Difference Between Sole Proprietorship and One Person Company

Nov 25, 2024
Private Limited Company vs. Limited Liability Partnerships

When deciding between a One Person Company (OPC) and a Sole Proprietorship (SP), understanding their core differences is crucial. An OPC is a legal entity with limited liability, separate from its owner, which can be beneficial for protecting personal assets. In contrast, a Sole Proprietorship is not a separate legal entity; here, the owner bears full responsibility for business liabilities, making it simpler but riskier.

Factors such as liability, compliance requirements and tax benefits may impact your choice between OPC and SP. While OPC offers better legal protection, SP provides simplicity and minimal regulatory obligations.

This guide will evaluate opc vs sole proprietorship in detail. 

Table of Contents

What is One Person Company (OPC)?

A One Person Company (OPC) is a company structure in India that allows a single individual to establish a business with limited liability. It provides the benefits of a corporate entity while retaining the simplicity of sole ownership.

Unlike a sole proprietorship, an OPC is a separate legal entity. This means it can own assets, enter into contracts, and protect the owner's personal assets from business liabilities.

OPCs operate under regulatory requirements similar to private limited companies but are tailored for single ownership. Additionally, the member must appoint a nominee to take over the business in case of the owner's incapacity or death.

What is Sole Proprietorship?

A sole proprietorship is a simple business structure, where the business is owned and managed by one individual. This makes it ideal for small businesses or individual entrepreneurs. The meaning of a sole proprietor is essentially someone who is the sole beneficiary of all business profits and is personally liable for any debts incurred by the business. There is no particular Sole Proprietorship Act in India. 

Unlike a One Person Company, a sole proprietorship does not separate the business entity from the owner. This means that all legal, financial and operational responsibilities rest with the proprietor, who has full control over decision-making and retains all profits.

Operating as a sole proprietor allows for flexibility and ease in starting or closing a business. There are minimal regulatory formalities, although certain licences may be required for specific sectors, like medical or food services. 

One Person Company vs Sole Proprietorship

Here is a detailed analysis of the difference between sole proprietorship and one person company:

Criteria Sole Proprietorship One Person Company (OPC)
Definition An unincorporated business owned and operated by a single individual, making it the simplest business form. A business structure introduced under the Companies Act 2013, allowing a single person to own a company with limited liability.
Liability The owner has unlimited personal liability, meaning their personal assets are at risk for business debts. Offers limited liability protection to the owner, so personal assets are generally safeguarded from business liabilities.
Formation and Compliance Minimal formalities required for setup, as it is not registered under any specific act. Requires registration with the Registrar of Companies (RoC) and submission of documents like MoA and AoA.
Continuity Business depends entirely on the owner’s existence; it ends if the owner dies or is incapacitated. Separate legal entity status allows the OPC to continue even if the owner passes away, with a nominee assuming control.
Fundraising Limited to personal savings, bank loans or funds from informal sources, which can hinder growth. Better positioned for fundraising through equity shares, allowing more potential for expansion.
Taxation Income is taxed as per individual income tax slabs, making tax management straightforward. Taxed as a company with applicable corporate tax rates, requiring additional annual filings with RoC.
Business Name Generally uses the owner’s name or a trade name, with no specific suffix required. Must include “OPC” in the company name, as mandated by law.

Sole Proprietorship Advantages and Disadvantages

Advantages of Sole Proprietorship

Quick Decision-Making

With full control, the sole proprietor can make prompt decisions, aiding responsiveness and agility in business operations.

Confidentiality

All business information remains private to the owner, enhancing operational discretion.

Ease of Formation and Low Costs

Starting a sole proprietorship involves fewer legal requirements, keeping setup costs low.

Direct Incentives

The owner retains all profits, providing direct motivation for business success.

Disadvantages of Sole Proprietorship

Unlimited Liability

The proprietor’s personal assets can be used to cover business debts, increasing financial risk.

Limited Access to Capital

Raising funds can be challenging, as sole proprietors often rely on personal savings or small loans.

Lack of Business Continuity

The business may end with the owner's incapacity, death or insolvency, impacting long-term stability.

Limited Specialisation

Managing all aspects of the business alone can hinder growth and focus on key areas.

