Difference Between Opc And Private Limited Company

Mar 24, 2024
Private Limited Company vs. Limited Liability Partnerships

Choosing the right business structure is a crucial decision for any entrepreneur. In India, two popular options are the Private Limited Company (Pvt Ltd) and the One Person Company (OPC). While Pvt Ltd companies suit growth-oriented startups with aspirations to scale, OPCs cater to solo entrepreneurs seeking simplicity with limited liability.

This blog explores the key features, benefits, and differences between these structures to help you decide what’s best for your business.

Table of Contents

Difference between Private Limited and One Person Companies

Although we will explore each legal structure in the upcoming sections, let's currently delve into a comparative analysis between these two entities.

Private Limited Company One Person Company
Suitable For Financial Services, Tech Startups, Medium Enterprises Franchises, Retail Stores, Small Businesses
Shareholders/ Partners Minimum – 2
Maximum – 200
Minimum – 1
Maximum – 1
Nominee Not required One Nominee mandatory
Minimum Capital Requirement No minimum capital requirement No minimum paid-up capital requirement exists. However, the minimum authorized capital required is Rs. 1,00,000 (One Lakh)
Tax Rates The basic tax rate, excluding Surcharge and Cess, is 25% The applicable Tax rate to the OPC would be 25%, excluding cess and surcharge
Fundraising Multiple options for Fundraising Limited options for Fundraising
ESOPs Can issue ESOPs to the Employees Unable to issue ESOPs to the Employees
DPIIT Recognition Eligible for DPIIT recognition Ineligible for DPIIT recognition
Transfer of Shares Shares can be easily transferred by amending AOA Transfer of shares isn’t possible; it can only be done in case of transfer of ownership
Agreements Duties, Responsibilities, and other basic clauses outlined in MOA and AOA Duties, Responsibilities, and other basic clauses outlined in MOA and AOA
Compliances • More compliance costs
• Mandatory 4 Board Meetings
• No mandatory audits till a specified threshold limit
Less Compliance Costs
Minimum 2 Board Meetings
Mandatory Audits
Foreign Directors NRIs and Foreign Nationals can be Directors No foreign directors are allowed
Foreign Direct Investment Eligible through Automatic route Not eligible for FDI
Mandatory Conversion No mandatory conversion If annual turnover exceeds Rs. 2 Crores or paid-up capital exceeds Rs. 50 lakhs, then mandatory conversion into a private limited company

While we have provided some context on the differences between a private limited company and an OPC, let's break down their features and registration process in detail. This will help you figure out which one suits your business needs best.

What is a Private Limited Company?

A Private Limited Company (Pvt Ltd) is one of the most sought-after business structures in India. It combines the benefits of limited liability, a separate legal identity, and scalability.

It’s a privately held entity governed by the Companies Act of 2013 and is often chosen for its ability to combine the flexibility of partnerships with the advantages of corporate status.

In a Private Limited Company, shareholders' liability is limited to the extent of their shareholding, which means personal assets are protected in case the company incurs losses or debts. This makes it an attractive option for entrepreneurs looking to build a scalable business while minimising financial risks.

In short, a Private Limited Company is ideal for entrepreneurs with big ambitions, as it provides:

  • A formal structure for business operations.
  • Easier access to funding through equity or debt.
  • A professional image that boosts credibility with investors and customers.

Private Limited Company Registration

Registering a Private Limited Company involves a detailed process governed by the Companies Act, 2013.

Step-by-Step Guide to Registration

  1. Document Requirements:
    • PAN and Aadhaar of all directors.
    • Proof of address for both directors and the company (rental agreement, utility bills, etc.).
    • Digital Signature Certificate (DSC) for directors.
  2. Name Reservation:
    • Apply to the Ministry of Corporate Affairs to reserve a unique company name. This is done using the SPICe+ (Simplified Proforma for Incorporating Companies Electronically) Part A.
  3. Drafting MOA and AOA:
    • Memorandum of Association (MOA): Outlines the company’s objectives and scope of operations.
    • Articles of Association (AOA): Governs the company’s internal management.
  4. Filing Incorporation Application:
    • Submit the SPICe+ Part B form along with MOA and AOA to the ROC.
    • Articles of Association (AOA): Governs the company’s internal management.
  5. Certificate of Incorporation:
    • Upon approval, the ROC issues a Certificate of Incorporation, officially recognising the company.

