The Companies Act of 2013 in India introduced the concept of “small companies,” aiming to reduce the compliance burden and offer various benefits to support their growth. This article aims to break down the features, advantages, and exemptions available to small companies under the Companies Act 2013.
Page Contents
- Small Company as per Companies Act 2013
- The reason behind introduction of Small Company
- Definition of a small company as per Companies Act 2013
- Breaking down the definition of Small Company as per Companies Act 2013
- Features of a small company as per Companies Act 2013
- Benefits of a small company as per Companies Act 2013
Small Company as per Companies Act 2013
The concept of small companies in India is relatively new. It was introduced by the Companies Act 2013 to support better facilitation of small businesses. A small company is nothing but a new form of a private company registered under the Companies Act 2013. A private company is classified into a small company based on its size, i.e., paid-up share capital and turnover. In other words, such companies may be called small-sized private companies.
The intent of distinguishing small companies from the rest is to give them a special status and to grant them certain benefits under the law. This blog is an attempt to consolidate the relaxations provided to a small company as per the Companies Act 2013.
The reason behind introduction of Small Company
Upon the recommendations received from an expert committee of Dr. JJ Irani, a renowned Indian industrialist, the concept of small companies was incepted in the Companies Act, 2013.
It was felt that a simplified framework should be applied to small companies through the aid of giving exemptions under company law. There is no reason why small businesses should suffer the repercussions of legislation designed to ensure that big, widely owned corporations balance the interests of their stakeholders. By relieving such companies from selected statutory internal/administrative procedures, company law should allow streamlined decision-making procedures.
The need was felt for such businesses to be subject to reduced financial reporting and audit standards and to streamlined capital maintenance schemes. In essence, small companies should have a regime that enables them to achieve transparency at a low cost.
Definition of a small company as per Companies Act 2013
A small company is a new concept introduced under Section 2(85) of the Companies Act, 2013 to provide some relaxations and privileges with lesser compliance burden on the entities that are smaller in size and operations.
A ‘small company’ is defined as a company, other than a public company whose paid-up share capital does not exceed Rs. 2 crores or such higher prescribed amount which shall not be more than Rs. 10 crores, and whose turnover of the preceding financial year does not exceed Rs. 20 crores or such higher prescribed amount which shall not be more than Rs. 100 crores.
(Amended vide Companies (Specification of Definitions Details) Amendment Rules, 2021 to be effective from 1st April 2021)
Breaking down the definition of Small Company as per Companies Act 2013
A small company is a private limited company that satisfies both the following conditions:
1. Paid-up share capital does not exceed Rs. 2 crores or such higher prescribed amount which shall not be more than Rs. 10 crores, and
2. Turnover of the preceding financial year does not exceed Rs. 20 crores or such higher prescribed amount which shall not be more than Rs. 100 crores.
Exceptions:
The above definition of a small company is not applicable to the following (i.e., a small company cannot be the below ones):
- A public company
- A holding company or a subsidiary company
- A company registered under Section 8
- A company or body corporate that is governed by any Special Act
Thus, even though the above-mentioned companies satisfy the capital and turnover requirements, they would nevertheless fall beyond the purview of ‘small company’ and, consequently, the advantages applicable to a small company cannot be extended to them.
Features of a small company as per Companies Act 2013
- A small company can only be a private company.
- It cannot be a public company, holding company, subsidiary company, a charitable company registered under Section 8, or a company governed by any Special Act.
- Small companies are subject to lesser penalties for non-compliance with any of the provisions of the Companies Act.
- It is worth noting that the status of a small company may change from year to year depending upon the range of paid-up share capital and turnover. This means that if a company crosses any of the thresholds provided (either for paid-up capital or turnover), the benefits that are available during a given year may be removed in the following year and may be made available again in the subsequent year (or years).