One Person Company (OPC) Advantages and Disadvantages

Advantages of One Person Company

Limited Liability

The owner's liability is limited to the capital invested, safeguarding personal assets from business debts.

Separate Legal Entity

Being legally distinct enhances the company's credibility and professionalism.

Tax Benefits

OPCs enjoy certain tax benefits, such as lower rates and deductions on business expenses.

Single Ownership with Control

The owner retains full control over operations, simplifying decision-making.

Disadvantages of One Person Company

Limited Funding Options

OPCs cannot raise funds from the public, which may restrict growth opportunities.

Compliance Requirements

Annual filings, account maintenance and meetings are required, adding to operational tasks.

Nominee Requirement

The need for a nominee can be limiting for owners wanting complete control.

Naming Restrictions

"One Person Company" must be part of the company’s name, reducing flexibility in branding.

Frequently Asked Questions:

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Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

Which is better, OPC or sole proprietorship?

When evaluating one person company vs sole proprietorship, the decision depends on your business goals. An OPC offers limited liability, protecting personal assets and provides credibility as a separate legal entity, which may attract investors. In contrast, a sole proprietorship is simpler to set up with fewer compliance requirements, but the owner is personally liable for business debts. 

Can a sole proprietorship be converted to OPC?

Yes, a sole proprietorship can be converted to an OPC. The process involves registering a new OPC and transferring the business’s assets and liabilities, following the regulations laid out by the Ministry of Corporate Affairs (MCA).

What are the tax benefits of OPC?

An OPC enjoys various tax benefits compared to a sole proprietorship. For example, OPCs can claim deductions on business expenses, such as salaries, office rent and travel costs. Additionally, OPCs benefit from lower corporate tax rates compared to individual tax rates applicable to sole proprietorships. 

How is OPC taxed?

An OPC is taxed as a private limited company, subject to corporate tax rates rather than individual tax rates. The current corporate tax rate in India for domestic companies is typically lower than the personal income tax rate applicable to sole proprietorships. 

Why is OPC a private company?

An OPC is classified as a private company because it operates with a single owner and has similar structural features to a private limited company, such as limited liability, a separate legal entity and compliance requirements. 

Can a sole proprietorship have employees?

Yes, a sole proprietorship can hire employees. The business owner, however, remains personally liable for any obligations or liabilities arising from employment, as the structure lacks limited liability protection.

Is a one person company the same as sole proprietorship?

No, a one person company is not the same as a sole proprietorship. While a one person company has a separate legal entity, a sole proprietorship does not have it. Moreover, the liability of the owner is limited in a one person company, as opposed to a sole proprietorship, where the owner’s liability is unlimited. 

Mukesh Goyal

Mukesh Goyal is a startup enthusiast and problem-solver, currently leading the Rize Company Registration Charter at Razorpay, where he’s helping simplify the way early-stage founders start and scale their businesses. With a deep understanding of the regulatory and operational hurdles that startups face, Mukesh is at the forefront of building founder-first experiences within India’s growing startup ecosystem.

An alumnus of FMS Delhi, Mukesh cracked CAT 2016 with a perfect 100 percentile- a milestone that opened new doors and laid the foundation for a career rooted in impact, scale, and community.

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Related Posts

Form MGT-8: Applicability, Format, and Requirements

Form MGT-8: Applicability, Format, and Requirements

For businesses, staying compliant with regulations isn’t just about ticking boxes—it’s about building trust with investors, customers, and regulators. One such important compliance requirement is Form MGT-8, a certification that ensures companies are meeting legal obligations while filing their annual returns.

If your company falls under certain criteria, you must get this form certified by a practising Company Secretary (CS) to confirm that your annual return is accurate and meets all legal requirements.

Understanding who needs to file Form MGT-8, its format, and compliance requirements can help companies avoid unnecessary risks and maintain smooth operations.

Table of Contents

What is Form MGT-8?

Form MGT-8 is a certification issued by a practising Company Secretary to validate that a company’s annual return complies with the provisions of the Companies Act of 2013. It assures that the company has accurately disclosed its financial and operational details, ensuring transparency and accountability.

The certificate covers aspects such as shareholding structure, board composition, meetings, and statutory records.

