Companies Act Section 193

Companies Act, Section 193: Regulation of Contracts by a One Person Company (OPC) with its Sole Member-Director

1. Introduction

Section 193 of the Companies Act, 2013, pertains specifically to One Person Companies (OPCs), a unique form of company introduced to facilitate individual entrepreneurship under a corporate structure. Unlike traditional companies that require multiple members and directors, an OPC may be formed by a single individual, who serves as both the sole member (shareholder) and the sole director. While this structure enhances simplicity and autonomy, it also raises concerns about potential conflicts of interest and the lack of transparency in decision-making.

To address these concerns, Section 193 establishes a legal framework that governs how OPCs must document and report contracts made with the sole member-director, especially when such contracts are not documented in writing. The objective is to maintain a minimum standard of corporate governance, even in a single-member environment, and to ensure that such transactions are traceable, fair, and accountable.

2. Applicability of Section 193

This section applies specifically to companies that are classified as:

One Person Companies (OPCs), and
Are either limited by shares or limited by guarantee, and
Have a sole member, who is also acting as the director of the company.
These provisions become relevant when the OPC enters into contracts or business arrangements with this sole individual in their capacity as director and member.

3. Requirement to Record Non-Written Contracts

Section 193(1): Duty to Document Contracts

When a One Person Company (OPC) enters into any contract or business agreement with its sole member who is also its director, and if such contract is not executed in writing, the company is obligated to take either of the following actions:

Prepare a written memorandum containing the full terms and conditions of the contract; or
Record the contract in the minutes of the Board of Directors meeting, specifically during the first Board meeting held after such contract has been entered into.
This provision ensures that even oral or informal agreements where there may be no independent oversight or witnesses are formally recorded in company documents, and hence can be verified by regulators, auditors, or other stakeholders if needed.

Key Considerations:

Transparency: This documentation ensures that the nature of the transaction, its terms, and the rationale are traceable, reducing the risk of hidden or unfair dealings.
Timeliness: The requirement that the contract must be recorded at the next Board meeting emphasizes the importance of prompt internal documentation.
4. Exception for Ordinary Business Transactions

The law recognizes that not all transactions between an OPC and its sole member-director require formal documentation. Therefore, Section 193(1) includes a proviso which provides that:

Nothing in this sub-section shall apply to contracts entered into by the company in the ordinary course of its business.

This means that if the OPC is entering into routine, day-to-day business contracts such as procurement of office supplies, payment of recurring service charges, or regular professional engagements these do not need to be documented through board minutes or memoranda.

This exception avoids unnecessary administrative burden while maintaining focus on contracts that are unusual, significant, or outside the regular course of business.

5. Reporting Requirements to the Registrar of Companies (RoC)

Section 193(2): Duty to Inform the RoC

In addition to internal documentation, OPCs are also required to report certain contracts to the government regulator. Specifically, if the contract was not in writing and was instead recorded in the Board minutes as per Section 193(1), the OPC must:

Notify the Registrar of Companies (RoC) of such a contract;
Within a period of 15 days from the date on which the Board of Directors approved or recorded the contract.
This provision introduces an additional layer of external oversight and legal compliance. It ensures that critical transactions between the OPC and its sole member-director are brought to the attention of the regulatory authorities, even in the absence of multiple shareholders or directors.