In line with the changes proposed in Budget 2021, the Ministry of Corporate Affairs (MCA) has notified the provisions beneficial to start-ups, One-Person Companies (OPC) and small companies. This note discusses the amendments effected in the Companies Act 2013 (The Act) along with the Companies Rules which will further facilitate the ease of doing business in India and provide a more robust corporate legal structure for companies.
- Incorporation of OPC simplified
The Companies (Incorporation) Second Amendment Rules, 2021 shall be effective from 1st April, 2021. These rules incentivize the incorporation of OPCs and are summarized as below:
- The conversion of private companies into OPCs have been made easier by removing the restrictions on turnover and paid-up share capital. Earlier, private companies having paid up share capital of “INR 50 lakhs” or less and average annual turnover of “INR 2 crores” or less could have converted themselves into OPC;
- The conversion of OPCs into a public or private company has been simplified. OPCs shall now be required to pass a resolution to alter their memorandum and articles to give effect to the conversion. OPCs to increase their number of members and directors and paid-up share capital as per the provisions of the Act
- The residency limit for an Indian citizen to set up an OPC has been reduced to 120 days from the existing 182 days to further ease the compliance; and
- Non-Resident Indians (NRIs) have been allowed to incorporate OPCs in India. The amendment has substituted the following “whether resident in India or otherwise” in place of “resident in India.”
- Expanded scope of definition of Small Companies
The Companies (Specification of Definitions Details) Amendment Rules, 2021 incorporating the expanded definition of small companies shall be effective from 1st April 2021. The rules increase the thresholds for a company to be eligible as small companies. The change in the increased thresholds for small companies are summarized as follows:
|S.No.||Criteria||Earlier threshold||Amended threshold|
|1.||Paid-up capital||INR 50 Lakhs||INR 2 Crores|
|2.||Turnover||INR 2 Crores||INR 20 Crores|
The move is targeted to benefit more than 2 lakh companies in easing their compliance requirements as mentioned in the Budget 2021 speech. Small Companies are generally benefitted under the Act by way of certain exemptions considering their size, such as exemptions from provisions of board meetings, directors' report, cash flow statement, audit report. The Act also provides for lesser penalties for any non-compliance by the small companies. With the increase in thresholds as stated above, more and more small companies shall be seen to be benefitting from a compliance point of view.
- Start-ups eligible for fast-track merger
The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2021 (effective date to be notified) makes start-ups eligible for fast-track merger with other start-ups or small companies under Section 233 of the Act. This move is aimed to benefit the start-up ecosystem by making the overall merger process simplified and providing an easy restructuring opportunity to the start-ups. Fast track merger is a popular option for holding companies and their wholly owned subsidiaries. Fast track merger does not require sanction from the National Company Law Tribunal (NCLT), making the whole merger process efficient and simple for the companies.
The amendments mentioned hereinabove with respect to OPCs, start-ups and small companies are bound to provide incentive to these companies to further invest and operate, while easing compliance burden on them. OPCs can now convert into public or private limited companies without any restrictions on the paid-up capital or turnover. Even NRIs now have ease to establish OPC in India. By raising the threshold for small companies, they will be saved from the strict compliances and the penalties that entailed with non-compliance. The start-up ecosystem is already on a rise in the country and with the fast-track merger option available to the start-ups, a more convenient and easy restructuring method lies ahead for them. With these amendments, MCA has taken a step in the right direction by easing compliances and reducing restrictions, thereby allowing various companies to take advantage of the same.
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