When Is Form MGT-8 Required?

Form MGT-8 is required in specific scenarios where companies exceed certain financial thresholds or have a specific status. It is mandatory for:

  • Listed companies
  • Companies with a paid-up share capital of ₹10 crores or more
  • Companies with a turnover of ₹50 crores or more

Form MGT-8 Format

Essential Components of the Form

Form MGT-8 is a certification report that includes various essential components to ensure compliance with the Companies Act, 2013. These components typically include:

  • Company Details – Name, registration number, and details of the company.
  • Certificate of Compliance – A statement certifying the company's adherence to the Act’s provisions.
  • Verification of Financial Records – Confirmation that financial statements have been audited and filed according to the law.
  • Board and Shareholder Meeting Details – Confirmation of meetings held and compliance with relevant provisions.
  • Transaction and Borrowing Details – Verification of loans, borrowings, and any changes in share capital.
  • Auditor Details – Information related to the appointment and reappointment of auditors.

Structure and Key Sections

Form MGT-8 follows a structured format, typically divided into the following sections:

  1. Part A: Company Overview
    • Includes company name, CIN (Corporate Identification Number), and registered address.
  2. Part B: Compliance Statements
    • Lists the provisions of the Companies Act, 2013 under which the company is required to comply. It includes details on financial statements, board meetings, and share capital transactions.
  3. Part C: Certification
    • The company secretary provides a certificate stating that the company has adhered to all the relevant provisions of the Act.
  4. Part D: Signature and Date
    • The form ends with the signature of the certifying company secretary, along with the date of certification.

Applicability of Form MGT-8

As per Section 92(2) of the Companies (Management and Administration) Rules, 2014, certain companies must have their annual returns certified by a practising Company Secretary. This applies to:

  • Listed companies
  • Companies with a paid-up share capital of ₹10 crores or more
  • Companies with a turnover of ₹50 crores or more

This certification ensures the company meets all statutory compliance requirements before submitting its annual return.

Related Read: LLP Form 11; Annual Return

Contents of Form MGT-8

Form MGT-8 contains several key elements that ensure a company is in compliance with the Companies Act of 2013. The contents include:

  • Company details: Name, registration number, and principal business activities.
  • Share capital structure: Details of shares issued and ownership distribution.
  • Compliance confirmation: Verification of board meetings, statutory filings, and regulatory approvals.
  • Certifications: Declaration by the practising Company Secretary affirming that the company has adhered to all relevant legal provisions.

Contents of the Form MGT-8 Report

The company secretary must certify that the annual return of the company is accurate and in compliance with the provisions of the Companies Act, 2013. The key points covered in the report include:

  • Status of the Company – The company’s legal status under the Companies Act.
  • Maintenance of Registers and Records – Ensuring records are updated within prescribed timelines.
  • Filing of Forms and Returns – Confirmation that necessary filings were made to the appropriate authorities.
  • Board Meetings – Verification that board and committee meetings were conducted correctly.
  • Register of Members/Shareholders – Confirmation of compliance with closure and maintenance requirements.
  • Loans to Directors – Adherence to provisions under Section 185 of the Companies Act for loans to directors.
  • Changes in Share Capital – Details on share capital transactions (issue, transfer, buyback, etc.).
  • Dividend Rights – Assurance that dividend-related processes have been followed.
  • Investor Education and Protection Fund – Confirmation of amounts moved to this fund as per Section 125.
  • Financial Statements – Certification that audited financial statements are signed and compliant with Section 134.
  • Director & KMP Appointments – Verification of appointments, reappointments, and remuneration of directors and key managerial personnel.
  • Auditor Appointments – Confirmation that auditor appointments comply with Section 139.
  • Approval from Authorities – Ensuring necessary approvals have been obtained.
  • Acceptance of Deposits – Compliance with the acceptance, renewal, and repayment of deposits.
  • Borrowings and Charges – Details on borrowings and matters related to charges.
  • Loans/Investments/Guarantees – Compliance with Section 186 for providing loans/investments to bodies corporate or individuals.
  • Alteration of AoA/MoA – Confirmation of any changes to the Articles or Memorandum of Association.

