A

Project Report

On

Legal issues faced by OPC

Institute of Management
Nirma University

Submitted to:
Prof. Naresh Poturaju
Assistant Professor, Nirma University

Submitted By

Aditya Jain (167104)

Dhruvil Vijay Patel (167119)
Rishabh Mahavirbhai Shah (167145)
Saurav Singhvi (167150)
Tushar Prajapati (167159)
 CONTENTS

SR. PARTICULAR S PAGE NO.

NO.

1 INTRODUCTION 3

2 LEGAL ISSUES FACED BY OPC 6-11

3 COMMENTS BY REGULATORY OFFICALS 12-15

4 EXPERT OPINION 16

5 CONCLUSION 18

6 ANNEXURE 19

7 REFERENCES 20
Introduction

When a person starts a business, the first question that comes to his mind more often than not
is to adopt which kind of form of an organization. The person has range of options from sole
proprietorship, partnership, private limited company and many others. Each form of the
organization has its own benefits and shortcomings. But any country would like to make sure
that people move from unorganized proprietorship to organized corporate structure. And India
also finally woke up to that calling by bringing this revolutionary new concept of One Person
Company (OPC) in the Companies Act, 2013.

As per Section 2(62) of the new Act “One Person Company” means a company which has only
one person as a member. This form of organization can only be formed by a natural person,
who is the citizen and resident of India. The company also needs to have a minimum share
capital of one lakh rupees. This form of organization cannot be formed when the person wishes
the engage in non-banking financial activities. These companies can also not invest in the
security of body corporate. These companies cannot have paid-up share capital more than 50
lakhs or the relevant turnover during the relevant period exceeds two crores. And if in case any
of this happens, the company would have to forcibly convert into Private Limited or Public
Limited Company.

The concept was brought in so that individuals, who are doing business as proprietors with
mostly unlimited liability, can enjoy the benefits of limited liability with only one person being
the member or shareholder of the company. Under the previous law, to enjoy this limited
liability the person would be required to form a Private Limited company, with at least two
members or a Public Limited company with at least seven members.
When the concept of OPC was formed, it was formed with keeping in mind “One Man Army”.
The concept was brought in to reduce compliance burden in corporate form of organizations
but at the same time enjoying most of the benefits that the corporate form of organizations
enjoys. OPC is expected to benefit people who are into self-employment and many small scale
sectors. It is a remarkable feature of the Companies Act, 2013. "OPC should boost the
confidence of small entrepreneurs".

This form organization has not become very popular in India as of now. Even after four years
elapsing since the new act came into place, there are hardly 15,000 OPCs in the country. The
concept has not taken off just like LLP when it was brought in 2008. OPCs however have
become more popular among certain class of people than others. It is because of its certain
peculiar features. The company has capping of paid of share capital at 50 lakhs but the
turnover during the relevant period is tapped at two crores. This is highly irrational and
irregular as any person who has invested 50 lakhs would certainly won’t a turnover that is
above two crores. Such provisions don’t really benefit any person who is into real business. The
ability of an OPC to attract loan capital is limited as the capital contributed by the sole member
of an OPC would be small as compared to companies having more than one member – in some
cases it runs into lacks. In view of the fact that the OPC can command only limited resources, it
is not suitable for business entities – particularly medium and large scale. And thus this form of
organization is particular suitable for professionals and thus who are into services. This form of
organization would provide them benefit of limited liability; otherwise such professionals would
liable to an unlimited extent. This is again clear from the data published by the Corporate
affairs ministry. "Economic activity wise classification of OPCs up to September 30, 2017 reveals
that the highest number of OPCs were in Business Services (8,666) followed by Community,
Personal and Social Services (1,515), Manufacturing (1,100) and Trading (1,044)," the ministry
said.
Apart from this issue of not being suitable for particular type of business, the OPCs form of
organization is also facing many legal issues. OPC is a very new form of organization and it is
yet to stand test of time. But there are some prima facie issues faced by them. These legal
issues are discussed in the following sections of the report and these issues are worth
discussing till they are finally settled through legislative amendment or any judicial
intervention.
Legal Issues Faced by OPC (One Person Companies) (In descending
order of adverse impact)