The process usually takes 10–15 working days, provided all documents are in order.

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Key Features of Private Limited Company

Here are some Private limited company features:

  • Ownership Structure: Owned by shareholders, managed by directors (who can also be shareholders).
  • Liability of Shareholders: Limited to the amount of unpaid shares they hold.
  • Capital Requirements: There is no minimum capital requirement; businesses can start with as little as ₹1 lakh authorised capital.
  • Perpetual Succession: The company exists independently of its owners' or directors' status.
  • Limited Liability: Shareholders’ liability is restricted to the amount invested.
  • Ease of Fundraising: Can raise capital from angel investors, venture capitalists, or private equity.
  • Tax Implications: Subject to corporate tax rates, including additional surcharges and cess, based on annual income.

What is a One Person Company?

Introduced under the Companies Act of 2013, a One Person Company (OPC) is a simplified corporate structure designed for solo entrepreneurs.

As the name suggests, it allows a single individual to own and operate a business while enjoying the benefits of limited liability and corporate status. OPCs are particularly suited for small businesses, consultants, and freelancers who want to step up from a sole proprietorship and gain a formal business identity.

The OPC structure is a bridge between sole proprietorship and private limited companies. It combines the flexibility of running a solo business with the legal and financial protections of a company, making it a popular choice for first-time entrepreneurs.

One Person Company Registration

The process is designed to be straightforward and entrepreneur-friendly, ensuring that individuals can easily transition from a sole proprietorship or informal business setup to a legally recognised company.

Step-by-Step Guide to Registration

  1. Document Requirements:
    • PAN, Aadhaar, and proof of address of the sole shareholder/director.
    • Nominee details.
    • Digital Signature Certificate (DSC).
  2. Name Reservation:
    • Reserve a unique name for the OPC via the MCA portal through SPICe+ Part A.
  3. Filing Application:
    • Submit the incorporation form, i.e. SPICe+ Part B with MOA and AOA, to the ROC.
  4. Certificate of Incorporation:
    • Receive the Certificate of Incorporation after approval.

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Key Features of OPC

Here are some One person company features:

  • Ownership Structure: The ownership is held by one individual, with the provision to nominate another person as a successor in case of the owner’s demise.
  • Liability of the Shareholder: The shareholder’s liability is limited to the unpaid value of their subscribed capital.
  • Capital Requirements: There is no minimum capital requirement, making it easier for individuals to start with minimal resources.
  • Ease of Formation: Streamlined setup and management processes.
  • Lower Compliance Costs: Fewer filings and regulatory requirements.
  • Limited Liability: Protects personal assets.
  • Tax Implications: OPCs are subject to the same corporate tax rates as Private Limited Companies. However, they enjoy lower compliance costs and simplified tax filings.

Similarities between OPC and Private Limited Company

  1. Limited Liability Protection: Both structures ensure the owner’s liability is restricted to their investment.
  2. Legal Entity: Both are considered separate legal entities distinct from their owners.
  3. Compliance with ROC: Both require periodic filings with the Registrar of Companies.
  4. Taxation: Both are subject to corporate tax rates.

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Our package includes:

  • Company Name Registration
  • 2 Digital Signature Certificates (DSCs)
  • 2 Directors’ Identification Numbers (DINs)
  • Certificate of Incorporation(COI)
  • MoA & AoA [Applicable for Private Limited Companies and OPCs]
  • LLP Agreement [Applicable for LLPs]
  • Company PAN & TAN

*Prices and documents can differ based on the company type.

Which company type to register your business with?

Before commencing the registration process for either a OPC or a Private Limited company, it is essential to carefully assess the following factors.

1. Consider the Nature and Size of Your Business

  • Evaluate the nature and size of your business. If your operations are on a smaller scale and you are a single operator, opting for OPC registration may be advantageous. Conversely, for larger businesses with substantial employee numbers and capital needs, registering as a Private Limited Company offers greater flexibility in capital raising.