Looking to register your Sole Proprietorship Company? Head over to Razorpay Rize and complete your company registration!

Compliance Aspects

The compliance aspects covered by Form MGT-8 include:

  • Corporate Governance: Ensuring proper board structure and transparency in decision-making.
  • Regulatory Filings: Confirmation that the company has submitted all required returns and documents.
  • Financial Reporting: Validation of financial statements and records.
  • Board Meetings & Resolutions: Verification of proper conduct of board meetings and resolutions.
  • Loans & Related Party Transactions: Ensuring transactions comply with legal provisions.
  • Approvals & Authorizations: Confirmation that necessary approvals from the Central Government or regulatory authorities are obtained where required.

Consequences of Non-Compliance

Failure to comply with the requirements of Form MGT-8 can result in serious consequences, including:

  • Penalties and Fines: Companies and responsible officers may face monetary penalties for non-compliance.
  • Legal Action: Regulatory authorities may initiate legal proceedings against defaulting companies.
  • Reputation Damage: Non-compliance affects investor confidence and the company's credibility.
  • Operational Restrictions: Companies may face restrictions in obtaining loans, tenders, and other business opportunities.

Conclusion

Form MGT-8 is a critical compliance document that ensures companies adhere to the Companies Act of 2013. It is mandatory for listed companies and those meeting specific financial thresholds.

By obtaining certification from a practising Company Secretary, companies can confirm their adherence to legal requirements, reducing regulatory risks. Understanding its applicability, format, and compliance aspects helps businesses maintain transparency and corporate governance.

Companies must meet the necessary compliance requirements to avoid penalties and safeguard their business interests.

Frequently Asked Questions

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Register your Limited Liability Partnership in just 1,499 + Govt. Fee

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Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

Who is eligible for MGT-8?

Form MGT-8 can only be certified by a Company Secretary in Practice (CS). A CS is eligible to certify this form if they are a member of the Institute of Company Secretaries of India (ICSI) and hold a valid certificate of practice. This ensures that the certification complies with legal and regulatory standards.

What is MGT-8 filed for?

Form MGT-8 is filed to certify that a company has complied with the provisions of the Companies Act, 2013, and the rules made thereunder. It is specifically used for certifying the annual return of the company, ensuring that the company's records, meetings, filings, transactions, and governance practices are in compliance with the legal requirements.

What is the difference between MGT-8 and secretarial audit?

  • MGT-8: This is a certificate provided by a company secretary in practice, confirming that the company's annual return complies with the requirements of the Companies Act, 2013. It is more focused on the company’s compliance with the law and internal governance.
  • Secretarial Audit: A secretarial audit is a comprehensive examination of a company’s records and operations to ensure compliance with various laws and regulations (including corporate governance and SEBI regulations). It is a more detailed and extensive process compared to MGT-8, usually required for larger companies.

Can MGT-8 be digitally signed?

Yes, MGT-8 can be digitally signed by the company secretary in practice who is certifying the form. The digital signature ensures the authenticity and validity of the document, in line with the requirements for filing documents electronically with the Registrar of Companies (RoC).

Who is required to file MGT-8?

The filing of Form MGT-8 involves the following steps:

How to file MGT-8?

The filing of Form MGT-8 involves the following steps:

  1. Preparation: The company secretary in practice certifies the company’s compliance with the Companies Act, 2013 and prepares Form MGT-8.
  2. Certification: The company secretary certifies the annual return, ensuring it is in line with the legal requirements.
  3. Submission: Form MGT-8, along with the annual return (MGT-7), is filed with the Registrar of Companies (RoC) through the Ministry of Corporate Affairs (MCA) portal. The company secretary digitally signs the form before submission.
  4. Filing Fee: Pay the prescribed filing fee on the MCA portal at the time of submission.

Akash Goel

Akash Goel is an experienced Company Secretary specializing in startup compliance and advisory across India. He has worked with numerous early and growth-stage startups, supporting them through critical funding rounds involving top VCs like Matrix Partners, India Quotient, Shunwei, KStart, VH Capital, SAIF Partners, and Pravega Ventures.

His expertise spans Secretarial compliance, IPR, FEMA, valuation, and due diligence, helping founders understand how startups operate and the complexities of legal regulations.

