Indian startups running a one-man show are in for a treat.
On Feb. 1, Indian finance minister Nirmala Sitharaman proposed the scrapping of capital and turnover limits on one-person companies or OPCs. As part of her budget speech for 2021-22 (April-March), Sitharaman also said that the residency limit for Indians to set up OPCs in the country will be reduced from 180 days to 120 days. In addition, the government will allow non-resident Indians to set up OPCs in India, which was so far prohibited.
These changes will help budding firms “grow without restriction on paid-up capital and turnover, allowing conversion into any other type of company at any time,” Sitharaman added. “This will be a big boost to startups.”
OPCs—firms with just one shareholder–have been legally recognised in several countries including the UK, the US, the UAE, China, Singapore, Turkey, and Pakistan. In India, too, the concept has been recognised for close to eight years.
Boost young startups
Even though the company structure was acknowledged by the government years ago, OPCs have not really taken off in India. In 2019, there were only a couple thousand of them.
OPCs were introduced in policymaking in India by the Dr JJ Irani Committee report in May 2005 and formalised in the Companies Act, 2013. OPCs so far came with hefty terms and conditions in the country. For example, if the paid-up share capital of an OPC exceeded Rs50 lakh ($63,465) or its average annual turnover of immediately preceding three consecutive financial years exceeded Rs2 crore ($273,859), the OPC had to mandatorily convert itself into a private or public company.
Sitharaman’s move to ease setting up and running OPCs will nurtures innovation, experts believe. After all, “it is relatively easier to shut down an OPC than a private limited company in case a startup fails, which seven out of 10 do,” Ashish Bhasin, Apac CEO and India chairman of media and digital marketing firm Dentsu Aegis Network, told Quartz.
This announcement “gives innovators a free hand to set up a company and experiment with ideas without worrying about compliance and regulatory roadblocks in setting up LLP’s and private limited companies,” Surya Phadke, director at DOOT Messenger, told Quartz.
There are several advantages of starting out as an OPC, Ankur Bansal, co-founder and director of Mumbai-based alternative credit platform BlackSoil, explained:
“The biggest advantage of a one-person company is that its identity is distinct from that of its owner. Therefore the owner will not be sued, only the company will. Another advantage is limited liability. Since the company is distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a default…OPC is a combined package of a sole proprietorship business and a company, borrowing the best of both worlds. A proprietorship cannot raise equity funding which is possible for an OPC. Also an OPC will be eligible for government schemes such as those focused on MSME ones.
What’s more is that while most businesses will eventually grow bigger and transition out of being an OPC, there are some that can cash in on the perks for a long period of time. For instance, like in the field of law or chartered accountancy, one can continue working as an OPC, noted Kushang, CEO and co-founder, supply chain automation startup SupplyNote.
The new provision for NRIs will provide even more boost to the segment.
The NRI angle
Several Silicon Valley veterans have in the past wanted to return to India but not found the right fit. For them, setting up an OPC could be an ideal homecoming scenario, Dentsu’s Bhasin pointed out.
But easing the entry for the Indian diaspora may not have a wide benefit, some say.
“I have not come across many internationally-based founders or startups seeking to invest or incorporate in India in the early days of the venture,” Vivek Srinivasan, founder of Startup Squares, a platform that helps budding entrepreneurs grow their businesses, told Quartz. “The only case where this might work is in the event that an international startup is seeking to outsource work to India and needs an entity simply to manage salaries and payroll.”
Meanwhile, the efficacy of Sitharaman’s claims is yet to be put to the test. ”The god lies in the details. Once the details emerge in 2-3 days, only then will you know the real benefits and real pitfalls,” said Bhasin. “The intent may be right but on-ground implementation is most important.”