1. No stable arrangement for Nomination

The OPC like any other form of corporate organization has features of perpetual succession.
And so the Act has mandated the requirement of nomination. It has been compulsory that in
the memorandum of the OPC, the sole member should nominate and indicate the name of the
person, with his prior written consent in Form INC3, who shall, in the event of death or other
contractual incapacity, become the member of the company to accept all the obligations and
responsibilities of the OPC. This form should in turn be filed with the registrar of companies.
And such person is also required to pay any unpaid amount on the shares. And when he himself
becomes sole member of the OPC, he is also required to nominate another person for the same
purpose. But the act provides that any nominee can withdraw his name by giving in writing the
notice to the sole member of the company. And in that case the sole member would have to
find another nominee within 15 days. The time period given is too short by the law, because
such person is required to take huge amount of obligations and liabilities. The other issues
arising in this chain of nominations is that the system of nomination is not a stable
arrangement. Firstly, any person nominated is not required to furnish any genuine reason while
taking back his consent. Secondly, the commitment of nominated person to pay for unpaid
amount of shares on becoming member remains a big question. The Act does not provide as to
what would happen to the OPC if the member and his nominee simultaneously die. Lastly, the
Act has created this system of nominations however failed in regulating this system properly.
 2. Ambiguity in Conversion

There also exists a legal issue in ambiguity of conversion of an OPC when becomes mandatory.
An OPC is mandatory require to convert itself into private limited company ( Act prescribes no
other form of organization to be converted into) within six months from the time period when
its paid-up share capital exceeds 50 lakhs or its turnover for the relevant period exceeds two
crore. But the act is very ambiguous in regards with what would happen if an OPC fails find a
partner who is willing to become the second member of the to be formed Private Limited
Company (A Private company requires minimum two members). And the Act is also silent as to
the implications of the failure of the OPC to complete such conversion. And the Act is also silent
as to what would be the status of the OPC from the point it exceeds the threshold limits and its
eventual conversion as per the rules. It does not provide whether the OPC will be treated as a
Private Limited Company or would continue as an OPC.

3. Restrictions on Conversion

The other legal issue in forming an OPC is that there are restrictions on its conversion into any
other form of organization. The Act restricts the conversion of an OPC into any other form of
organization for the first two years from the date of its incorporation. And as a result if any
person faces any of these legal issues during the first two years of the incorporation, he would
have to either liquidate his company or would have to exceed the paid-up capital or turnover
requirements otherwise he would have no way out. So an OPC cannot convert into any other
form of organization for the first two years, except if the threshold limit for paid-up share
capital exceeds 50 lakhs or its turnover for the relevant period exceeds two crores.
 4. Uncertainty about the status of number of OPCs formed by same person

There is also issue in regards with the status of OPC, when the same person forms number of
OPCs. The act clearly states that a person cannot be a member of two OPCs but he can be a
nominee in many OPCs but a member in only one OPC. And in case such nominee becomes
member of the OPCs on the death of the previous sole member, the question arises what
would happen to the OPC of which he was originally the sole member as he cannot be a
member in two OPCs. And this restriction is very unique for OPCs, because in India a person can
form any number of sole proprietorship, partnerships or companies. These unnecessary
restrictions put an additional burden on the regulators as now they would have to track the
members of each OPC formed. And the Act also does not provide any answer to what would
happen if the person breaches the mark of one OPC. It is not clear that such OPC would be
dissolved or would be treated as sole proprietorship or would lose its corporate identity. The
main issue is that why there is a restriction on the number of OPCs to be formed.

