Only natural-born citizens of India, including small businessmen, entrepreneurs, artisans, weavers or traders among others can take advantage of the 'One Person Company’ (OPC) concept outlined in the new Companies Act.
Non-resident Indians or individuals who do not reside in India for over 182 days cannot incorporate a OPC, the draft rules to the Companies Act, 2013 has clarified.
Resting the doubts regarding incorporation of OPC by a corporate entity or non-resident Indians, the draft rules said only a “natural person” who is an Indian citizen and is resident in India shall be eligible to incorporate an OPC.
"Further, it is also provided that the nominee for the sole member of an OPC should also be a “natural person” who is an Indian citizen and is a resident in India," said Lalit Kumar, partner in the law firm J Sagar Associates.
"When the Companies Bill was originally introduced in Parliament, ambiguity arose whether such OPC can access foreign funds i.e. whether a person resident outside India can form an OPC in India. Now it is completely clear that a person resident outside India cannot form an OPC," Kumar said.
Overall, the draft rules to the new companies law offer a slew of exemptions to OPC including provisions related to AGM, calling of extra-ordinary general meeting, quorum of meetings and the restrictions on voting rights.
However, the rules make it clear that a person cannot form more than five OPCs.
The concept of OPC allows the registration of a company with only one shareholder unlike the Companies Act of 1956 where it is mandatory to have at least two shareholders for incorporating a company. OPC will have limited regulatory costs and other requirements under the companies law compared to normal companies, experts said.
OPC can directly access target markets, raise loans, execute business plans in a corporate framework rather than being forced to share profits with middlemen, said corporate affairs minister Sachin Pilot. Pilot said OPC would provide tremendous opportunities for millions of people, including those working in areas like handloom, handicrafts and pottery who, so far, did not have a legal entity to back their business. However, experts have sought more clarity on draft rules that says OPC will need to be converted to a private limited or a public limited company if the total on its balance sheet exceeds Rs 1 crore in a financial year.
But another rule says OPC will cease to exist as OPC when its paid up share capital exceeds Rs 50 lakh or the average annual turnover during the period of immediately preceding 3 consecutive financial years exceeds Rs 2 crore.
Draft rule 2.4 (2) states "the close of the financial year during which its balance sheet total exceeds Rs 1 crore” is when the OPC has to convert into either a private limited or a public limited company. "It is not clear why this test it given, when in Rule 2.4 (1), the only two tests that are mentioned are paid-up share capital exceeding Rs 50 lakh or the average annual turnover during the period of immediately preceding three consecutive financial years exceeding Rs 2 crore," said Kumar of JSA.