Basics of Business and reason for Conversion
Formation and structuring of any business depends upon various factors like financial stability, control over business, management decisions etc. on basis of such factors businessperson decides to adopt model for his business that could be a sole proprietorship, partnership firm, company, HUF etc.
In India, setting up of business in form of a Company is highly favored and accepted when compared with other forms of business. Although a Company itself can be incorporated into three categories, Private Limited Company or Public Limited Company or One Person Company, thereafter it can bifurcated as per the nature of business, capital, guarantee like non-profit organisation, Company limited by guarantee etc.
People were generally inclined towards formation of private company as it can be easily formed when compared to incorporation of a public limited company. However, with the enforceability of Companies Act, 2013, new concept in India, One Person Company has gained significant popularity due to its unique features like ownership and control is retained by single person similar to a sole proprietorship which makes the idea of incorporating a one person company lucrative to all sort of businessperson.
One Person Company is easily incorporated with sole member, one nominee and one director only. Any person can arrange for nominee and in almost every OPC sole member acts as director, thus there is no hassle in constituting board of director as required in case of private company. As OPC is a hybrid form of sole proprietorship and a private company it enjoys benefit of both including but not limited to full control over business, easy management, lesser compliance, separate legal entity etc.
In the current scenario, some businessman thinks it fit to convert its Company into One Person Company due to below given reasons:
- Regulatory authorities are gradually becoming stricter by introducing new corporate governance practice for Companies.
- Increasing penalties and imprisonment for non-compliance of provisions.
- To retain control where sole person handles business.
- Easy management.
- Reduction of extra compliance as applicable on Companies.
- More emphasis and focus on growth of business.
Companies Act, 2013 (Act) has specified provisions to follow when a private limited company wants to convert itself into a one person company
To understand the conversion it is fundamental to get through the concept of One Person Company and Private Limited Company which is presented below in comparative table.
|Particular||Private Limited Company||One Person Company|
|Definition||Section 2(68) of Companies Act, 2013 “Private company” means a company which by its articles, (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that— (A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company;||Section 2(62) of Companies Act, 2013 One Person Company means a company which has only one person as a member.|
|Minimum Number of Members||Two||One|
|Maximum Number of Member||Two Hundred with exclusion given in definition||Only one person can be member|
|Nominee||No concept of Nominee||One Nominee|
|Minimum number of Directors||Two||One|
|Transfer of Shares||Restricted||Sale of share results into transfer of whole business since the owner is the sole member of OPC|
|Control||Control with all shareholders||Full control as sole member of OPC|
|Activities||No restriction||Cannot carry business of Non-Banking Finance Company|
|Compliance under various regulation||Excessive compliance in comparison to one person company||Less compliance applicable|
|Quantum of Penalty||High||Less|
Primary Prerequisites for conversion of private company into One Person Company
Section 18 of Companies Act, 2013 allowed conversion for already registered as a class of company into another class of the Company and Act has also specified basis requirement for conversion of private company into public company as given below:
As per rule 7 of The Companies (Incorporation) Rule, 2014, a private company can convert itself into one person company if it satisfies basic criteria:
- Paid up share capital of fifty lakhs rupees or less and
- Average annual turnover during the relevant period; is two crore rupees or less
“Relevant period” means the period of immediately preceding three consecutive financial years
- Conversion is permitted by alteration of memorandum of association and articles of association of the company in accordance with the provisions the Companies (Incorporation) Rules, 2014
Process of Conversion
- Any director or person authorised by the Board will dispatch a notice to call for Board Meeting. Notice shall be give as per section 173 of Companies Act,2013 read with secretarial standard 1 on Board Meetings.
- Conduct Board Meeting and consider the proposal for conversion of Company into OPC.
- Post approval, dispatch notices for calling an Extra Ordinary General Meeting/ Annual General Meeting (AGM) to all the members in accordance with provisions section 101 of Companies Act,2013 read with secretarial standard 2 on General Meetings
- Accord approval of Members through Special Resolution at Extra Ordinary General Meeting/Annual General Meeting (AGM) for conversion
- Ensure Before passing such resolution, the company shall obtain No objection in writing from members and creditors
- File E form MGT-14 to submit special resolution with the Registrar of Companies
- After approval of MGT-14 file E form INC-6, application to conversion within 6 months of passing resolution
- Attach requisite documents with INC-6 like affidavits, list of members, creditors etc.
- On being satisfied and complied with requirements, the Registrar shall issue the Certificate.
Company should decide before conversion regarding the sole shareholder and nominee.
- Company should confirm that it does not carry NBFC activity as OPC are not allowed to carry NBFC activity
- Company should ensure all compliance with respect to returns and forms to be filed with the Ministry of Corporate Affairs
- As per rule 7 of The Companies (Incorporation) Rule, 2014, a section 8 company i.e. non profit making companies are not allowed to convert into a one person company
- Registration of a company under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the company before conversion and such debts, liabilities, obligations and contracts may be enforced in the manner as if such registration had not been done
Compliance after Conversion:
- Print of New Memorandum of Association and Article of Association to reflect conversion.
- Change in Sign Board, Letter head, stationary and other items where old name used to be displayed.
- Make application to update name in PAN.
- Send intimation and application to other authorities where Company is registered i.e. GST, EPF, ESI etc.
- Send intimation to various suppliers and parties with whom Company has business.
- Send intimation to banks where Company is maintaining bank accounts.
It is pertinent to note that the above stated regulatory framework are as per Companies Act, 2013 only, If any Company is registered with other any regulatory bodies like RBI, MSME, IRDA, Companies have to follow additional compliance as prescribed by different regulators under which Company is registered.