5. Artificial Legal Persons as Member of OPC

One of the major issues in OPC is that a Private or a Public Company which has a fully owned
subsidiary cannot get that converted into OPC. Because as per the Act, an OPC can only be
formed by an individual, who is a natural person and so any “body corporate” or any other form
of organization being the sole member or shareholder of the company doesn’t arise. In
contrast, countries like China, USA and Singapore which has this form of organization from long
allows an artificial legal person to be the sole member of OPC. Ideally the Act should have
paved way for formation of wholly owned subsidiaries as OPCs. In this way this become an issue
for the business people who wish to have their own a Private or a Public company as the sole
member of OPC and thus it restricts the usage of this form of organization.
 6. Many level of Compliance

The main motive behind bringing this concept of OPC was to foster small businesses in India.
But much level compliance that these OPCs needs to follow, defeat the very purpose for which
they were formed. It is a widely held opinion among the business people that a sole proprietor
would not mind limited liability as a cost rather than having to reckon with so many provisions.
This happens to be a major legal issue that hinders the growth of OPCs in India. The OPCs are
required to comply with much general compliance, along with compliances relating to Board
meetings and directors, contracts, share transfer, audits and general meetings.

7. Uncertainty of Income Tax on OPC

Another legal issue that OPC face is that there is uncertainly and ambiguity is regards with the
Income tax on OPC. This issue arises because the concept of OPC is not yet recognized under
the Income Tax Act, 1961 and as a result of that the OPC may be put under the same tax slab as
that of other private companies and making it liable for several additional taxes like the
dividend distribution tax, minimum alternate tax and surcharges. Since Income Tax Act, 1961
does not recognize them separately; they are put under the private company bracket. And as
per the IT Act, private companies have been placed under the tax bracket of flat 30% taxation
on the total income. On the other hand, sole proprietors are taxed at the rates applicable to
individuals, which mean that different tax rates are applicable for different income slabs. Sole
proprietors also benefit from exemptions available to individuals under the IT Act. It is unclear if
the IT Act would be amended to include such exemptions to OPC, as per the present date, the
concept of OPC is in limbo under applicable taxation laws.
 8. Contracts with OPC

Some legal issues also arise in relation with the contracts entered by the sole member or
shareholder of the OPC. If the contracts are unwritten, certain procedural formalities are to be
followed. But written contracts and contracts in the ordinary course of business are exempted
from these formalities. However, the term ‘ordinary course of business’ is a very vague concept
and it has also not been defined under the Companies Act, 2013. And there is always a
possibility that the sole member may suppose that a particular contract is in ordinary course of
business and may not follow those formalities. But if any suit is filed, judiciary may interpret it
otherwise as there are no hard and fast rules for it. That may put OPC into trouble. The act is
also silent on regulations of contracts with third parties. The third parties who wish to do
business to OPC would have to conduct their own due diligence for such contracts. But at the
same time this due diligence would become difficult because there are various exemptions to
OPCs in regards with holding annual general meeting, board meeting etc.

9. Liaison with ROC and General Public

The law of OPC requires that such company may have only one director and who can also be
the sole member and shareholder. But this can become an issue when such a person is out of
India or is unavailable at the registered office for a great part of the year. This situation can
cause a problem when OPC is required to deal with public queries or queries from the registrar
of companies. While in other form of corporate organization, the law specifically requires two
or more directors and including one managing director and so either of whom is available for
taking queries from general public or from the registrar of the companies.
 10. Role of Company Secretaries

One of the legal issues in OPC is that the act requires the annual returns of OPC to be signed by
company secretary and in case there is no company secretary, it has to be signed by the
director of the company. This raises an issue regarding the role of company secretary in the
OPC. This form of organization has restricted structure as it cannot have paid-up share capital
more than 50 lakhs and annual turnover for the relevant period more than two crores. And that
would mean that this form of company would not be able to generate a big bottom line and
thus it would have limited means and so more often than not would not be able to support a
company secretary in full time employment. However, the practicing company secretary can
play a decisive and an important role by providing consultancy and assistance in administration
to this corporate form of organization.
Comments by regulatory officials and related persons

• In a May (2014) newsletter, the ministry of corporate affairs said of OPCs, "It is expected
this model will encourage small and medium enterprises…in the unorganized sector
with the concept of limited liability and open avenues for more favorable banking
facilities."

https://www.business-standard.com/article/opinion/why-one-person-firms-are-
popular-114102600651_1.html

• Recently (2013), Corporate Affairs Minister Sachin Pilot had said that the concept of OPC
is quite revolutionary. ”... also, rather than the middlemen conjuring profits, the one
person company will have direct access to the market and wholesale retailers,”

https://www.thehindubusinessline.com/economy/An-individual-can-register-only-5-
one-person-companies/article20672956.ece