2. Fundraising Requirements

  • Assess your fundraising requirements. If your objective is to raise funds through equity, opting for a company structure is essential. However, if you can fundraise through debt options, the OPC structure may work.

3. Compliance Requirements

  • Generally, OPCs have fewer compliance requirements compared to Private Limited Companies, making them more suitable for small businesses. Nonetheless, ensure that you are aware of several post-incorporation compliances that come along with each business structure and choose accordingly.

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Explore side-by-side comparisons of popular company types with prices to help you give a clear picture of the nuances involved with different legal structures.

Conclusion

Choosing between a Private Limited Company and a One Person Company depends on your business needs.

If you’re a solo entrepreneur who clearly focuses on managing things independently and prefers minimal compliance requirements, an OPC can be a great option. It’s a straightforward structure, perfect for freelancers, consultants, or small-scale businesses who want the advantages of limited liability while keeping things simple.

However, if you’re building a business with big dreams, such as attracting investors, scaling operations, or entering international markets, a Private Limited Company might be a better fit.

When making this decision, it’s essential to consider not only where your business is today but also where you want it to be in the future. Think about:

  • Your business goals: Are you aiming for steady income or scaling into new markets?
  • Your growth plans: Will you need external funding or partners?
  • Your resources and bandwidth: Can you manage the compliance requirements of a Private Limited Company, or is a simpler structure better suited for now?

Explore side-by-side comparisons of popular company types with prices to help you give a clear picture of the nuances involved with different legal structures.

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

What are the documents required for Private Limited Company Registration

To register a Private Limited Company (PVT Ltd) in India, the following documents are typically required:

  1. For Directors and Shareholders:
    • PAN Card: Mandatory for all Indian citizens involved in the company.
    • Identity Proof: Passport, Aadhaar card, voter ID, or driving license.
    • Address Proof: Bank statement, electricity bill, or any government-issued document not older than two months.
  2. For Registered Office Address:
    • Rent/Lease Agreement: If the office is rented.
    • NOC (No Objection Certificate): From the property owner.
    • Utility Bills: Electricity or water bill (not older than two months).
  3. Photographs:
    • Passport-sized photos of directors and shareholders.
  4. Digital Signature Certificate (DSC):
    • Required for all directors to file forms online.

Can an Indian citizen living abroad from a One Person Company (OPC)?

Yes, an Indian citizen living abroad can form a One Person Company (OPC) in India, but with certain conditions:

  • The person must be an Indian citizen and a Resident of India, as per the Companies Act, 2013.
  • Resident of India means the individual has stayed in India for at least 120 days in the preceding financial year.

If an Indian citizen living abroad doesn’t meet this residency requirement, they cannot form an OPC but may explore alternative structures like a Private Limited Company, which allows for non-resident directors and shareholders.

Is Foreign Direct Investment (FDI) allowed for a One Person Company?

No, Foreign Direct Investment (FDI) is not allowed in a One Person Company (OPC) under the automatic route. OPCs are restricted to Indian citizens and residents, and allowing FDI would contradict this principle.

For businesses looking to attract foreign investment, registering as a Private Limited Company is the better option.

What is the process of converting a Private Limited Company to an OPC?

Currently, the Companies Act of 2013 does not allow the conversion of a Private Limited Company into a One Person Company (OPC). However, if the business scale reduces and fewer directors/shareholders are required, the owners may dissolve the Private Limited Company and incorporate an OPC.

When to convert an OPC to a Private Limited Company?

As per the Companies Act of 2013, a One Person Company (OPC) must be converted into a Private Limited Company (PVT Ltd) in the following scenarios:

  1. When the Paid-Up Capital Exceeds ₹50 Lakhs:
    • If the capital crosses ₹50 lakhs, the OPC must be converted into a PVT Ltd company within six months.
  2. When the Annual Turnover Exceeds ₹2 Crores:
    • If the turnover of the OPC exceeds ₹2 crores in the previous three consecutive financial years, conversion is mandatory.