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Startup India Seed Fund Scheme for Startups | Razorpay Rize

Startup India Seed Fund Scheme for Startups | Razorpay Rize

As a part of the “Startup India” program, the Startup India Seed Fund Scheme was introduced in 2021 to facilitate the process of creating a robust startup ecosystem and providing financial assistance to startups for proof of concept, prototype development, product trials, market-entry, and commercialization.

Description Who is it for? Benefits
To provide monetary support for proof of concept, prototype development, product trials, market, and commercialization Startups using Technology as their core product or service Under this scheme, Financial assistance up to Rs. 50 lakh will be provided to startups at an early stage through incubators
Startup India Seed Fund Scheme

Table of Contents

Eligibility

  • Should be recognised by DPIIT.
  • Startups should not have received more than Rs 10 lakh of monetary support under other significant government schemes.
  • The Startup shall have been in existence for no more than two years at the time of application.
  • Should be using technology as its core product or service to create innovative solutions in different sectors.
  • Must have a business idea to develop the product with a scope of scaling
  • According to the Companies Act of 2013 and the SEBI (ICDR) Regulations of 2018, Indian promoters must own at least 51 percent of the company at the time of application to the incubator.
  • The seed support is generally available in grants and debt/convertible debentures.

Application procedure for Startups

The application procedure for availing the seed fund from the incubators by the startups under the StartUp India Seed Fund Scheme is as follows:

Startup India Registration

  • Go to https://seedfund.startupindia.gov.in/.
  • On the top right side of the homepage, click the 'Login' button, then the 'Create an Account' option at the bottom of the "Login" tab.
  • The ‘Startup India’ registration page will open.
  • After filling out the form, click the 'Register' button.
  • An OTP will be sent. Enter the OTP and click the ‘Submit’ button.

Startup India Seed Fund Application

  • Go to the website again and click on the ‘Apply Now’ button on the right-hand side of the homepage.
  • Click on the ‘Apply Now’ button under the ‘For Startups’ option and log in using the username and password registered.
  • The application form will open. Put in all the details, upload the documents, and click on the ‘Submit’ button.
  • The application will be submitted for the selection of the startup.

Selection of Startups for the Scheme

The Eligible Incubator will select startups for this scheme based on the following criteria:

  • Idea
  • Feasibility
  • Novelty
  • Fund Utilization Plan
  • Business Plan
  • Presentation
  • Potential Impact

Benefits

To register a company in the U.S., several essential criteria must be met.

  • Under this scheme, up to Rs 50 lakh in financial assistance will be provided to startups at an early stage through incubators.
  • The incubator will disburse the seed fund to an eligible startup:
    - As a grant for validation of “prototype development, proof of concept or product trials”-  
    Up to Rs. 20 Lakh        
    - Investment for commercialization, market-entry, or scaling up through debt-linked instruments -
    Up to Rs. 50 Lakh
  • Once incubated, physical infrastructure, testing support, mentoring for prototype or commercialization, human resources, and legal compliances are provided to the startups, all by the incubators.
  • For eligible startups, income tax and capital gains tax exemptions are available.

Post funding process

Each incubator must track specific criteria for each beneficiary startup. Every beneficiary startup must present the reports to its incubators periodically. The data is submitted to Startup India in real-time via their web dashboards and further to the EAC quarterly. Each Startup’s return on investment is also reported by the designated incubator.

  • Proof of concept
  • Prototype development
  • Progress of product development & field trials
  • Turnover of startup
  • Progress of market launch
  • Quantum of loan, angel, or VC funding raised
  • Jobs created by startup

Frequently Asked Questions

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Register your Business starting at just 1,499 + Govt. Fee

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Register your Limited Liability Partnership in just 1,499 + Govt. Fee

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Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

What is a Shelf Prospectus? Meaning & Provisions Under the Companies Act, India

What is a Shelf Prospectus? Meaning & Provisions Under the Companies Act, India

A shelf prospectus is a legal document under the Companies Act of 2013 that allows a company to issue multiple rounds of securities without filing a new prospectus for each offering.

Once a company gets approval for a shelf prospectus, it can issue securities in tranches over a period (usually one year) without repeating the regulatory approval process. This mechanism is particularly beneficial for businesses that require frequent access to capital markets.

