Small companies have a new definition. Will it help?

In the recent past, the Ministry of Corporate Affairs (MCA) has taken several measures towards ease of doing business by announcing various circulars and amendments in the Companies Act and relevant Rules and Regulations.

This was made to help businesses during the period of Covid stress, stimulating transparency, adopting better governance and disclosure measures, revamping compliance structures, decriminalisation of various provisions of the Companies Act & the LLP Act, 2008. It also included extending fast track mergers to startups, incentivizing incorporation of One Person Companies (OPCs) and to further promote India as the place for investment and ease of doing business by both domestic and foreign investors by enabling modernised and proficient processes.

The Government has been dedicated to taking initiatives and steps to create a more conducive business environment for law-abiding companies, including a reduction of compliance burden on such companies. Small companies exemplify the entrepreneurial ambitions and innovation proficiencies of millions of citizens and contribute to development and employment in a substantial manner. The recent amendments are in consonance with the objectives of the Government for promoting ease of doing business in India.

In line with its objectives to promote business and entrepreneurship in India, earlier, MCA had notified an amendment in the Companies (Specification of Definitions Details) Rules, 2014 that came into effect from April 01, 2021. Pursuant to the said amendment, the definition of “Small Companies” under the Companies Act, 2013 (which is defined under Section 2(85) of the Act) was updated by increasing their thresholds for paid-up share capital from “not exceeding Rs 50 lakh” to “not exceeding Rs 2 crore” and turnover from “not exceeding Rs 2 crore” to “not exceeding Rs 20 crore”.

The MCA on September 16, 2022 through a public announcement declared that it has further revised the threshold for paid-up capital of “small companies”. According to the latest amendment, the definition of ‘Small Companies’ has further been updated by increasing the thresholds for paid-up Capital from “not exceeding Rs 2 crore” to “not exceeding Rs 4 crore”. Furthermore, the turnover has been revised from “not exceeding Rs 20 crore” to “not exceeding Rs 40 crore”. This latest alteration in the definition of small Companies will further facilitate ease of doing business and reduce the compliance burden on small companies.

Small businesses are companies, partnerships, or sole proprietorships which have fewer employees and/or less annual revenue than a regular-sized business or corporation. The Act defines the rules and provisions regarding a Small Company. Such Companies enjoy various advantages over other companies in terms of compliance requirements.

Few benefits which a Small Company enjoys are as follows:

  • For instance, a small company is required to hold only two board meetings in one fiscal year, unlike other companies which are required to hold four such meetings in the same period.
  • Such companies are not required to maintain their cash flow statement as part of their financial statement, unlike other Companies.
  • These Companies have the advantage of preparing and filing an Abridged Annual Return i.e. (Form MGT-7A).
  • The requirement of mandatory rotation of statutory auditors is not applicable for small companies.
  • The requirement to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report by an auditor of a small company is not mandatory.
  • Annual Returns of the small company could simply be signed by a company secretary, in case the Company has one, or by a single director.
  • Small companies are ascribed to lesser penalties under Section 446B of the Act.

Therefore, the recent amendment by the MCA in the definition of a small company is expected to benefit lakhs of companies in terms of fewer compliances, reduced filing fees, and reduced penalties (in the event of any defaults). Such initiatives and steps of the Government towards enhancing the ease of doing business in India will not only motivate the new generation entrepreneurs and startups domestically, but is also opening the doors for FDI in India.

(Daizy Chawla, Senior Partner, S&A Law Offices, and Jatin Kapoor, Principal Associate, S&A Law Offices)

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