The Solitary Reaper

THE SOLITARY REAPER

(ONE PERSON COMPANY UNDER COMPANIES BILL, 2012)

If I make a suggestion to you that a person can single-handedly establish a company in India, the odds are that you will not believe me. You probably will not welcome this challenge to the traditional notion of a company created by the Companies Act of 1956: the one that involves a Board of Directors, shareholders or at least, two members. But the Companies Bill of 2012 does exactly that, it challenges this traditional structure by the introduction of the ‘One Person Company’ (OPC). (The bill was recently passed by the Parliament and is at present, awaiting the assent of the President to become law.)

As the name suggests, a ‘One person Company’ is a company that has only one person as its sole member. This is stark contrast to the earlier requirement of two members for a private company and seven members to constitute a public company. Earlier, a person who wanted to conduct business individually could only do so through a sole proprietorship where the legal and financial liability is upon the proprietor. But OPC is a ‘win-win’ option; it provides the benefits of a sole proprietorship and a company wherein the person can choose to be the only shareholder in the company but he will not have to bear the legal and financial liability as the company continues to have a separate legal identity.

What are the features and procedure of an OPC?

· An OPC has only person as a shareholder/member.

· It is a private company that requires a minimum paid up share capital of one lakh rupees.

· The number of directors can be more than one and the shareholder may or may not be a director.

· The OPC can be of three kinds: Company limited by shares/ Company limited by guarantee/ unlimited company.

· The letters ‘OPC’ shall be mentioned in brackets below the name of the company incorporated by the shareholder, wherever its name is printed, affixed or engraved.

· The shareholder has to name a nominee in the memorandum of Association to take over the management of the affairs of the company in the event of death or incapacity to contract of the shareholder.

· The nominee shall be named only his prior consent is taken and he may choose to withdraw his consent at any time.

· The written consent of the nominee is required to be submitted to the Registrar of Companies at the time of incorporation of the OPC, along with the M&A (Memorandum & Articles).

· The shareholder has the freedom to change the nominee at any time. In order to effect such change, a notice has to be given by the shareholder to the person and the company. Also, the same has to be intimated to the Registrar.

· There can be a maximum of 15 directors appointed for the OPC, with a mandatory requirement of one director at any given time.The shareholder continues to act as the director until the Company chooses to appoint others.

How does the law relating to Companies accommodate the OPC?

The Companies Bill has several provisions that relax certain norms for the OPC. For instance, the OPC is not required to prepare a cash-flow statement and the annual return can be signed by the Director instead of a Company Secretary. Also, the OPC is exempted from having to conduct an Annual General Meeting (AGM) and any business that should have been conducted through such meeting shall be done in the case of an OPC by passing a resolution that should be entered in the minutes book of the company. The OPC is nevertheless required to conduct a meeting of Board of Directors in each half of the calendar year, and the gap between two such meetings should not exceed 90 days. In addition, it is sufficient if one director signs the financial statements of the company and the OPC gets 6 months from the close of the financial year to file the financial statements of the company.

What are the advantages of the OPC?

For the corporate sector, the advantage is that the unorganized and unregulated sector of sole proprietorship will find its way into the more organized and regulated structure of a private company. For the individual, it is certainly an improvement over the sole proprietorship as his legal and financial liability is limited in case of the OPC. This could also serve as an incentive for small and medium enterprises to take the OPC route over doing business as sole proprietors.

A grey area remains regarding whether foreign companies can be the sole shareholder in a wholly owned subsidiary in India. If yes, it could lead to an upswing in the inflow of foreign investment in the economy because the companies will no longer need to appoint nominal members only to satisfy the condition of minimum two members for their subsidiaries in India. The ambiguity is due to the fact that though the definition uses the term ‘person’ which may legally include a company as well, but a succeeding shareholder needs to be nominated to take over in event of death of the shareholder. The concept of death is generally perceived as possible only in case of natural persons and therefore, the fact that the requirement to name a nominee is a mandatory requirement may act as a barrier for foreign companies.

What are the pitfalls involved with the OPC?

The shareholder will have to be prepared to pay the corporate tax at the rate of about 30 percent (basic rate) that could cost his pocket a lot more than the income tax slabs ranging from 10% to 30% that apply the does not incorporate his company. In addition, he would also have to pay the Minimum Alternate Tax at the basic rate of 18.5% and the Dividend Distribution tax of about 15 percent that will be applicable.

Also, there is no explicit provision in the bill that provides for conversion of an OPC into a Non-OPC. This is a major setback because it is natural for a company to expand as it grows with the introduction of more shareholders. The absence of any provisions relating to the same could limit the flexibility of the entrepreneurs and businesses.

Is India the only country where OPC is present?

The concept of the OPC is quite common abroad, and countries such as China, Singapore, USA, Pakistan and other countries of the Gulf region have introduced it in their domestic corporate laws. China implemented it in 2005, and prescribed that the promoting individual will act as the shareholder as well as the director. In the US, the concept is available in the form of a single member limited liability company (LLC).

The concept of the One Person Company is still a new player on the corporate block and it may be quite a while before it gains ground among the other options of a private limited company, a limited liability partnership (LLP) and a sole proprietorship. It might be too soon to say that the Indian entrepreneur has reason to rejoice but this is certainly a progressive step in the Companies Bill of 2012, at least on paper.

Article by Tania Singla

Grayscale Admin Team

www.grayscale.org.in