Benefits of a small company as per Companies Act 2013
Some privileges and exemptions are offered by law to companies holding the status of a ‘small company’. They enjoy various relaxations or advantages over other companies, some of which are as follows:
| Section | Nature of privilege granted |
| Proviso to Section 2(40) | Cash flow statement: The financial statements of a small company need not include a cash flow statement. |
| Section 67(2) | Financial assistance for buy-back: Financial assistance (by way of loan, guarantee, etc.) can be given for the purchase of own shares in the company or in its holding company. |
| Section 92(1) | The signing of annual return: The annual return of a small company needs to be signed by the company secretary, or where there is no company secretary, by the company’s director. However, it need not be signed by a company secretary in practice. |
| Section 121(1) | Report on AGM: A small company is not required to prepare a report on Annual General Meeting. |
| Section 134(3)(p) | Statement showing performance of BOD: A small company is not needed to prepare a statement showing the manner in which formal annual evaluation of the performance of the Board, its Committees, and individual directors has been made. |
| Section 149(1) | The number of directors: A small company need not have more than 2 directors on its Board. |
| Section 149(4) | Independent directors: A small company is not required to appoint independent directors on its Board. |
| Section 152(6) | Rotation of directors: Unlike a public company, a specified proportion of directors are not needed to retire every year in a small company. |
| Section 164(3) | Disqualification of director: A small company, may by its Articles, provide for any additional grounds for disqualification for appointment as a director of the company. |
| Section 165(1) | The number of directorships: The restrictive provisions concerning the total number of directorships that an individual can hold in a public company (maximum 10) do not include directorships held in small companies that are neither a holding company nor a subsidiary company of a public company. |
| Section 167(4) | Vacation of office of director: A small company, may by its Articles, provide for any additional grounds for vacation of the office of a director of the company. |
| Section 173(5) | The number of board meetings: Unlike other companies that need to hold four Board Meetings in a calendar year, a small company is needed to hold at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two Board meetings must not be less than ninety days. |
| Section 190(4) | Contract of employment: The provisions relating to the contract of employment with managing directors or whole-time directors are not applicable to a Small Company. |
| Section 197(1) | Managerial remuneration: Unlike a public company, the total managerial remuneration payable by a small company, to its directors, including managing director and whole-time director, and its manager in respect of any particular financial year may exceed eleven percent of the net profits. |
| CARO, 2020 | CARO: The reporting requirements laid down under the Companies (Auditor’s Report) Order, 2020 for matters to be included in an auditor’s report do not apply to a small company. |
| Rule 8A of Companies (Accounts) Rules, 2014 | Matters in Board’s report: For the purpose of compliance with Section 134(3), the Board’s report of a small company shall be prepared in an abridged form as prescribed by the Central Government. Small companies are exempted from the matters to be included in the Board’s report as per Rule 8 of Companies (Accounts) Rules, 2014. |
| Section 143(3) | Auditor’s report: The auditor’s report in the case of a small company is not required to indicate whether there are adequate internal financial controls in place (with reference to financial statements) and the operating effectiveness of such controls. |
| Section 139(2) | Rotation of auditors: Every company needs to mandatorily change its auditor by rotation in pursuance of Section 139(2) of the Companies Act 2013. However, a small company need not comply with this section and hence is exempt from meeting the requirements of this section. |
| Section 446B | Lesser penalties: If a penalty is payable by a small company for non-compliance with any of the provisions of the Companies Act, then such company and its officer in default shall be liable to a penalty not more than one-half of the penalty specified in such provisions. But this is subject to a maximum of Rs. 2 lakh in the case of a company and Rs. 1 lakh in the case of an officer who is in default. |
Conclusion
The introduction of “small companies” in the Companies Act 2013 has provided a much-needed impetus to small businesses in India. With a slew of benefits like reduced compliance requirements and simplified governance structures, small companies can now focus more on their operations and growth rather than being entangled in bureaucratic procedures. While the Companies Act doesn’t differentiate a small company by a specific name, its status under the Act bestows several benefits that can be quite lucrative for emerging businesses.
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