One Person Company – a still-born, half-baked concept?

The Companies Bill 2012 proposes a new concept of One-person Company (OPC). The obvious objective is to overcome the hurdle of needing a second person to form a company, despite the saying that “two’s company”. This brief post is to highlight its nature, some issues and also questioning the real benefit of an OPC.

OPC, as the term implies, is a company with one and only one shareholder. The need to have two directors also is avoided and only one director is needed. However, unlike a shareholder, the number of directors can be more than one. And the single shareholder need not be the director or any of the directors. A succeeding shareholder will have to be named in case of death of the initial shareholder.

Thus, it is expected to help an individual incorporate himself/herself. The need to find a second shareholder/director for a proprietary business in corporate form is avoided.

Succession/transfer of a business in corporate form is clearly easier than if it owned in a sole proprietary form. And one can delink different businesses in separate OPCs since there is no limit on how many OPCs one single individual can form.

The OPC will have to add the tag One-person Company under its name.

Some other procedural concessions in terms of meetings, etc. are given for obvious reason that there cannot be a “meeting” of a single shareholder/director.

However, beyond a few procedural concessions, and avoidance of the need of second shareholder/director, it is not clear what substantial benefits are available. The relatively long/complicated procedure for formation, maintenance and dissolution of a Company remain without any major relief. The requirement of finding a second shareholder/director is generally not found cumbersome in India where a friend, relative or staff member can easily act as such.

Further, except a few minor procedural concessions, the provisions of accounts, audit, etc. would also apply to an OPC.

Certain businesses like that of finance may face problems if sought to be carried in a Company form. Thus, an individual engaged in business of lending or investments may need prior registration from the Reserve Bank of India, minimum net owned funds of Rs. 2 crores, etc.

Conversion of existing proprietary businesses can create complexities of tax. There is an existing provision in the Income-tax Act, 1961 (section 47(xiv)) which should help in availing relief from capital gains, even if originally it was not framed with an OPC in mind. However, other tax issues may remain. The concern of deemed dividends under Section 2(22)(e), the question of allowability of remuneration to proprietor, etc. are some other challenges an OPC may face. The other challenge will be of stamp duty on transfer of the business to the OPC.

Strangely, it is not clear how an OPC may go to the next logical step of becoming a non-OPC when it wants to introduce more shareholders. Ideally, a simple amendment of its memorandum and articles should have sufficed. However, there are no specific provisions enabling this. The question therefore is whether an OPC is doomed to remain a one shareholder company during its existence?

Conversion from a non-OPC to an OPC has also not been provided for. Thus, an existing private limited company may not be able to convert itself into an OPC.

OPCs should have been useful particularly in case of wholly owned subsidiaries of companies where the parent company would be the sole shareholder. However, there is a requirement that makes one wonder whether a company can be the sole shareholder. The definition of OPC does talk of a “person” being a shareholder. However, it is required that a succeeding shareholder be named in case of death of the initial shareholder. The concept of death is generally understood in sense of natural persons and not companies. Thus, unless one takes a view that this requirement is not a mandatory one or stretch it to include dissolution of a company, the concept of OPC may not be available for forming a WOS.

All in all, it seems that despite the initial enthusiasm that this concept received, it seems that in practice, this by itself is not likely to encourage sole proprietors to convert into a company in large numbers. 

Mandatory imprisonment under Companies Bill 2012

The Companies Bill 2012 has an innocuously titled chapter titled “Miscellaneous” which provides stringent and perhaps unprecedented punishment.

The Chapter provides for imprisonment and fine for several types of situations. A minimum imprisonment (six months/three years) is also provided.

Clause 447, for example, says that any person found guilty of fraud shall be punishable with imprisonment of at least six months but which may extend to 10 years and fine. The fine shall be at least the amount involved but may extend to 3 times such amount. If the fraud involves the public interest, the minimum imprisonment would be 3 years.

The term fraud is widely and inclusively defined. It has to be in relation to a company/body corporate, public or private, listed or unlisted. There should be an intent to deceive, to gain undue advantage from or to injure the interests of specified persons. There are no requirements of minimum amount, materiality, etc. for such act/omission, etc. to be treated as fraud. The affected person may be the Company, the shareholders, the creditors or any other person. The fraud may be committed by any person. The person need not have gained any amount and the affected person need not have lost any amount.

There are other provisions in the Bill that refer to this clause and deem certain actions to be “fraud” punishable under clause 447. For example, furnishing of false information or suppression of material information in documents filed with the Registrar in relation to registration of a Company amounts to fraud and punishable under clause 447. So is the making certain untrue/misleading information in any prospectus.

Clause 448 refers to intentional making of materially false statement or omitting material facts. These may be in documents such as report, certificate, financial statement, prospectus, or other document required by or for the purposes of the Act or rules. These too will be punishable as fraud under Clause 447.

Clause 449 states that intentional giving of false evidence while being examined on oath or in a solemn affirmation attracts minimum imprisonment of 3 years and which may extend to 7 years.

In view of specific provisions in clause 441, the offences listed above are not compoundable.

While frauds, misstatements, etc. have been of serious concern recently, one wonders whether such stringent, minimum and mandatory punishment for such a broad group of cases is justified and whether it has been adequately debated.