By Priya Singh, K.L.E. Society’s Law College.
With the enactment of the Companies Act, 2013 and the incorporation of the concept of One Person Company (hereinafter referred to as OPC) in it, the legal mandate by Companies Act, 1956 that required a minimum of two shareholders and two directors has now been struck down. As the name suggests, the OPC consists of only one shareholder. The need for minimum of two directors has also been brought down to a minimum of one director and maximum of fifteen. . The idea of OPC was mooted by the J J Irani Committee which was set up to take a comprehensive view on the changes necessary in the Companies Act, 1956 in context of the changing economic and business environment This has opened floodgates of opportunities for the entrepreneurs who wanted to independently carry on their business and their only resort being sole proprietary, which is an arduous task, given its unlimited liability and non-recognition as a separate entity in the eyes of the law.
Though the concept is new to India, it is a well-established practice in Singapore, USA and much of the European Union. Along with the status of a company, come its benefits like limited liability and existence as a separate legal entity. This was to stop the prevalent practice of entrepreneurs wherein they would float a company under the 1956 Act along with a nominal member/director who would be holding a single share in the company, holding the rest of the shares with themselves. A person could thereby have the best of both worlds (Private company and sole proprietary). Another reason for introducing this concept is to bring in the unorganized sector to the organized and structured sector of the corporate world thereby opening the opportunities for more favorable banking facilities[1], and limited liability, separate entity.
Given the advantages of the private company and the sole proprietary combined together to form an OPC, it doesn’t come with its own pitfalls. An OPC does definitely reduce the risk of unlimited liability of an individual in a proprietary by limiting it to the amount of unpaid shares. But, what I fail to understand is of what substantial help is an OPC in regard to the ‘one person’ feature. It is not a very difficult task to find a second member who would be agree to be a member just for namesake holding a single share. The expensive, time-consuming and lengthy procedure which requires extensive paperwork to form an OPC, for its continuance and its dissolution are the same as applicable to a private company except for some minor procedural exceptions.
A person is known by a company he keeps. But rarely had one ever thought of having a company comprising of one person as owner, director etc. Section 2(62) of the 2013 Act provides the definition of an OPC. The other legal requirements for an OPC is that
- The term ‘OPC’ to be suffixed before the name of the company to clearly show that its distinction form other companies and let the other stakeholders be aware of the nature of the company.
- The single member has to nominate a succeeding shareholder who will take his place after the death of the initial shareholder.
- The minimum paid up capital is of Rs. 1 lakh.
With compliance to Section 18 of the 2013 Act, an OPC can be converted to a private or public company by increasing the shareholders, directors and paid up capital to the minimum amount in each of these cases. However, an OPC has to mandatorily convert into a public or private company when the paid up share capital exceeds Rs 50 lakh or average annual turnover during the relevant period crosses Rs 2 Crore, then a firm ceases to be an OPC.[2]
Provided that there is only one director, the OPC is exempted from holding any general meetings, annual general meetings and extraordinary general meetings. If there is more than one director then two general meetings need to be conducted every year and communication by the member must be noted in the minute book and signed by him. Section 98 and Section 100-111 of the 2013 Act are also not applicable to an OPC.
One serious advantage of an OPC that experts say would be that of the increase in Foreign Direct Investment in India from MNCs, as they will no longer need to appoint two nominees to form a wholly-owned subsidiary in India. But they have failed to acknowledge that there is a requirement for the member of an OPC to be strictly an Indian. How can a foreign company then form an OPC? Also, attention needs to be drawn to the use of the term ‘person’ in an OPC. Whether it includes a juristic person in its purview of not is of question. In other cases, a ‘person’ as construed by the various judgments dealing with this issue would have also included a juristic person. It would have been of great use if parent companies could form wholly owned subsidiaries by way of an OPC with the parent company as the sole member forming it. However, as mentioned earlier there is a special requirement by the member to nominate a succeeding shareholder to take place of the initial shareholder in case of his death before the dissolution of the firm. Death is of natural persons and not of companies. Whether ‘death’ also includes in its purview, the dissolution of a company (in this case the parent company) is not clear.
In an OPC, the tax payable is significantly higher than that of a sole proprietary. While, The OPC is charged at a base tax rate of 30% along with other applicable taxes like minimum alternative tax (base tax rate 18.5%), dividend distribution tax (base tax rate 15%) and others[3] like dividend tax distribution. He then also will be liable to pay tax on his personal income from the company. This can prove to be a major deterrence for prospective entrepreneurs who are thinking of setting up an OPC even after seeking the relief given by Section 47(xiv) of the Income Tax Act, 1961 against capital gains. A sole proprietor is only required to pay tax that is applicable to individuals in accordance to their income.
CONCLUSION
With the introduction of the One Person Company into the Indian corporate world just this year, it is hard to decide so early what the future of this novel idea would be. Even through its shortcomings, the advantages it offers seem to overpower them as the corporate has witnessed initial enthusiasm towards it. However, one cannot take some of its serious pitfalls lightly. The OPC as of now lies in a grey area, the future of which is uncertain.
[1] CS. Prashant, An insight into One Person Company, http://webcache.googleusercontent.com/search?q=cache:http://rna-cs.com/an-insight-into-one-person-company (as of 21st November 2013 16:30 hours)
[2] Hindustan Times, An individual can register only 5 one-person companies (dated 6th October 2013)
[3]Magazine42, Good news for small business – one person company now possible in India, http://inc42.com/magazine/buzz/good-news-for-small-business-one-person-company-now-possible-in-india/ (as of 21st November 2013 at 16:55 hrs)