Simply put, a company gets approval for a prospectus and "shelves" it for use when needed. Just like a store keeps items on a shelf, ready to be picked up when required, companies can tap into their shelf prospectus whenever they decide to issue securities within the approved period.

Table of Contents

Shelf Prospectus Meaning

A shelf prospectus is a document issued by companies intending to offer securities in multiple tranches over a specified period without filing a new prospectus for each offering. Governed by the Companies Act of 2013, it serves as a framework to streamline capital-raising activities while ensuring regulatory compliance.

This approach helps all types of companies save time and resources while maintaining transparency in financial disclosures.

What Is The Validity Period of Shelf Prospectus?

As per the Companies Act of 2013 and SEBI regulations, a shelf prospectus is valid for one year from the issue date. During this period, the company can make multiple security offerings without submitting a fresh prospectus.

However, an Information Memorandum must be filed for each subsequent offering to ensure updated financial and operational disclosures.

What Are The Requirements For Shelf Prospectus?

To issue a shelf prospectus, a company must fulfil specific requirements under the Companies Act, 2013:

  • Eligibility Criteria: The company must be a public financial institution, a bank, or a company notified by SEBI.
  • SEBI Approval: Approval from the Securities and Exchange Board of India (SEBI) is mandatory before issuance.
  • Financial Disclosures: The prospectus must include audited financial statements, business details, and risk factors.
  • Regulatory Compliance: The company must adhere to statutory provisions and filing requirements.

Who Can Issue Shelf Prospectus?

Not all companies are eligible to issue a shelf prospectus. As per SEBI regulations, only specific entities can do so, including:

  • Public Financial Institutions such as banks and NBFCs.
  • Scheduled Banks that meet regulatory criteria.
  • Other Companies notified by SEBI, provided they meet compliance standards.

Looking to register your LLP? Head over to Razorpay Rize and get your LLP incorporated today!

What Are The Eligibility Criteria For a Company to Issue a Shelf Prospectus?

To issue a shelf prospectus, a company must meet the following key eligibility criteria:

  • Strong Financial Performance: A consistent and positive financial track record is essential.
  • Regulatory Compliance: The company must have a history of timely filings and adherence to statutory norms.
  • Market Reputation: A credible and trustworthy market presence is necessary.
  • Clear Disclosure of Fund Utilization: The company must provide transparency regarding how the raised funds will be used.

5 Incredible Advantages of Shelf Prospectus

A shelf prospectus offers several benefits to companies and investors:

  1. Flexibility: Companies can issue securities as needed without additional regulatory approvals.
  2. Cost Efficiency: Reduces administrative and compliance costs associated with repeated filings.
  3. Faster Time to Market: Companies can respond quickly to market conditions.
  4. Improved Investor Relations: Provides transparency and trust through consistent financial disclosures.
  5. Strategic Financial Planning: Enables better capital-raising strategies over time.

How Does an Investor Benefit from a Shelf Prospectus?

Investors gain multiple advantages from a shelf prospectus:

  • Greater Transparency: A single document offers comprehensive details about the company.
  • Consistent Access to Securities: Investors can participate in multiple offerings from a single prospectus.
  • Time-Saving: Reduces the need to analyse multiple prospectuses for each security issuance.
  • Better Investment Planning: Enables informed decision-making with consistent financial disclosures.

Difference Between Shelf Prospectus and Red Herring Prospectus?

Parameter Shelf Prospectus Red Herring Prospectus
Purpose Used for multiple securities offerings over time Used for IPOs before the issue price is finalised
Validity Period Valid for one year from the issue date Valid only for a single IPO
Flexibility Allows multiple issuances without a new prospectus Only valid for a one-time offering
Information Contains comprehensive details about the company and financials Lacks finalised share price details
Regulatory Requirement Requires filing of Information Memorandum Needs SEBI approval before IPO launch

Financial Securities and Shelf Prospectus

A shelf prospectus allows companies to issue various types of financial securities, including:

  • Equity Shares: Ownership stakes in a company.
  • Debentures: Debt instruments issued by companies.
  • Bonds: Fixed-income securities providing periodic interest payments.

