Budget 2021: One Person Companies announcement explained
Presenting India's first-ever paperless Union Budget 2021, Finance Minister Nirmala Sitharaman proposed the incorporation of One Person Companies (OPCs), with no restriction in paid-up capital and turnover, as well as an update to the definition of small companies under Companies Act, 2013.
In her speech, the FM said, "As a further measure which directly benefits startups and innovators, I propose to incentivise the incorporation of One Person Companies (OPCs) by allowing OPCs to grow without any restrictions on paid-up capital and turnover, allowing their conversion into any other type of company at any time, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days, and also allow Non-Resident Indians (NRIs) to incorporate OPCs in India,"
What does this mean?
The Companies Act, 2013 had introduced the concept of One Person Company (OPC), which led to the recognition of a completely new way of starting businesses, providing several flexibilities to form a company along with protection of limited liability that sole proprietorship or partnerships lacked.
Section 2(62) of the Companies Act defines a One Person Company as a company that has only one person as a member. Furthermore, members of a company are nothing but subscribers to its Memorandum of Association (MoA), or its shareholders. So, an OPC is effectively a company that has only one shareholder as its member. Such companies are generally created by early-stage entrepreneurs. Currently, to form such a company, a minimum paid-up capital of Rs 1 lakh is required, and the FM in the Union Budget 2021-22 has proposed to not have any minimum paid-up capital.
According to the Ministry of Corporate Affairs (MCA), if the paid-up share capital of an OPC currently surpasses Rs 50 lakh, or its average annual turnover of immediately preceding three consecutive financial years exceeds Rs 2 crore, then the company is mandated to convert itself into a private or public company — which will not be the case after the latest proposal by the FM.
Conversion of OPCs into other companies
Rules regulating the formation of OPCs expressly restrict the conversion of OPCs into Section 8 companies, i.e. companies that have charitable objectives. Also, OPCs cannot voluntarily convert into other kinds of companies until the expiry of two years from the date of their incorporation.
This basically means that when an OPC is incorporated, the conversion into a Private Limited Company cannot happen before two years, but now the government has announced that this will be cap will be removed and that the OPCs will be able to convert into any other type of company at any time.
MCA also defines that to become an eligible member of an OPC, only an Indian citizen, and resident in India is eligible to become a member and nominee of an OPC. A resident in India is currently referred to a person who has lived in India for not less than 182 days during the immediately preceding one financial year. The latest announcement reduces the period to 120 days from 182 days.
For YourStory's multimedia coverage of Budget 2021, visit YourStory's Budget 2021 page or budget.yourstory.com