One Person Company (“OPC”) can be formed as defined under Section 2 (62) of the Companies Act, 2013 with one person as Director and Member.
The condition is that with the single member a nominee must be appointed.
Now with the announcements in the Budget 2021, more leeway and advantages are provided to OPC and they are:
1. The residency requirements for the Director have been reduced to 120 days from 182 days.
2. This will encourage NRIs to form OPCs in India.
3. The Paid-up capital limit of 50 lakhs and turnover of 2 crores has been done away with for compulsory conversion for OPCs.
4. OPCs will have the growth run without any compulsory statutory restrictions about Paid up capital or Turnover limits.
5. The expansion in definition of small business by increasing the limit for paid up capital to 2 crores and turnover to 20 crores will benefit many businesses.
6. The expansion and ease of provisions will certainly help many micro, small and proprietary businesses.
While we understand the benefits of these relaxations and ease of doing businesses, let us examine the hard facts about OPCs attracting investments from outsiders.
The harsh reality is that OPCs are entirely dependent on One single person who is the lone promoter/Shareholder. There needs to be an appointment of a nominee who can be any trusted source of the single promoter. Self-funded businesses can form OPCs very easily because they are not looking for outside investors and can grow steadily without any restrictions and can remain as OPCs.
But what about micro businessmen and entrepreneurs who want to attract external investors like angel, seed funding, Pes, Venture capitalists and other forms of funding.
So, what are the factors or questions that can go against OPCs:
a. The reliance to be placed on a single promoter.
b. Any investor will look for Equity stake and Board representation. If this is a condition precedent, then the OPC will have to convert into a Private Limited Company.
c. Only people who have reputation, are successful, or small-scale self-sufficient businesses can continue as OPCs in the long run.
d. Startups must think through carefully before putting the ideal structure because if they want to have external investments they cannot remain as OPCs in the long run.
e. Credit rating, valuations for OPCs will certainly be slashed because of the reliance on a single person and there are no co-founders who are looked at with a critical eye by the investors.
f. The continuity of the OPC business after the Promoter is certainly a looming factor.
g. The culture in a OPC will certainly be designed on the expectations of the single promoter.
h. OPC is a proprietary business with a cloak of a recognized entity which sets it apart from its promoter who has a limited liability.
To conclude the relaxation of certain norms will attract NRIs to set up OPCs and bring foreign inflow towards FDI the other side of the coin throws up harsh facts in front of us.
OPCs have their own limitations beyond a certain level of growth and if they want to scale up, they must convert into a Private Limited Company with external investments.
If they want funding with the status of OPCs they must depend on funding from banks, financial institutions, and other forms of debt funding. Again, the issue is how much can one leverage on debt vis a vis equity.
So, attracting external investments as an OPC is a myth.
Hope that there will be some innovation in financial products exclusively designed for OPCs.