Expanding ‘Small Company’ Scope under Section 2(85): Analysis of Stakeholder Representations on Corporate Laws (Amendment) Bill, 2026
Short Summary
Clause 18 of the Corporate Laws (Amendment) Bill, 2026proposes a major expansion of Section 2(85) of the Companies Act, 2013, elevating the statutory capping threshold for a “Small Company” to ₹20 crore in Paid-Up Share Capital and ₹200 crore in Turnover.
The MCA Notification dated 1st December 2025 (which raised the limits to ₹10 crore and ₹100 crore respectively), this legislative move aims to reduce compliance friction for Indian enterprise.
However, a detailed summary of representations submitted by professional bodies, industry stakeholders, and corporate law practitioners indicates that expanding monetary caps alone is insufficient. Stakeholders have identified fundamental operational gaps—ranging from the rigid exclusion of non-profit entities and genuine subsidiaries to potential anti-avoidance loopholes in horizontal group structures and risk vectors in share dematerialisation.
This article summarises the various feedback of the stakeholder submitted on Section 2(85) and related corporate provisions, evaluating how these proposals balance Ease of Doing Business (EoDB) with regulatory oversight.
Master Overview of Stakeholder Representations
| Regulatory Theme |
Present Law / Bill Framework | Stakeholder Representation / Recommendation |
Core Rationale & Policy Impact |
| Section 8 Companies | Excluded under Proviso (b) to Section 2(85) |
Delete Proviso (b); extend relief to eligible Section 8 entities |
Non-profits spend disproportionate funds on commercial compliance rather than charitable objects. |
| Subsidiary Companies | Excluded under Proviso (a) to Section 2(85) |
Omit “or subsidiary company”; assess eligibility strictly on size | Standalone SPVs, startups, and MSMEs backed by holding companies are denied EoDB benefits unfairly. |
| Security Dematerialisation | Small companies exempted under Rule 9B(1) | Delete “other than a small company” from Rule 9B(1) | Prevents off-market share manipulation, tax evasion, circular trading, and physical title disputes. |
| Financial Threshold Caps | Proposed at ₹20 Cr Capital / ₹200 Cr Turnover | Enhance to ₹50 Cr Capital / >₹350 Cr Turnover or index dynamically | Prevents statutory obsolescence as Indian business scale expands rapidly. |
| Anti-Avoidance Check | Excludes vertical holding-subsidiary structures only | Insert Proviso Sub- clause (D) cross- referencing Section 90 (SBO) | Prevents promoters from horizontally fragmenting businesses into multiple small shell units. |
| Systemic Delivery MCA21 | Relief requires individual claims or static filings
|
Grant automatic system-driven relief directly from MCA21 e-filings | Eliminates administrative delays and pre-fills forms automatically. |
1. Re-evaluating Exclusions: Section 8 Non-Profit Entities
The Representation
Stakeholders have urged the removal of clause (b) of the proviso to Section 2(85), which excludes companies registered under Section 8 from qualifying as small companies, irrespective of their financial size.
Draft Proposed Proviso:
“Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company; or
(B) a company or body corporate governed by any special Act.”
Context & Justification
Section 8 companies are prohibited from distributing dividends to members and must apply their profits solely to charitable, educational, or social welfare objects. A significant number of such entities operate localized schools, trust-like structures, or social enterprises, many of which are registered under Sections 12AB and 80G of the Income Tax Act, 1961.
Imposing full commercial compliance—including complex cash flow disclosures, secretarial standards, and strict board meeting frequencies—diverts scarce non-profit funds away from charitable delivery. Extending small company benefits to qualifying Section 8 entities aligns corporate law with income tax rationalization.
2. Rationalizing Standalone Subsidiaries, MSMEs, and SPVs
The Representation
Stakeholders argue that the blanket exclusion of subsidiary companies under Proviso (a) to Section 2(85) is overly rigid. They propose deleting the words “or subsidiary company”, making unlisted subsidiaries independently meeting the financial thresholds eligible for small company status.
Draft Revised Section 2(85):
“Small Company” means a company, other than a public company,—
(i) 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
(ii) 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 clause shall apply to—
(A) a holding company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
Context & Justification
Small company benefits should be granted based on operational scale and size, not corporate ownership architecture.
- Many genuine MSMEs, Special Purpose Vehicles (SPVs), and tech startups operate as wholly-owned subsidiaries of holding companies or foreign entities.
- The parent entity’s exposure is already monitored via Consolidated Financial Statements (CFS) under Section 129(3) and Related Party Disclosures under Section 188.
- Denying simplified compliance to an independently small subsidiary creates unnecessary administrative drag without delivering additional investor
3. The Regulatory Trade-Off: Universal Dematerialisation under Rule 9B The Representation
While broadening the definition of a small company eases regulatory friction, stakeholders caution against a major oversight: excluding small companies from mandatory security dematerialisation under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014. It is strongly represented that the words “other than a small company” be deleted from Rule 9B(1), making demat mandatory across all unlisted corporate structures, coupled with an online confirmation filing on MCA21.
