Budget 2021: NRIs can now start One Person Companies, but less relevant for startups

Representative image (PC- MoneyControl.Com)

Finance Minister Nirmala Sitharaman announced in the Union Budget 2021-22 on February 1 that the government would reduce compliance for one person companies (OPC) to promote entrepreneurship and innovation in India.

As the name suggests, OPCs are companies having only one member or shareholder. It has lower capital and turnover requirements and relaxations on number of board meetings or annual general meetings (AGMs) to be held.

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What has changed now is that OPCs  can grow without any restrictions on paid-up capital and turnover, allowing their conversion into any other type of company at any time. The government also reduced the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allow Non-Resident Indians (NRIs) to incorporate OPCs in India.

If the paid-up capital of the company exceeds Rs 50 Lakh or the average turnover exceeds Rs 2 Crore, OPC shall convert itself into Private or a Public Company.

In India, most startups have multiple shareholders. While most investors encourage startups to have multiple founders, even in single founder companies, there are some angel investors, incubators, accelerators, etc who hold shares in the company. Hence broadening the scope of OPCs may not help many startups. However, the Finance Minister's announcement may encourage this structure in India.

So far, the government has recognised 41,061 startups in India. The sector is growing rapidly with more and more unicorns emerging in the market. The country is now home to 38 unicorns, a dozen created in 2020 alone.

According to industry experts, the beneficiaries of the change in law may be NRIs who want to initiate startups in India, and not the usual Indian entrepreneurs and startup ecosystem.

"Earlier, NRIs were not allowed to set up OPCs. This could encourage them to startup in India with less compliance requirements, and convert to a private limited company easily later on. But the larger startup ecosystem doesn't seem to be the focus of this amendment," said Moin Ladha, partner at law firm Khaitan & Co.