Connect with us 
Setting up a company in India starts with one foundational legal provision — Section 3 of the Companies Act, 2013. Whether you are an Indian entrepreneur, an NRI, or an overseas investor exploring company formation in India, understanding Section 3 is the first step toward a smooth and legally compliant incorporation process.
At Mercurius, we regularly guide founders and businesses from across the globe through India’s company registration process, and Section 3 is where every such journey legally begins. Here are the top 7 things you must know about company formation in India as laid down under Section 3 of the Companies Act, 2013.
Table of Contents
- 1. A Company Can Be Formed Only for a Lawful Purpose
- 2. Public Company in India: Minimum 7 Members Required
- 3. Private Limited Company in India: Minimum 2 Members Required
- 4. One Person Company (OPC) in India: A Single Founder Can Incorporate a Company
- 5. Choose the Right Liability Structure Before Registration
- What Happens If Membership Falls Below the Minimum
- Why Section 3 Matters for Global Founders
- Frequently Asked Questions
- How Mercurius Can Help
1. A Company Can Be Formed Only for a Lawful Purpose
Section 3 clearly states that a company, can be formed for any lawful purpose. This means the business activity must be legal under Indian law.
For example, a company can be formed for trading, consultancy, manufacturing, IT services, export-import, accounting services, etc., but not for illegal activities.
This is the very foundation of company formation in India — the object and business activity of the proposed company must be legally permissible. If you are planning company registration in India from abroad, ensure your intended business activity does not fall foul of Indian law, sector-specific regulations, or FDI norms.
2. Public Company in India: Minimum 7 Members Required
As per Section 3(1)(a), when seven or more persons come together, subscribe their names to a memorandum, and comply with the registration requirements of the Act, they can form a public company. There is no upper limit on the number of members a public company can have, making it a suitable structure for businesses planning to raise capital from the public or list on stock exchanges.
3. Private Limited Company in India: Minimum 2 Members Required
Section 3(1)(b) provides that a private company can be formed with two or more persons subscribing their names to a memorandum and fulfilling the Act’s registration requirements. This is the most common and preferred structure for startups, family businesses, and foreign investors setting up a subsidiary in India, largely due to its limited liability protection and comparatively simpler compliance framework.
4. One Person Company (OPC) in India: A Single Founder Can Incorporate a Company
One of the most significant contributions of Section 3(1)(c) is the introduction of the One Person Company (OPC) — a private company that can be incorporated by just one individual. The sole subscriber signs the memorandum and complies with the registration requirements, allowing solo entrepreneurs to enjoy corporate status and limited liability without needing a co-founder or partner.
Every OPC in India Must Nominate a Successor Member
Section 3 mandates that the memorandum of a One Person Company must also mention the name of another person who, in the event of the subscriber’s death or incapacity to contract, will become the member of the company. This nominee’s prior written consent is compulsory and must be filed with the Registrar of Companies at the time of incorporation, ensuring business continuity even if the sole owner is unable to continue.
Nominee Consent in India Can Be Withdrawn or Changed
Section 3 also allows flexibility: the nominated person may withdraw their consent, and the member of the OPC can change the nominee at any time by giving the prescribed notice. Any such change must be intimated to the company and subsequently filed with the Registrar, keeping the company’s records accurate and legally up to date.
Eligibility is restricted: under Rule 3 of the Companies (Incorporation) Rules, 2014 (as amended by the Companies (Incorporation) Second Amendment Rules, 2021, effective 1 April 2021), only a natural person who is an Indian citizen — resident in India or otherwise — can incorporate or act as nominee of an OPC. NRIs became eligible under this 2021 amendment, provided they meet the residency test where applicable (120 days in the preceding financial year, reduced from the earlier 182-day requirement).
Foreign nationals who are not Indian citizens cannot use the OPC route and should instead consider a wholly owned subsidiary, joint venture, or branch/liaison office structure.
5. Choose the Right Liability Structure Before Registration
Under Section 3(2), a company formed under this section may be incorporated as a’:
- company limited by shares,
- a company limited by guarantee,
- or an unlimited company.
This choice determines the extent of liability of the members and should be finalised carefully, as it directly affects investor confidence, funding options, and the risk exposure of the founders and shareholders.
What Happens If Membership Falls Below the Minimum
Section 3A of the Companies Act, 2013 puts real weight behind these minimums. If a public company’s membership drops below seven, or a private company’s drops below two, and the company continues doing business for more than six months in that condition, every member who is aware of the shortfall during that period becomes personally and severally liable for the company’s debts contracted while the shortfall continued. Staying above the Section 3 minimums is not just a formality — it is a liability safeguard for every member on the register.
Why Section 3 Matters for Global Founders
For entrepreneurs and businesses outside India, Section 3 answers the two most fundamental questions before incorporation: who can form a company, and what form should it take. Getting this right at the outset — choosing between a private company, public company, or OPC, and finalising the liability structure — saves significant time, cost, and compliance effort down the line.
Frequently Asked Questions
1. Can a foreign national (non-Indian citizen) incorporate a One Person Company in India?
No. Under Rule 3 of the Companies (Incorporation) Rules, 2014, only Indian citizens are eligible to be the sole member or nominee of an OPC. Foreign nationals typically enter India through a private limited company (wholly owned subsidiary), joint venture, or branch/liaison office instead.
2. Can a foreign national incorporate a private limited company in India?
Yes. Unlike an OPC, a private limited company has no citizenship restriction on its members. Foreign nationals and foreign companies can be shareholders and hold up to 100% of the shares in most sectors under the FDI automatic route, subject to sectoral caps and government-route conditions under the Consolidated FDI Policy (DPIIT).
3. Can an NRI incorporate an OPC in India?
Yes. Since the Companies (Incorporation) Second Amendment Rules, 2021, Indian citizens can incorporate an OPC “whether resident in India or otherwise,” which extends eligibility to NRIs.
4. What is the minimum number of members needed to keep a private or public company legally compliant?
Two for a private company and seven for a public company, at all times. Falling below this for more than six months while continuing business exposes aware members to personal liability under Section 3A.
5. Does Section 3 also set the minimum number of directors?
No. Section 3 governs members/subscribers. Director requirements are set separately under Section 149 of the Companies Act, 2013.
How Mercurius Can Help
Choosing the right company structure is the first step toward building a legally compliant business in India. At Mercurius, we help Indian entrepreneurs, NRIs, and foreign investors understand the requirements under Section 3 of the Companies Act, 2013 and select the most suitable structure — whether it is a Private Limited Company, Public Company, OPC, or another business form.
Our team provides end-to-end support for company formation in India, including structure selection, name approval, drafting of MOA and AOA, nominee documentation for OPCs, DSC and DIN assistance, ROC filing, MCA registration, and post-incorporation compliance.
With 17+ years of experience, a team of 400+ professionals, and clients across 60+ countries, Mercurius makes company registration in India simple, compliant, and hassle-free.
Planning to start a company in India?
Connect with Mercurius today for expert-led company formation support.
