Introduction:
The concept of “Small Company” has been introduced for the first time by the Companies Act, 2013. The Act identifies some companies as small companies based on their capital and turnover for the purpose of providing certain relief/exemptions to these companies. Most of the exemptions provided to a small company are same as that provided to a One Person Company.
Definition: (Not notified)
Section 2(85) defines a Small Company as –
‘‘small company’’ means a company, other than a public company,—
- paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or
- turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:
Provided that nothing in this Section shall apply to—
- a holding company or a subsidiary company;
- a company registered under Section 8; or
- a company or body corporate governed by any special Act
Salient Features:
- Only a private company can be classified as a small company.
- Holding company, subsidiary company, charitable company and company governed by any Special Act cannot be classified as a small company.
- For a small company, either the paid up capital should not exceed Rs. 50 lakhs or the turnover as per latest statement of profit & loss should not exceed Rs. 2 crores.
- The status of a company as “Small Company” may change from year to year. Thus the benefits which are available during a particular year may stand withdrawn in the next year and become available again in the subsequent year.
For qualifying as a small company, it is enough if either the capital is less than Rs. 50 lakhs or turnover is less than Rs. 20 crores. It is sufficient if either one of the requirement is met without meeting the other requirement. However, these limits may be raised but not exceeding Rs. 5 crores in case of capital and Rs. 20 crores in case of turnover.
Special Provisions and Exemptions available to a Small Company:
As mentioned before, the privileges/exemptions available to a small company are same as that available to a one person company, but not all privileges available to a one person company are available to a small company.
- The annual return of a Small Company can be signed by the company secretary alone, or where there is no company secretary, by a single director of the company.
- A small company may hold only two board meetings in a year, i.e. one Board Meeting in each half of the calendar year with a minimum gap of ninety days between the two meetings.
- A small company need not include Cash Flow Statement as a part of its financial statements.
- Provision regarding mandatory rotation of auditor/maximum term of auditor being 5 years in case of an individual and 10 years in case of a firm of auditors is not applicable to a small company.
- Merger process between 2 or more small companies is to be approved on fast track basis. Such merger would require approval of ROC, Official liquidator, members holding at least 90% of total number of shares and majority of creditors representing 9/10th in value the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of twenty-one days along with the scheme to its creditors for the purpose, or otherwise approved in writing.
Further, as per the definition of a small company, holding and subsidiary companies are specifically excluded from the concept of small company. Thus even though both the holding company and subsidiary company may fulfill the capital or turnover requirement of a small company, they will still fall outside the purview of small company and accordingly the benefits which are available to a small company cannot be applied to a company which is holding or subsidiary company.
In other words, a holding or a subsidiary company can never enjoy the privileges of a small company even though they may fulfill the capital or turnover requirement of a small company.
Similarly, a company may classify as a small company in a particular year but may become ineligible in the next year and may become eligible again in the subsequent year.
Section 129(3) (Financial statement) mandates that a company which has one or more subsidiary companies must prepare consolidated financial statements in addition to standalone statement. However, companies which have subsidiary companies, i.e. holding companies are outside the purview of small companies. It appears from the above that the requirement of consolidation of financial statements will not arise for small companies. But, explanation provided under sub-Section 3 of Section 129 contains that for the purpose of consolidation, the word “subsidiary” shall include associate company and joint venture. Thus, a small company which has any associate company or joint venture will still be required to prepare consolidated financial statements. This meaning of “subsidiary” is only for the limited purpose of Section 129(3) and not for the purpose of determining whether a company is a small company or not.
Conclusion:
A company falling under the limits of capital or turnover as prescribed will automatically be covered under the category of “small company” and can avail the exemptions and privileges it is entitled to. However, the status of a company as “Small Company” may change from year to year. Thus the benefits which are available during a particular year may stand withdrawn in the next year and become available again in the subsequent year.
Note: The provisions relating to small companies shall come into force as and when the Companies Act, 2013 and the Rules thereof are notified.
Disclaimer: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.