In India, small company is a company which fulfills certain specified pre-requisites i.e. threshold limits prescribed under the Companies Act, 2013 ( the “Act”). These companies enjoy certain benefits for being small companies e.g. lesser legal compliances, cost-efficient and less time consuming compliance, and to ensure that small businesses do not suffer from stringent regulations originally designed to govern the balance of various stakeholders in large entities. Sub-section 85 of Section 2 of the Companies Act, 2013 provides the threshold limit for small companies which has been increased by The Ministry of Corporate Affairs (MCA) by Companies (Specification of definition details) Amendment Rules, 2022 notification dated September 15, 2022
Accordingly, the pre-requisites for being a small company are-
- The Company should be a company other than a public company i.e. private company can obtain the status of small company;
- Company’s paid-up share capital shall not exceed Rs. 4 crores (previously Rs. 2 crores); and
- Company’s turnover shall not exceed Rs. 40 crores (previously Rs. 20 crore)
The government has power to further increase these threshold limits. Important point to note here is that to become eligible, companies are required to fulfill both requirements at the same time viz. ABC Private Limited has paid-up share capital of Rs. 2.5 crores and its turnover for immediately previous FY is Rs. 30 crore then it is a small company however, if either paid-up share capital or the turnover of ABC Private Limited crosses the prescribed limit it shall lose the status of small company e.g. if ABC Private Limited’s paid-up share capital remains intact i.e. Rs. 2.5 crores but its turnover increases to Rs. 41 crores it shall not be a small company.
Now the proviso to this sub-section also provides certain exceptions i.e. the company which can not be a small companies and those types of companies are
- a public company (as section provides that the company shall be a company other than public company);
- a holding company;
- a subsidiary company;
- a company registered under Section 8 of the Act e.g. NGOs;
- a company or body corporate governed by any special Act e.g. insurance companies because they are governed by the Insurance Act, 1938
What is the objective of forming a separate class of companies like small companies?
The Government claims to be working on making it easier for businesses to operate in India. The ruling party had the agenda of improving business conditions and fixing legal environment in India to host a business friendly environment for both domestic as well as international entrepreneurs. In the year 2018, as per the report of World Bank, India was standing on 77th rank out 193 countries for ease of doing business and current forecast says that this rank shall further improve and India is most likely to grab the 63rd rank in this list.
By forming a separate class of companies government identifies the companies which do not need stringent regulations to govern them because they are small or medium, primarily family owned business having mostly personal investment of directors and shareholders which do not involve public interest as compared to public companies and other large entitles wherein greater public interest is involved. Mostly, government intervenes when public interest is involved. Since extent of public interest in these companies is rather limited they are expected to be as self-compliant entities with less stringent requirements.
Now that the threshold limit has been increased a larger number of companies shall fall under the purview of small companies. It will be easier for these companies to fulfill their legal compliance as compliance shall become more cost-effective, less stringent and less-time consuming for them.
The flip side of the coin
On one side this amendment is a good step taken by the government as compliance for many companies shall be easier, on the other hand, this amendment is not a very good news for professionals like CA and CS as it will reduce their area of work e.g. annual return of companies other than small companies require certification of professionals that compliance of various provision of the Act has been made. Now, a larger number of companies shall fall under the purview of small companies, number of companies requiring certification of professionals shall plunge thereby reducing area of work for professionals.
Final thoughts
On one side the government is trying to improve ease of doing business by reducing legal compliances for a greater number of companies at the very same time scope of work for professionals is shrinking. Amendments and changes should be made keeping in mind the interests of all stakeholders and not a particular section.
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