Steps for Conversion:

  • Pass a special resolution in the OPC for conversion.
  • File necessary forms with the Ministry of Corporate Affairs (MCA), such as INC-5 and INC-6.
  • Update the Memorandum of Association (MoA) and Articles of Association (AoA) to align with the requirements of a Private Limited Company.

Voluntary Conversion:

If the OPC owner wishes to scale the business, raise funds, or bring in multiple shareholders, they can also opt for voluntary conversion without waiting for mandatory thresholds.

Related Posts

What is Partnership? Features, Types and Benefits

What is Partnership? Features, Types and Benefits

A partnership is a formal arrangement where two or more parties come together to manage and operate a business. Partnerships are a common way for individuals and entities to pool resources, expertise, and efforts to achieve shared goals. They can take various forms, such as general and limited liability partnerships, each with unique characteristics.

Unlike running a business alone, a partnership fosters teamwork, shared decision-making, and mutual responsibility. In a partnership, profits, liabilities, and operational responsibilities are typically shared among partners according to the terms of a partnership agreement.  It’s a model built on trust and cooperation, making it a popular choice for startups and growing businesses.

In this blog, we’ll explore partnerships, their key features, and why they’re an attractive option for many entrepreneurs looking to build something together.

Table of Contents

Features of Partnerships

Partnerships are defined by several key features:

  • Shared Responsibilities: Partners collaborate on business operations, contributing their expertise, resources, and capital to achieve mutual goals.
  • Shared Resources: Partnerships allow the pooling of financial and intellectual resources, enhancing operational efficiency.
  • Shared Goals: Partners align on strategic objectives to grow the business and share in its success.
  • Flexibility: Partnerships can be structured to suit specific needs, from informal agreements to formal legal contracts.
  • Decision-Making Process: Decision-making is often a collective process, emphasising the importance of trust and mutual understanding among partners.
  • Legal Agreements: While partnerships can be informal, formal agreements provide clarity on roles, profit-sharing, and conflict resolution.
  • Dissolution: Partnerships can be dissolved legally if required, often guided by the terms of the agreement or applicable laws.

Types of Partnerships

There are various types of partnerships, each serving different purposes and offering distinct advantages. For-profit partnerships generally fall into three main categories:

1. General Partnership

In a general partnership, all partners share equal responsibility for the business’s liabilities and profits. Each partner is personally liable for the business’s debts, making it crucial to draft a partnership agreement that outlines profit-sharing, roles, and responsibilities. 

For example, two entrepreneurs starting a retail business together would likely form a general partnership.

2. Limited Partnership

Limited partnerships (LPs) feature both general partners and limited (or silent) partners. General partners manage the business and assume entire liability, while limited partners contribute capital and enjoy liability protection up to the amount they invest. 

An example might be a real estate development project funded by silent investors.

3. Limited Liability Partnership

Limited liability partnerships (LLPs) protect partners’ personal assets by limiting liability for business debts. LLPs are particularly common in professions like law and accounting, where personal liability is a significant concern. 

For example, in a law firm LLP, equity partners own a share of the business, while salaried partners do not hold ownership but receive bonuses tied to performance.

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What is the Partnership Act 1932?

The Partnership Act of 1932 is a legal framework governing partnerships in India. Key provisions include:

  • Definition and Formation: Outlining what constitutes a partnership and the requirements for its formation.
  • Rights and Duties: Defining the rights, responsibilities, and liabilities of partners.
  • Partnership Agreements: Emphasising the importance of clear agreements to avoid disputes.
  • Dissolution: Providing guidelines for legally dissolving a partnership.

The Act ensures transparency and fairness in business partnerships, making it a crucial reference for anyone entering into such arrangements.

Advantages and Disadvantages of Partnerships

Advantages

  • Easy to establish and operate
  • Shared financial and intellectual resources
  • Tax benefits, such as pass-through taxation
  • Flexible business structure

Disadvantages

  • Unlimited liability for general partners
  • Potential for conflicts among partners
  • Limited lifespan unless explicitly agreed otherwise
  • Shared profits

How to Form a Partnership?