This streamlined approach reduces delays and administrative hurdles for issuing these securities over multiple tranches.

What Is an Information Memorandum?

An Information Memorandum is a document containing essential details about a company’s financials, operations, and business strategy. It is a key resource for investors, offering in-depth insights into the company's capital-raising plans.

When a company issues securities under a shelf prospectus, it must file an Information Memorandum before each offering to ensure updated and accurate disclosures.

Procedure to Fill Form PAS-2

Form PAS-2 is required to be filed as per the Companies (Prospectus and Allotment of Securities) Rules, 2014. Here’s how to fill it:

  1. Company Details: Enter the name, registered office, and CIN.
  2. Security Details: Specify the type and number of securities being offered.
  3. Offer Details: Mention the issue price, purpose, and utilisation of funds.
  4. Financial Statements: Attach recent audited financial reports.
  5. Declaration: Ensure proper authorisation and sign the form.

Procedure to Upload Form PAS-2

Once Form PAS-2 is completed, follow these steps to upload it to the MCA (Ministry of Corporate Affairs) portal:

  1. Prepare the Form: Ensure all required fields are filled out correctly and attach the necessary documents.
  2. Log in to the MCA Portal: Use company credentials to access the e-filing section.
  3. Upload the Form: Select Form PAS-2, attach supporting documents and verify details.
  4. Payment of Fees: Pay the prescribed filing fee through the portal.
  5. Submit and Confirm: After submission, a confirmation receipt and acknowledgement are generated.

Conclusion

For companies, a shelf prospectus eliminates the repetitive, time-consuming regulatory hurdles that come with multiple capital raises.

Instead of drafting and filing a new prospectus each time, businesses can plan their fundraising strategically, issuing securities when market conditions are favourable. This saves time, reduces administrative costs, and provides the flexibility needed to stay competitive.

For businesses, this means less paperwork, faster fundraising, and more flexibility to raise funds when needed. For investors, it provides greater transparency and clarity, helping them make better financial decisions.

By using a shelf prospectus wisely, companies can focus on growth, and investors can confidently explore opportunities—making it a win-win for everyone in the financial market.

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Frequently Asked Questions

What is meant by Shelf Prospectus?

A Shelf Prospectus is a type of prospectus that allows a company to issue securities in multiple tranches over a period of time without needing to file a separate prospectus for each offering. It provides flexibility for companies to raise funds as needed, reducing administrative burdens and costs.

What is Shelf Prospectus in Company Law Section 1?

In the context of Company Law (India - Companies Act, 2013, Section 31), a Shelf Prospectus is a prospectus issued by public financial institutions, banks, or listed companies for raising capital through multiple offerings. The prospectus remains valid for a specified period, and the company only needs to file an Information Memorandum before each tranche of issuance.

Does the Shelf Prospectus Require a Different Prospectus for Each Offering?

No, a Shelf Prospectus eliminates the need to file a separate prospectus for each offering. Instead, an Information Memorandum is submitted before each issuance, updating investors with relevant details about the specific tranche.

Is Shelf Prospectus Valid for Years?

In India, a Shelf Prospectus is typically valid for one year from the date of filing). Within this period, the company can issue securities in multiple tranches without filing a fresh prospectus each time.

Why Would a Company File a Base Shelf Prospectus?

A company files a Base Shelf Prospectus to:

  • Streamline Fundraising: Raise capital efficiently over time without repetitive regulatory approvals.
  • Reduce Costs: Minimize administrative and legal expenses associated with frequent filings.
  • Enhance Flexibility: Issue securities when market conditions are favourable.
  • Ensure Compliance: Maintain transparency while avoiding delays in capital raising.

Sarthak Goyal

Sarthak Goyal is a Chartered Accountant with 10+ years of experience in business process consulting, internal audits, risk management, and Virtual CFO services. He cleared his CA at 21, began his career in a PSU, and went on to establish a successful ₹8 Cr+ e-commerce venture.

He has since advised ₹200–1000 Cr+ companies on streamlining operations, setting up audit frameworks, and financial monitoring. A community builder for finance professionals and an amateur writer, Sarthak blends deep finance expertise with an entrepreneurial spirit and a passion for continuous learning.

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