Recent amendments to Incorporation Rules: A boost for startup ecosystem in India

While the pandemic certainly created a havoc in the world, it also brought out the resilient side of the people and businesses. During the lockdown, while some startups struggled, most reinvented themselves and turned the challenge into an opportunity. More than before, technology and innovation became the focal point, and helped businesses sail through. With a view to bringing these businesses under the umbrella of organized sector and shielding them from a similar wrath in future, certain reforms have recently been announced as part of the annual budget.

The concept of One Person Company (“OPC”), though introduced in India by the Companies Act, 2013, was originally envisaged by the Dr. J.J. Irani Committee Report in May 2005. The rationale behind recognizing the formation of a single person economic entity was to encourage the entrepreneurial capabilities of the people and incentivize the corporatization of small businesses and entrepreneurship, by providing them a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away time, energy and resources on procedural matters[1].

The Companies Act, 2013 (“Act”) defines the term ‘One Person Company’ to mean a company which has only one person as a member[2] and classifies it as a private company[3]. However, the Act accords several relaxations to OPCs from procedural formalities and statutory compliances which are not otherwise available to private companies, like in relation to holding of meetings, details to be included in financial statement, etc. and thus, makes its working easy and hassle free. The recent amendments[4], to the Companies (Incorporation) Rules, 2014 (“Incorporation Rules”) have further eased the norms pertaining to OPCs.

Pursuant to the recent amendment, an Indian citizen, whether resident in India or otherwise can now set up an OPC or be a nominee for the sole member of such company. Previously, Indian citizens resident outside India were not allowed to incorporate or run an OPC in India. The minimum period for which an Indian citizen must reside in India during the immediately preceding one calendar year to qualify as a ‘resident’ to set up an OPC has been reduced to 120 days from 182 days earlier. Further, the restrictions on an OPC to continue as one until the expiry of 2 years from the date of its incorporation and convert mandatorily, into either private or public company, upon exceeding certain thresholds[5] have been done away with. Now, an OPC can convert into any type of company at its discretion anytime. The bar on a private company exceeding the said thresholds (not being a section-8 company) from converting into an OPC has also been removed.

This move intended to bring the unincorporated business into line with the organized corporate sector should incentivize incorporation of OPCs and allow them to grow without any restrictions. The startup ecosystem in India, even though rapidly evolving, is very primitive particularly in terms of who gets access to entrepreneurship and this eased framework is definitely a step in the right direction. Further, it will promote ease of doing business, and encourage even Indian citizens not resident in India with entrepreneurial potential to build startups and invest their money in India.

These amendments will come into effect from April 1, 2021.

Authors:

Rupaly Middha, Associate

Footnotes:

[1] Dr. J.J. Irani Committee Report, 2005.
[2] Section 2(62), Companies Act, 2013.
[3] Section 3(1)(c), Companies Act, 2013.
[4] Companies (Incorporation) Second Amendment Rules, 2021.
[5] Paid up share capital of Rs. 50 lakhs or average annual turnover of Rs. 2 crores during the period immediately preceding 3 consecutive financial years.