Below are the steps for the partnership registration process:

  1. Draft a Partnership Agreement: Clearly outline roles, profit-sharing, and dispute-resolution mechanisms.
  2. Register the Partnership: Depending on the jurisdiction, registration may be required.
  3. Obtain Necessary Licenses and Permits: Ensure compliance with local regulations.
  4. Set Up Operations: Establish the business’s infrastructure and processes.

Partnerships vs. Companies

Choosing the right business structure is one of the most critical decisions for any entrepreneur. While partnerships and companies are both popular choices, they differ significantly in terms of ownership, liability, management, and regulatory requirements. 

Each structure has its own advantages and challenges, making it essential to understand which one aligns best with your business goals.

Feature Partnership Company
Legal status No separate legal entity Separate legal entity
Liability Unlimited (except LLPs) Limited
Profit distribution Shared among partners Distributed as dividends
Management Managed by partners Managed by the board of directors

Partnerships are generally more flexible but come with higher personal risk, whereas companies provide greater liability protection but involve more regulatory requirements.

Related Read: Private Limited Company Vs. Limited Liability Partnerships (LLP)

Frequently Asked Questions

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Register your Private Limited Company in just 1,499 + Govt. Fee

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Register your One Person Company in just 1,499 + Govt. Fee

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

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

Register your business

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

How Does a Partnership Differ From Other Forms of Business Organisation?

A partnership differs from other business structures like sole proprietorships, limited liability companies (LLCs), and corporations primarily in ownership, liability, and decision-making.

What Is a Limited Partnership vs. a Limited Liability Partnership?

A Limited Partnership (LP) and a Limited Liability Partnership (LLP) are two distinct types of partnerships:

  • Limited Partnership (LP):
    • Composed of general partners who manage the business and have unlimited liability and limited partners who contribute capital but have liability only up to their investment.
    • Common in investment ventures where limited partners provide funds, and general partners manage the operations.
  • Limited Liability Partnership (LLP):
    • All partners have limited liability, protecting them from personal responsibility for the business’s debts.
    • Ideal for professional businesses like law firms or accounting firms, where partners share management duties but seek protection from personal liabilities.

Do Partnerships Pay Taxes?

Partnerships themselves do not pay income taxes. Instead, they are considered pass-through entities, meaning that the partnership’s profits and losses are passed through to individual partners. 

Each partner reports their share of the partnership’s income on their personal tax return, where they are taxed based on their portion of the profit.

What Types of Businesses Are Best suited for Partnerships?

Partnerships are well-suited for businesses that benefit from shared expertise and resources. Some ideal types include:

  • Professional Services: Law firms, accounting firms, and medical practices, where partners bring specialised skills.
  • Family Businesses: Small family-owned businesses where partners are trusted to work together.
  • Creative Industries: Advertising agencies, design firms, or production companies that require collaborative efforts.
  • Startups: Early-stage businesses that need multiple people to contribute capital, ideas, and effort but do not want the complexity of a corporation.

What is a partnership, and how does it work?

A partnership is a business arrangement where two or more individuals share ownership and management responsibilities, pooling resources to run the business. The partners agree on how profits, losses, and responsibilities will be shared, typically outlined in a partnership agreement.

The partnership can be structured in various ways, such as general partnerships or limited partnerships, depending on the desired level of liability and control. 

What are the different types of partnership working?

There are several types of partnership structures based on liability and management involvement:

  • General Partnership
  • Limited Partnership (LP)
  • Limited Liability Partnership (LLP)
  • Joint Venture

Who is a secret partner?

A secret partner is a business partner who contributes capital and shares in the profits and losses but does not take part in the day-to-day management or operations of the business. Unlike a dormant or silent partner, a secret partner’s identity is not disclosed to the public or clients but is still legally bound by the partnership’s obligations and liabilities.

How many types of partners are there?

In a partnership, there are four main types of partners:

  1. Active Partner: Actively participates in the management of the business and shares in both profits and liabilities.
  2. Sleeping (or Dormant) Partner: Invests capital but does not participate in day-to-day management; however, they share in profits and losses.
  3. Secret Partner: A partner whose identity is kept hidden from the public but participates in the partnership’s activities and shares in profits and liabilities.
  4. Limited Partner: A partner who contributes capital but has limited liability, meaning they are only liable up to the amount they have invested in the business.

