Amendments in filing Annual Returns by the One-Person Companies

Introduction:

According to the One Person Company^[1] modification to the Companies Act^[2], a private company must have two directors and members, whereas a public company must have three directors and seven members. It also states that a single individual is no longer qualified to form a corporation. Only one director and one member can create a business under section 2(62)^[3], although with less compliance. The Ministry of Corporate Affairs^[4] adjusts in the one-person business regulation. It is being done to provide benefits to start-ups and innovators in the country, as well as those who provide products and services on e-commerce platforms and to attract more unincorporated businesses to the organized sector. The start of One Person Companies is boosting the firm’s rules to allow OPCs to grow without any limitations on paid-up capital and turnover, and to allow them to convert to other classified firms at any time. Furthermore, under the Companies Act, the fast track method for mergers will be extended to include mergers of startups with other startups and small businesses. This is because the process for these businesses is completed at a faster rate. The purpose of this article is to clarify the recent notifications released by the MCA on March 5, 2021, which introduced certain adjustments (“Amendment”) about the filing of the shortened form of annual reports by one-person enterprises and small businesses. The Companies (Amendment) Act^[5] and the Companies (Management and Administration) Rules, 2014^[6] have amended section 92 of the Companies Act. An annual return of a corporation is a detailed document submitted with the Registrar of Companies in electronic form that is regarded as a public record of all financial facts of the firm for the previous financial year. Within 60 days following the completion of the Annual General Meeting, a company’s annual return shall be filed with the Registrar of Companies, and a copy should be posted on the company’s website^[7]. Unlike the Financial Statements, which only disclose the financial aspects of the company, the annual return includes extensive non-financial and financial disclosures such as the company’s registered office, business activities, shareholding pattern, indebtedness, information about shareholders and key managerial personnel, and other important disclosures related to the company’s management mandated under section 92^[8]. Sections 92 (1) and (3)^[9] of the aforementioned amendment provided for the following:

• Empowering the federal government to mandate an abbreviated yearly return for OPCs and small businesses;
• Removal of the requirement to report indebtedness in the annual return;
• Removal of the requirement to report names, addresses, countries of incorporation, registration, and percentage of shareholding of Foreign Institutional Investors;
• Removal of the requirement to report indebtedness in the annual return; removal of the requirement to report indebtedness in the annual return;
• Removal of the requirement to report indebtedness in the annual return;
• Removal of the requirement to report indebtedness in the annual return;
• Eliminating the need of attaching an extract of the annual report to the Board’s report in favor of requiring corporations to post a copy of the annual report on their website and include a link to it in the Board’s report.

The sole document that must be filed with the Registrar of Companies every year, regardless of the firm’s performance the previous year, is the annual return of the company. The goal of revealing the company’s annual return year after year, from its incorporation to dissolution, is to guarantee that the company’s business operations are transparent.

Before the Amendment

On March 5th, 2021, the modifications to the Companies Act and the MGT Rules went into effect. Previously, there was no distinction between submitting yearly returns for other firms and one-person organizations/small businesses. According to the MGT Rules, all businesses, including small businesses and sole proprietorships, were obliged to submit returns in form MGT-7. In circumstances where corporations did not have their website, another requirement existed that required them to append a copy of their annual return in form MGT-9 to the Board’s report. Previously, every financial year, all firms were required to declare their debt in their annual report. Any commitments or liabilities payable by the firm to any third party throughout the financial year are included in the company’s Indebtedness. The company’s indebtedness certificate had to be signed by either the Company Secretary or the CFO^[10].

Major Amendments^[11]

1. NRIs were formerly prohibited from starting OPCs. Now, any Indian citizen, whether resident in India or not, would be entitled to create an OPC.
2. The recommended time of residency for those claiming to be Indian citizens has been reduced from 182 days to 120 days.
3. The rule prohibiting voluntary conversion unless the OPC has been in existence for two years from the date of incorporation is urged to be repealed, and from April 1, 2021, conversion of a one-person company into a public company, a private or public firm, instead of a firm enrolled under section 8 of the act, will be prohibited, after raising the minimum number of members and directors to two or a minimum of seven members and directors.
4. The current limit on paid-up capital and turnover for OPCs (Rs 50,00,000 paid-up share capital and an average turnover of Rs 2 crore over two years) is being removed, allowing OPCs to expand in terms of their paid-up capital and turnover without limitation.
5. Rationalization of e-forms applied to OPCs by denying e-form INC-5 and modifying e-form INC-6 (appeal for conversion from OPC to a Private company or a Public company and Private company to OPC).