Regulatory Risk Matrix: Physical vs. Demat Holdings
1. Lack of Price & Transfer Transparency: Off-market physical share transfers in unlisted entities occur privately without standardized valuation, facilitating opaque ownership changes.
2. Tax Evasion & Circular Trading: In the absence of depository tracking, promoters can engage in circular transactions (e.g., transferring shares to a friendly party at ₹20 and repurchasing at ₹10) to create artificial tax losses.
3. Inadequate Shareholder Safeguards: Physical share certificates remain susceptible to loss, forgery, and title disputes. Depository integration ensures a centralized electronic audit trail monitored by SEBI and MCA.
4. Threshold Calibration: Growth-Linked Indexation & Categorisation
A. Expanding Caps Beyond ₹200 Crore
The 2026 Bill proposes capping permissible limits at ₹20 crore capital and ₹200 crore turnover. However, representations highlight that given India’s compounding GDP growth, a turnover ceiling of >₹350 crore and capital cap of ₹50 crore would better future-proof corporate growth over the next decade.
B. Dynamic Periodic Indexation
To avoid legislative lag (noting that recommendations from the 2022 Company Law Committee Report took years to materialize), stakeholders advocate empowering the Central Government to adjust thresholds periodically via notification, linked to inflation and economic growth indices, avoiding the need for frequent statutory amendments.
C. Listing Status as Primary Classification Benchmark
Over 97% of Indian businesses operate as unorganized firms or partnerships, with only 3% registered as companies. High compliance costs deter firm-to-company conversion. Stakeholders argue that regulatory oversight should be primarily benchmarked against Listing Status and Public Debt Exposure rather than purely internal operational metrics.
D. The Counter-Perspective: Over-Exemption & Employee Count
A notable counter-representation cautions against excessive threshold increases. Referencing the J.J. Irani Committee Report (2005), which introduced the small company concept based on UK law, experts note that the Indian definition lacks an employee headcount criterion. Raising thresholds too high without employee qualifiers risks exempting larger commercial entities from audit requirements, Internal Financial Control (IFC) reporting, and CARO disclosures.
5. Plugging the Horizontal Loophole: Section 90 SBO Integration
The Representation
While the proviso to Section 2(85) excludes vertical holding-subsidiary structures from small company status, it leaves a loophole for horizontal group structures. An individual or promoter group can artificially split business operations across multiple parallel standalone entities to keep each below the statutory limits.
Proposed Statutory Amendment
Stakeholders propose inserting Sub-clause (D) into the proviso of Section 2(85):
“(D) a company in which any individual, whether by himself or together with one or more relatives, holds significant beneficial ownership, within the meaning of section 90, in more than one company availing the benefit of this clause, where the aggregate paid-up share capital or aggregate turnover of such companies exceeds the limits specified in sub-clause (i) or (ii), as the case may be.”
Policy Impact
Cross-referencing Significant Beneficial Ownership (SBO) under Section 90 ensures that promoters cannot split single integrated business operations into multiple small shell entities merely to claim regulatory concessions, reduced penalty schemes (Section 446B), or audit exemptions.
6. Transition Rules & Automated Systemic Delivery
A. Mid-Year Threshold Transitions
A recurring operational hurdle arises when a company crosses small company thresholds mid-financial year (e.g., via rights issue or revenue surge). Stakeholders request explicit transition rules clarifying whether compliance changes trigger immediately or apply from the start of the next financial year.
B. Direct MCA21 Systemic Relief
Relief provisions—such as capped additional fees (Section 403), reduced penalties (Section 446B), CSR exemptions (Section 135), and simplified returns (MGT-7A)—should apply automatically through MCA21 analytics.
- Pre-filled Compliance: The MCA21 portal can verify eligibility directly from filed Financial Statements (AOC-4) and Annual Returns (MGT-7/7A), applying pre-filled forms and lower fee structures by default.
- Curable First Default: First-time, good-faith procedural defaults should be curable within a statutory grace period before administrative penalties escalate.
Conclusion & The Road Ahead
The representations surrounding Section 2(85) under the Corporate Laws (Amendment) Bill, 2026, signal a shift toward mature corporate governance in India. While raising financial limits is a welcome step for Ease of Doing Business, it must be supported by mandatory security dematerialisation (Rule 9B) and anti-fragmentation checks under Section 90.
Integrating automated MCA21 delivery with balanced inclusions for non-profits and standalone subsidiaries will allow India’s corporate law framework to foster business growth while safeguarding market integrity.
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Disclaimer: This post is for informational and educational purposes only and does not constitute professional legal or secretarial advice. Readers are advised to consult professionals before acting on any information provided herein.
CS Sandeep Parekh | Sandeep P Parekh & Co. (SPPC) | [email protected]