National Initiative for Developing and Harnessing Innovations- Seed Support System (NIDHI-SSS)

National Initiative for Developing and Harnessing Innovations- Seed Support System (NIDHI-SSS)

The National Initiative for Developing and Harnessing Innovations (NIDHI) is a comprehensive program created by the Department of Science & Technology, Government of India, through its Innovation & Entrepreneurship division. It fosters the transformation of ideas and innovations, particularly those rooted in knowledge and technology, into thriving startup ventures.

NIDHI-Seed Support System is an initiative of the National Science & Technology Entrepreneurship Development Board (NSTEDB), Department of Science & Technology. aims to bridge a significant gap in financial support for technology-driven startups in their early stages.

Description Who is it for? Benefits
To provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization, etc. For MSMEs and Technology startups Financial Support up to Rs 100 lakhs per start-up as Seed Support

The core concept of seed support revolves around offering financial aid to budding startups with promising ideas, innovations, and technologies. It strives to provide financial assistance to startups for proving their concept, developing prototypes, conducting product trials, entering the market, and commercializing their innovations.

Table of Contents

Components of NIDHI Scheme

The key components of NIDHI are:

1. NIDHI-GCC

Grand Challenges and Competitions for scouting innovations;

2. NIDHI-PRomotion and Acceleration of Young and Aspiring technology entrepreneurs (NIDHI-PRAYAS)

Support from Idea to Prototype

3. NIDHI- Entrepreneur In Residence (NIDHI-EIR)

Support system to reduce risk

4. Startup-NIDHI through Innovation and Entrepreneurship Development Centres (IEDCs)

To encourage students to promote start-ups in Institutions

5. Start-up Centre in collaboration with MHRD

To drive entrepreneurship and innovation in National Institutions of Higher Learning

6. NIDHI-Technology Business Incubator (TBI)

To help convert Innovations into startups

7. NIDHI-Accelerator

Fast-tracking a start-up through focused intervention

8. NIDHI-Seed Support System (NIDHI-SSS)

To provide early-stage investment

9. NIDHI Centres of Excellence (NIDHI-CoE)

A World-class facility to help startups go global

Focus Areas of NIDHI-SSS

Technology-based product proposals in sectors such as agriculture, healthcare, manufacturing, engineering, IoT, biotechnology, medical devices, water, waste management, energy, climate tech, fintech etc.

Eligibility of NIDHI-SSS

  • Must be a registered company in India with a minimum of three months of residency at the Science and Technology Entrepreneurs' Park (STEP) / Technology Business Incubators (TBIs).
  • Must be an Indian start-up.
  • Must have Indian promoters holding the shares of at least 51% in the incubated startup.

Please note: This assistance is not intended for Indian subsidiaries of multinational corporations or foreign companies. However, individuals holding Overseas Citizens of India (OCI) or Persons of Indian Origin (PIO) status will be treated as Indian citizens under this scheme.

Application procedure for Startups

  • Website and newspaper ads are posted to signal the availability of seed support at specific incubator organizations.
  • Social media posts announce the call for applications.
  • Applicants are shortlisted based on eligibility criteria.
  • The NIDHI-SSMC makes decisions regarding the shortlisted applicants.
  • Selected applicants are chosen for funding.

Benefits of NIDHI-SSS

Seed support of up to INR 100 Lakhs with average financial seed funding ranging from INR 25 Lakhs.

Other assistance areas include:

  • Product development
  • Testing and trials
  • Test Marketing
  • Mentoring
  • Professional Consultancy
  • IPR issues
  • Manpower for day-to-day operations

Frequently Asked Questions

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Register your business
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Register your Private Limited Company in just 1,499 + Govt. Fee

Register your business
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Register your One Person Company in just 1,499 + Govt. Fee

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

Register your business
rize image

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

Register your business

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
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How does the application process for the NIDHI Seed Support Scheme work?