• "As people become more aware of the benefits of an OPC, I expect a lot of start-ups to
go with the OPC tag from 2016," says (2014) Saran Kumar Uppalapati, partner, SBS and
Company LLP
https://www.business-standard.com/article/opinion/why-one-person-firms-are-
popular-114102600651_1.html

• “This will bring the unorganised sector of proprietorship into the organised version of a
private limited company. The organised version of OPC will open the avenues for more
favourable banking facilities, particularly loans to such proprietors,” says Pavan Kumar
Vijay, managing director of Corporate Professionals, a corporate financial advisory firm.
https://www.business-standard.com/article/companies/now-one-person-can-start-a-
company-112122000186_1.html
• "This concept is really beneficial for small entrepreneurs who can benefit from limited
liability. We are happy OPC (registrations) are picking up," said (2014) a senior ministry
official.
https://www.business-standard.com/article/opinion/why-one-person-firms-are-
popular-114102600651_1.html

• “Simplifying of process and toning down of penalties will definitely boost the number of
OPCs in India," said (2015) Riaz Thingna, partner at consultancy firm Walker Chandiok &
Co.
https://economictimes.indiatimes.com/news/economy/policy/government-easing-
registration-norms-cutting-penalty-for-one-person-
companies/articleshow/47241290.cms

• Syed Perwez Hussain (2014) from Svans and Associates says: "It is difficult for any
company to explain the term OPC in a sale proposal contract or to create a profile with
OPC attached to its name. So, people still opt for the tag of private limited company."
https://www.business-standard.com/article/opinion/why-one-person-firms-are-
popular-114102600651_1.html

• “Start-ups, always on the lookout for investment, have to change their legal status to a
private limited company before bringing in investors”, says (2014) Agam Gupta, co-
founder, quickcompany.in.
https://www.business-standard.com/article/opinion/why-one-person-firms-are-
popular-114102600651_1.html
• "Right now, I can take my own decisions and there are less norms to follow. But in case
some investor is looking, I will convert my company to a private limited one," said
(2014) Kashinath Kapte, founder, Yuvaskills Services Private Ltd (OPC).
https://www.business-standard.com/article/opinion/why-one-person-firms-are-
popular-114102600651_1.html

• “In view of the fact that the OPC can command only limited resources, it is not suitable
for business entities – particularly medium and large scale. This form of business
organization is suitable for professionals for pursing their profession. This will benefit
them for it affords them security in the form of limited liability. If otherwise, the
professional would be liable to an unlimited extent and even their personal assets
would be in jeopardy” said T.V. Naraynaswamy, FCS.
https://www.icsi.edu/media/webmodules/companiesact2013/Annexure-G.pdf
 From the government side when this concept was brought in, the idea was very novel
and they expected that this will help in corporatization of organizations in our country.
When the concept was newly brought in, it was expected that this would benefit small
and medium business by providing them with limited liability and more credibility. It
was also expected that start-ups would favor this kind of organization when compared
to the traditional ones. But the concept couldn’t stand to the test of time and over the
years it just didn’t pick up as it was expected. The main reason behind it was that the
provisions and regulations were very complex and heavy and not complying with the
resulted into heavy penalties. And this cause resulted into effect of not many OPCs
operating in the country and very few people are aware about it and now that became a
cause of people not opting for OPC because then they would have to explain the term
OPC in the contracts and so on and so if any person wants to go for corporatization, he
would still prefer Private Limited Company. Thus the concept was brought in to provide
credibility by corporatization but it didn’t essentially work. And so even start-ups who
opted for OPCs initially, would want to get it converted into Private Limited Company to
raise funds. And thus OPCs would particularly be preferred by professionals as that
would help them to limit their liability.
Expert Opinion

Mr. Amit Bhaskar who is the professor at Institute of Law, Nirma University and an expert at
corporate law said that “Regarding natural Person can only be OPC and not incorporated body,
the concept of OPC is very new and novel in India and hence law makers thought that it would
not appropriate at this stage to allow Company to be a member of OPC. Further OPC is for
young and new entrepreneur who wants to take advantage of limited liability through OPC and
not for those who are capable of forming full fledge company.