The MCA has stated the following goals for amending the OPC Rules:

1. To directly benefit start-ups and innovators in the country, especially those who supply products and services on e-commerce platforms ;
2. To bring in more unincorporated businesses into the organized corporate sector;
3. To allow OPCs to grow without any restrictions on paid-up capital and turnover;
4. Allowing their conversion into any other type of company at any moment; and
5. To allow Non-resident Indians to incorporate OPCs in India.

Removal of form MGT-9

The Form MGT-9^[12] is an extract of the annual return (MGT-7) that was included in the company’s Board of Directors’ report. Section 92(3) and section 134(3)(a)^[13] are the sources of Form MGT-9. Previously, the regulations required an extract of the annual report (Form MGT-9) to be filed with the Director’s report, regardless of whether the firm was private, public, OPC, or small. Every corporation was required to follow the requirements and append the annual return extract in Form MGT-9. The MCA recommended a change to Section 134 (3)(a)^[14] through a notification dated July 31, 2018, which eliminated the need for Form MGT-9. Companies could now include the online site for the annual report in the Board’s report, thanks to the modification. However, there were discrepancies in the legislation, since section 92 read with Rule 12 of the MGT Rules, which required an extract of the annual report to be affixed with the Board’s report in Form MGT-9, remained unamended. This discrepancy between the two clauses remained among professionals, causing them to post the annual return’s online link on the company’s website as well as file Form MGT-9. The MCA modified section 92(3)^[15] and the MGT Rules with effect from August 28, 2020, to resolve the conflict between the provisions. The amendment required every firm to post a copy of its annual report on its website, with the web address of the same being given in the Board’s report. By changing the MGT guidelines, the MCA has provided firms who are unable to publish a copy of the website link the option of attaching an excerpt of the annual return to the Board’s report.

Other Alterations

The MCA also deleted terms from section 92 (1)^[16] in its latest announcement. The obligation of providing information on the company’s debts in the annual report was removed from the amendment. The omission was not justified, but the revision does not affect the company’s filings because details of indebtedness are included in the balance statement, which is available on the company’s website. There has also been a change in the information that Foreign Institutional Investors in the firm must provide. This modification removes the necessity to provide information like names, addresses, countries of incorporation, registration, and shareholding percentages.

Conclusion

Every business in India is required to file an annual return with the Registrar of Companies at the end of each fiscal year. The current modification clarifies the yearly return filing process and eliminates any confusion. By introducing Form MGT-7A, the government has made a serious effort to reduce cumbersome documentation for small businesses and one-person businesses. The advantages of the changes removing Form MGT-9 and replacing it with Form MGT-7A may be considered as a positive step toward the central government’s aim of reducing compliances and burdensome filings for businesses and improving the ease of doing business in the nation. Reduced compliance and documentation will allow firms to stay focused on their core activities, resulting in increased growth.

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References:

[1] Hereinafter referred to as OPC.

[2] Companies Act, 2013 (Hereinafter referred to as Companies Act).

[3] The Companies Act, 2013

[4] Hereinafter referred to as MCA.

[5] The Companies Amendment Act, 2017

[6] Hereinafter referred to as MGT.

[7] FAQ On One Person Company, (Oct 31, 2021, 6:00 PM), https://www.mca.gov.in/MinistryV2/onepersoncompany.html.

[8] Supra 3

[9] Supra 3

[10] Notification by Ministry of Corporate Affairs, (Nov 1, 2021, 10:00 AM), https://www.mca.gov.in/Ministry/pdf/CompaniesMgmtAdminAmndtRules_05032021.pdf.

[11] Annual Return, (Nov 1, 2021, 11:00 AM), http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17475.

[12] Notification by Ministry of Corporate Affairs, (Nov 2, 2021, 12:00 AM), http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3z9mihm9CxHHzu82fmWlMKzy8jPS04vbR.

[13] Supra 3

[14] Supra 3

[15] Supra 3

[16] Supra 3