The application process involves submitting a detailed proposal outlining the startup's innovative idea, project plan, budgetary requirements, and expected outcomes. Shortlisted applicants may be required to undergo further evaluation and due diligence before final selection.

Is there a limit on the number of times a startup can apply for funding under the NIDHI Seed Support Scheme?

A startup supported once will not be eligible to apply for subsequent rounds of seed support to any STEP/TBIs.

What is the post-selection process of the NIDHI-SSS?

The post-selection process in the NIDHI Seed Support Scheme typically involves several steps aimed at facilitating the disbursement of funds and providing ongoing support to the selected startups.

After the seed support is recommended to an incubated startup, the terms of agreement with the incubated startup are framed by the STEP/TB, linking the progress milestones, monitoring norms, reasonable repayment, recovery provisions in case of loan, and terms of equity liquidation in case of equity holding by STEP/TBI.

Asset Reconstruction Companies (ARCs): Business Model

Asset Reconstruction Companies (ARCs): Business Model

India’s banking sector often grapples with the challenge of rising non-performing assets (NPAs). These stressed loans lock up capital, reduce profitability, and weaken the overall financial system. To address this, Asset Reconstruction Companies (ARCs) were introduced as a mechanism to manage and recover bad loans.

ARCs essentially act as financial intermediaries. They acquire NPAs from banks and financial institutions, clean up their balance sheets, and work towards reviving the distressed assets. In doing so, ARCs reduce the burden on banks and create room for fresh credit flow into the economy.

But how do ARCs actually function? What’s their business model? And what challenges do they face in India’s evolving financial landscape? Let’s break it down.

Table of Contents

What is an Asset Reconstruction Company?

An Asset Reconstruction Company (ARC) is a specialised financial institution that buys NPAs or stressed assets from banks and other lenders. By transferring these assets to ARCs, banks can focus on fresh lending and growth, while ARCs work to recover value from distressed accounts.

The importance of ARCs lies in their ability to:

  • Clean up bank balance sheets.
  • Strengthen financial stability.
  • Contribute to economic growth by reviving stressed businesses.

In simple terms, ARCs buy bad loans from banks and try to recover as much as possible, either by reviving the business or liquidating its assets.

Background of Asset Reconstruction Companies in India

The Narasimham Committee first recommended ARCs in India in 1998, recognising the growing problem of NPAs in the banking system. This led to the enactment of the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), which provided the legal foundation for ARCs.

Key points about ARCs in India:

  • ARCs must register with the Reserve Bank of India (RBI) under Section 3 of the SARFAESI Act.
  • They primarily acquire secured NPAs from banks and financial institutions.
  • Their role includes asset reconstruction and securitisation, simplifying lender balance sheets.

The Evolution of ARCs

Over the years, ARCs have evolved as a vital solution to the rising NPAs that hamper the profitability and liquidity of banks. By purchasing and managing these stressed assets, ARCs not only reduce risk exposure for banks but also:

  • Create investment opportunities in the distressed debt market.
  • Provide a structured framework for debt recovery.
  • Support economic stability by reviving potentially viable businesses.

How Does ARC Work?

The ARC business model typically involves the following steps:

  1. Acquisition of Assets: ARCs purchase NPAs from banks, usually at a discount, either in cash or through the issuance of Security Receipts (SRs) to the banks.

  2. Management of Assets: Once acquired, ARCs restructure, reschedule, or attempt to revive the borrower’s operations.

  3. Recovery Mechanisms: Recovery can happen via settlement with borrowers, enforcing collateral, selling assets, or bringing in new investors.

  4. Return on Investment: ARCs earn returns by successfully recovering dues and distributing proceeds to banks or SR holders.

Note: ARCs must maintain a minimum Net Owned Fund (NOF) of ₹100 crore to operate legally.

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The Core of the ARC Business Model

The ARC business model is built on three core pillars:

  1. Acquisition: Buying NPAs at a discounted value from banks and financial institutions.
  2. Restructuring: Developing strategies to revive stressed businesses, including debt restructuring or converting debt into equity.
  3. Recovery: Enforcing security interests, liquidating assets, or monetising businesses to recover maximum value.