As far as legal compliance is concerned, the law makers thought that OPC may be used as Shell
Company for illegal activities like money laundering and hawala transaction etc and hence long
cumbersome procedure. I think legal compliance should be there but it should not be
cumbersome. I think lawmakers would look into this issue.

Regarding ambiguity in conversion into Private Company, it is correctly pointed that Lawmakers
have not provided for implication for default in conversion after exceeding the prescribed
turnover limits. This should be categorically provided in Law. Some Penal provisions must be
there. However, the moment it exceeds the threshold limits, it shall be treated as deemed
Private Company from that date”.
An expert opinion was also taken from Mr. Mayuresh Gajanan Chavan, who is the owner of
Movingup Ecommerce OPC private limited. This company was one of the first few OPCs
incorporated in Ahmedabad and was incorporated on 10Th of December, 2014. We had a
meeting with him at his office place and he shared his views regarding this legal issues faced by
OPCs. He was very frank in stating at very start of the conversation that he is not really much
aware about OPC or its regulations and paper work because all this work is handled by his
charted accountant. He said that he started this OPC on the recommendation of his charted
accountant. His charted accountant said that by incorporating such a company you will be able
to get benefit of limited liability. And he was quick to act on his suggestion because he had a
good amount of personal assets and didn’t want to put them in jeopardy. Though he did say
that initially he had to furnish a lot of documents and follow processes that were complex but
he said that it was worth because now his personal assets are protected. He didn’t face any
conversion issue because paid-up share capital of his company is just one lakh rupees and his
turnover never crossed 20 lakhs and is also not likely to cross. During the entire conversation he
was adamant on the fact that OPC is a private limited company with just one sole member. But
the act specifies that it is a new form of organization under corporate structure. This might
prove a fact that many owners of OPCs would have incorporated this organization on the basis
of the advice from their charted accountants and they themselves may not be much aware
about it. When asked about whether he faces any issues in regards with this form of
organization, he said that he has to write the word “OPC” under his company’s name every
time he issues a check, makes a contract or even writes his company’s name anywhere and that
is not very convenient. And the problem also arises when many people are not aware about
OPCs. When asked about the ambiguity in taxation as OPCs are not recognized under the
Income Tax Act, 1961, initially he tried to dodge the question. But later he admitted that, he is
also an owner of a sole proprietorship firm named “Star International” and he diverts most his
earnings through that firm as that would benefit him in taxation and the only reason to keep
this OPC is to protect his personal assets from the third parties. When asked on how this
process works, he said that this is handled by his charted accountant and he is not really aware
about it.
Conclusion

The idea behind bringing this new form of organization was to help in corporatization of the
businesses in India. But the government somewhat failed to achieve that objective by making
such rules and provisions that would result into many issues for OPCs. There are so many
limitations and restrictions which could be removed or relaxed in order to make OPCs popular.
It is strongly recommended to do away with the turnover limit and the restriction that only
natural person can be the sole member of the OPC to make it more popular. But on the other
side of the coin, it is suggested that this would foster formation of Shell companies for illegal
activities and therefore this cumbersome processes and restrictions are necessary. It is now up
to the government to find a right balance, so that the objectives for formation of this new form
of organization are achieved and at the same time the use of these OPCs for illegal activities is
not compromised. The government should also take other steps to make OPCs popular so that
they are widely accepted in the market on par with Private Limited Companies and there are no
conversions due to that. The immediate requirement from the government is also to suitably
devise a tax structure that complements the OPC entity. Otherwise, OPCs would continue to be
used as a shield to protect personal assets and sole proprietorship to do actual business. And
concurrently government should also bring changes in other laws to make OPCs a more
attractive option. If it does not happen, there is hardly any reason for a person think of One
Person Company to meet his business needs, when there are so many restrictions and issues
under the Act. The government should therefore look to make a simple and comprehensive act
like that of Limited Liability Partnership Act, 2008. Even after all this, how successful will the
OPC form of organization be is a million-dollar question.
Annexure

Figure 1 Mail by Prof. Amit Bhaskar

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