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“Small Companies” Under Companies Act, 2013

December 17, 2019

Introduction:

Small Companies are basically the companies with limited amount of investment and having the privilege of special status under the Companies Act, 2013.

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 and / or exemptions to these companies. Most of the exemptions provided to a small company are same as that provided to a One Person Company (OPC).

Definition:

Section 2(85) of the Companies Act, 2013 defines a Small Company as – ‘‘small company’’ means a company, other than a public company, —

  1. 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 ten crore rupees; and
  2. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this Section shall apply to—

  1. a holding company or a subsidiary company;
  2. a company registered under Section 8; or
  3. a company or body corporate governed by any special Act

Meaning of Small Company as per definition of Companies Act, 2013:

A Company to be a small company (other than a public company) must satisfy both the following conditions:

  1. paid-up share capital does not exceed fifty lakh rupees and
  2. turnover as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees

Thus, both the criteria specified in the definition must be fulfilled for a company to fall into the category of small company. However, these limits may be raised but not exceeding rupees ten crores in case of paid up capital and rupees one hundred crore in case of turnover.

Further, the following companies do not fall under the purview of small company and the exemptions or reliefs to small companies are not available to them:

  1. Public company
  2. Holding company or a subsidiary company
  3. A company registered under section 8 of Companies Act, 2013 or
  4. A company or body corporate governed by any special Act;

Thus, the above companies even if they meet the criteria of capital and turnover, 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 them.

Salient Features of Small Company:

  • 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.
  • 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.
  • With gradual growth of business, if a company cross any of the thresholds provided, either for paid-up capital or turnover, the company must give up the status of the small company and the benefits granted for such companies.
  • Earlier, for qualifying as a small company, it was enough if any one of the criteria was met i.e; either the capital is less than Rs. 50 lakhs or turnover is less than Rs. 2 crores. Later the word “or” in sub-clause (i) of Section 2(85) was substituted by word “and” by Companies (Removal of difficulties) order dated 13.02.2015.

Special Provisions and Exemptions available to a Small Company:

The motive behind defining a “small company” under Companies Act, 2013 is to provide benefits by way of certain privileges and / or exemptions to such companies by considering its small size and to ensure it does not suffer with the consequences of non-compliances with the stringent provisions of the Act which are designed to regulate the large-scale companies. Instead of focusing on numerous compliance terms, such company would rather focus on growing its business.

As mentioned before, the privileges/exemptions available to a small company are same as that available to a one-person company (OPC), but not all the privileges available to OPC are available to a small company.

The privileges and /or exemptions available to small company are:

  • Signing of Annual Return:

-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.

  • Board Meetings:

A small company may hold only two board meetings in a year instead of fulfilling the requirement of four meetings in a year like other companies, i.e. A small company may hold one Board Meeting in each half of the calendar year with a minimum gap of ninety days between the two meetings.

  • Financial Statement:

Financial statement as defined under section 2(40) of Companies Act 2013, includes cash flow statement for the financial year. However, this section specifically excludes requirement of cash flow statements for small companies, One Person Company and Dormant Company. Thus, a small company need not include Cash Flow Statement as a part of its financial statements.

  • Rotation of Auditor:

Provisions 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 as per section 139(2) of the Companies Act, 2013.

  • Matters to be included in Board’s Report:

Small companies are exempted from the matters to be included in the Board’s report as per Rule 8 of Companies (Accounts) Rules, 2014. Instead the Board’s report of One Person Company (OPC) shall include the matter stated in Rule 8A of Companies (Accounts) Rules, 2014.

  • Internal Financial Controls:

A small company is not required to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.

  • Lesser penalties for Small Companies under Section 446B of the Companies Act, 2013:

If a small company fails to comply with the provisions of section 92(5), section 117(2) or section 137(3), such company and officer in default of such company shall be liable to a penalty which shall not be more than one half of the penalty specified in such sections.

  • Fast Track Merger of Small Companies:

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.

  • Professional Certification for e-forms to be filed with MCA:

As per Rule 8 (12) of Companies (The Registration offices and fees) Rules, 2014 the e-forms filed by small companies are not required to be pre-certified by the Chartered Accountant or the Company Secretary or as the case may be the Cost Accountant, in whole-time practice.

Small companies are the backbone of any economy and the procedure for managing a small business must be made simple to boost employment and the economy. The stringent provisions of Companies Act, 2013 are mainly designed for large organizations for better management and administration. Compliance of each provision would be impractical for such small businesses and therefore they are exempted.

Conclusion:

A small company is not specifically registered as a Small Company. A company falling under the limits of capital and turnover as prescribed will automatically be covered under the category of “small company” and can avail the exemptions and privileges it is entitled to.

Therefore, a private limited company may be called a small company immediately after its incorporation, subject to conditions provided above. The promoters and directors are generally unaware of the eligibility status of Small Company and the benefits being given to them. Hence, it is necessary for them to be aware of such provisions to claim the beneficial position.

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 if the criteria are met.

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