These pillars determine the sustainability and profitability of ARCs.

Process of Asset Reconstruction by ARCs

The process of asset reconstruction typically involves:

  • Management takeover of the borrower’s business.
  • Sale or lease of part or entire business.
  • Debt rescheduling to provide repayment flexibility.
  • Enforcing security by selling collateral.
  • Possession of secured assets for liquidation.
  • Conversion of debt into equity, enabling ARCs to hold a stake in the borrower company.

This multi-step process maximises recovery and ensures balance sheet clean-up for lenders.

What are the Services Provided by Asset Reconstruction Companies?

ARCs provide a wide range of services, including:

  • Acquisition and management of distressed assets.
  • Debt restructuring and settlement.
  • Recovery and asset monetisation.
  • Investor management through security receipts.
  • Advisory services for stressed asset management.

While they operate under the SARFAESI Act, 2002 and RBI guidelines, ARCs must adapt to challenges like economic downturns, legal delays, and shifting regulations. Technology adoption is also becoming critical in driving recovery efficiency and risk management.

Recent Changes in ARC Regulations by RBI

The RBI has introduced significant regulatory reforms to strengthen governance in the ARC sector. Recent updates include:

  • Stronger corporate governance with mandatory independent directors.
  • Enhanced transparency through periodic performance disclosures.
  • Revised investment norms for security receipts (SRs), encouraging higher skin-in-the-game from ARCs.

Challenges Faced by ARCs

While ARCs play a vital role, they face multiple hurdles:

  • Legal and Judicial Delays: Court proceedings and enforcement under SARFAESI or IBC can be time-consuming.
  • Regulatory Changes: Frequent shifts in RBI and government policies impact operations.
  • Capital Requirements: ARCs often struggle with limited capital for large NPA acquisitions.
  • Economic Uncertainty: Market downturns can reduce asset valuation and recovery potential.

Best Practices for Aspiring ARCs

For ARCs to thrive, the following best practices are essential:

  • Build a robust risk management framework.
  • Continuously innovate restructuring strategies.
  • Leverage technology and analytics for recovery.
  • Develop strong relationships with regulators and stakeholders.
  • Invest in training and upskilling teams.

Frequently Asked Questions (FAQs)

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Limited Liability Partnership
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  • Firms sharing resources with limited liability 

Frequently Asked Questions

What is the minimum fund for ARC?

To set up an Asset Reconstruction Company in India, the minimum Net Owned Fund (NOF) requirement is ₹300 crore (as per RBI guidelines, updated in 2022).

What is the difference between a bad bank and an asset reconstruction company?

While both focus on resolving stressed assets, they are not the same:

  • Bad Bank: A government-backed entity that consolidates bad loans from various banks. It doesn’t necessarily focus on recovery, but rather on holding and restructuring them to reduce immediate pressure on banks.
  • ARC: A specialised financial institution that buys bad loans from banks at a discount and actively works on recovering the dues through restructuring, settlements, or asset sales.

In short, bad banks act as repositories, while ARCs focus on active resolution and recovery.

Who can fund an ARC?

Funding for ARCs typically comes from:

  • Banks and financial institutions (may also hold stakes in ARCs)
  • Private equity firms and investors looking to enter the distressed assets market
  • Foreign investors, subject to RBI and FDI guidelines

Sponsors, who must hold at least 51% ownership as per regulations

What strategies do ARCs use to recover debts?

ARCs deploy multiple recovery strategies, such as:

  • Restructuring loans to make repayment more manageable for borrowers
  • Taking over the management of stressed companies to revive operations
  • One-time settlements (OTS) with borrowers at negotiated terms
  • Asset sales (selling collateral like property, land, or machinery)
  • Legal proceedings under the SARFAESI Act to enforce security interests

How does the SARFAESI Act support asset reconstruction?

The SARFAESI Act, 2002, is the backbone of ARC operations. It gives ARCs the power to:

  • Enforce security interests without going through lengthy court processes
  • Take possession of secured assets of defaulting borrowers
  • Sell, lease, or manage those assets to recover dues
  • Empower banks and ARCs to speed up the resolution of bad loans

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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