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Budget 2021: FM announces changes in small companies’ threshold; modifications for One Person Company

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Delivering the Union Budget 2021-22, Finance Minister Nirmala Sitharaman, on Monday, proposed changes in definition of small companies under the Companies Act. Companies with paid-up capital up to Rs 2 crore and turnover up to Rs 20 crore will fall under small companies. Previously, this threshold held the limit of paid-up capital to Rs 50 lakh and turnover up to Rs 2 crore. This is aimed at benefiting more than 2 lakh companies in compliance required.

Further, the Budget made space for easing norms around setting up of One Person Company (OPC) by reducing the residency limit of NRIs from 182 to 120 days. Earlier, only Indian resident citizens were allowed to form one person companies in India.
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“I propose to incentivise the incorporation of OPC by allowing OPCs to grow without any restrictions on paid-up capital and turnover. Allowing their conversion into any type of company any time. Reducing the residency limit for Indian citizens to 120 days from 180 days. This will be a big boost to startups,” she said.

The move has garnered positive response from experts. “Non-resident individuals with entrepreneurial potential are now enabled to set up One Person Companies (OPC) with no paid up capital and turnover restrictions, reducing registration timeline from 182 days to120 days. Earlier only Indian resident citizens were permitted to set up OPCs. This would be attractive to the Indian Diaspora,” Tapati Ghose, Partner, Deloitte India, told ET Digital.

Like the name suggests, OPC is a company incorporated by a single person. Other countries where the concept is legal are UK (2006), China (2005), Turkey (2012), Pakistan (2003), among others.

“Allowing NRIs to invest through this route can encourage startup’s and small business set up without the concerns of a larger compliance framework or minimum capital commitment,” says Moin Ladha, Partner, Khaitan & Co.

In India, it came into existence on May 31, 2005 by Dr J.J Irani Committee and was aimed at scaling the entrepreneurial spirit in India by making their contribution in the economy felt. Therefore, this helps in giving a spotlight to single person economic entities such as small traders, artisans and other service providers and encourages aspiring entrepreneurs.

Under the Companies Act, 2013, OPC is a separate legal entity and will need to register for a perpetual succession. Here, the liability to make loan repayments availed by the OPC falls on the OPC only unlike a sole proprietorship.

Among advantages, one can say that an OPC is free from stringent legal compliances such as board meetings, financial statement inclusions, quorums, mandatory rotation of an auditor.

OPC’s legal status also gives it an edge when it comes to taking loans from any banks compared to a sole proprietorship. In July 2013, the Reserve Bank of India directed all Scheduled Commercial Banks to promote financing of priority sectors, i.e., agricultural and small-scale industries. Over the years, OPCs have ventured into other sectors including construction, mining and quarry, electricity, etc.