) and Rule 2.2 (1), the written consent of the nominee is required for the purpose entering his/her name in the memorandum of the OPC. Name of the person nominated shall be mentioned in the memorandum of OPC and the nomination in Form No. 2.1 along with consent of such nominee obtained in Form No. 2.2 and fee as provided in Annexure B shall be filed with the Registrar at the time of incorporation of the company along with its memorandum and articles.


Further, pursuant to second proviso of sub-section (1) of section 3, the person nominated by the subscriber or member of OPC may withdraw his consent by giving a notice in writing to such sole member and to the OPC [Rule 2.2 (3)]. Sole member shall nominate another person as nominee within 15 days on the receipt of the notice of withdrawal and shall send an intimation of such nomination in writing to the Company, along with the written consent of such other person so nominated in Form No. 2.2. [Rule 2.2 (4)]


The company shall within thirty days of receipt of the notice of withdrawal of consent under sub-rule (3) file with the Registrar, a notice of such withdrawal of consent and the intimation of the name of another person nominated by the sole member in Form No.2.3 along with fee as provided in Annexure B and the written consent of such another person so nominated in Form No.2.2. [Rule 2.2 (5)]

When does OPC lose its status?

Under the following circumstances OPC is to mandatorily convert itself into a public company or a private company with minimum number of members as specified, when:

  • paid up share capital of OPC exceeds fifty lakh rupees, or
  • on the last day of the relevant period during which its average annual turnover exceeds two crore rupees, or
  • on the close of the financial year during which its balance sheet total exceeds one crore rupees

In the above cases, OPC shall within 6 months convert itself into a public company or a private company with minimum number of directors and members.


"Relevant period" means the period of immediately preceding three consecutive financial years


Company should do the following compliance:

  • It shall alter its memorandum and articles by passing an ordinary or special resolution in accordance with sub-section (3) of section 122
  • Increase the number of directors
  • Increase the number of members
  • Within thirty days of losing the status, the One Person Company shall give a notice to the Registrar in Form No. 2.6
Analysis on the ambiguities in the provisions

Transfer provisions

The process of transfer has not been laid either under the Act or the Rules. At the same time, the process of change of nominee also is not there. In case of a nominee becoming a member (by virtue of death or incapacity), the rule provides for opting out of one OPC, so as to comply with the limit of 5. However, this should also be in case of a transfer, in which case also, there has to be a change of nominee of the original member as well. The Rules have not envisaged transfer of a member’s holding at all.

Alteration of MoA

It is notable that section 13 for alteration of the MOA seems to provide that only the clauses for which procedure has been provided in the law can be altered.

Conversion of OPC into private/public Company and vice versa

However, the ambiguity is Rule 2.4 (1) sub-rule (1) specifies only two criteria of paid up capital of 50 lakhs and average annual turnover of Rs. 2 crore, exceeding which OPC shall cease to be entitled to continue as OPC.However, sub-rule (2) specifies time limit even for a third criteria of financial year during which the balance sheet total exceeds one crore rupees.This requirement does not seem to be in consonance with sub-rule (1).In case of intimation to Registrar, what about on meeting the third criteria as mentioned in sub-rule (2) of balance sheet total exceeding one crore.This also needs to be clarified or inserted in the Rules.


Just the way there is criteria for conversion of OPC into private/public Company, there must correspondingly be a process of converting an existing company into an OPC. An OPC is only a special case of a small company. Therefore, there should be no reason to deny the benefit of OPC status to existing companies.

Related Party transactions

Section 193 provides that where OPC limited by shares or by guarantee enters into acontract with the sole member of the company who is also the director of the company, thecompany shall, unless the contract is in writing, ensure that the terms of the contract or offerare contained in a memorandum or are recorded in the minutes of the first meeting of theBoard of Directors of the company held next after entering into contract, unless the contract is in the ordinary course of business. However, will the concept of related party be applicable even in case of OPCs when one OPC enters in a transaction with another OPC having same member/nominee/director? Likewise, what if an OPC enters into a contract with a company other than OPC in which there is common member/nominee/director?Provisions of section 189 in relation to maintaining of registers for related party transactions do not recognise any transaction in case of OPCs. One may say that because OPC are small companies and may be will not have much impact on the Corporate Governance, therefore, the same may not be applicable in the above cases.


It has been provided in sub-section (2) that the company shall inform the Registrar about every contract entered into by thecompany and recorded in the minutes of the meeting of its Board of Directors underwithin a period of fifteen days of the date of approval by the Board ofDirectors.

Maximum number of directorships

Are the provisions of section 165, in relation to maximum number of directorship also applicable in case of OPCs? The Rules prescribe for a cap of 5companies in case of membership. Apparently, the limit will apply in case of directorships.

OPC: effective tool for transfer of property?

In case the property owned lets say by an individual, owning a flat, is acquired in the name of an OPC, the property becomes transferable by way of transfer of shares. Therefore, the stamp duty and tax valuation issues become easier as there will be no conveyance on such transfer. Hence, the property gets transferred by virtue of transfer of shares. Ofcourse, this is subject to the fact if the shares of OPC are transferable or not. If yes, this can surely be a very useful tool.


Recently, the Supreme Court in the case of Hill Properties Ltd. v. Union Bank of India said that the ownership of the share may give an inheritable transferable right to use the property too.

Benefits of OPC

  • Since, the concept is limited to an incorporated proprietorship; this may be a way to encourage small traders to move to incorporated status. From a taxation point of view, the concept of OPC may not appeal to smaller proprietorships since the base rate of tax of a company is quite steep (30% approx) and may result in a higher incidence of taxation for the smaller sole ventures. However, considering the OPCs can be formed by natural persons only, one may expect relaxation in tax provisions as in case of partnerships; 
  • Less provisions of the Act to be complied with like holding of meetings, quorum requirements, maintenance of registers etc.;
  • Less maintenance of records;
  • Low administrative costs;
  • Simple legal regime provided by way of exemptions;
  • A natural person can have such a form of company for its investment purpose and therefore, may not therefore, strictly fall under the Non Banking Financial Companies Regulations with the Reserve Bank of India (RBI); hence may  not need to comply with requirements of net owned funds, other compliances with RBI
  • De-risking of the business by transferring the liabilities to the company
Some of the statutory compliances applicable/exempted to OPC
 

Section

Provisions

Proviso to 2 (40)

OPC may not include cash flow statement as part of its financial statement

Proviso to 3 (1)

Memorandum to prescribe the name of the person who will in the event of death/incapacity of the member, become the member thereafter.

Firs Proviso to 92 (1)

In case of OPC, either a Company Secretary or a director where there is no Company Secretary, to sign the Annual Return

96 (1)

Exempts OPC from holding Annual General Meeting (AGM)

98, 100-111

Provisions relating to AGM provides exemption to OPC

134

Signing by only one director of financial statements, board’s report etc. in case of OPC

152

Member deemed to be the first director of the company

173 (5)

One Board meeting in each half of a calendar year and the gap between the two meetings is not less than ninety days.
Proviso says that this will not be applicable in case OPC has only one director

193

Every contract between the OPC and its member-director to be recorded in writing in the memorandum in the minutes of the first meeting of theBoard of Directors of the company held next after entering into contract, except for those in the ordinary course of business.

1Rules and forms are only in the draft stage and are pending notification

2 http://judis.nic.in/supremecourt/imgs1.aspx?filename=40751


Disclaimer:  The views expressed in this article are solely the views of the author


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