A Move Towards Ease of Doing Business: Amended Definition of a Small Company – The Ministry of Corporate Affairs (“MCA”)
Contents News/Article Date: 13th December 2022
Relating to which Act: decriminalizing certain aspects of the Companies Act, 2013 r/w the allied rules made thereunder (“Companies Act”)
Applicable to which State: All establishments in the States covered by the Companies Act, 2013
Type: The Ministry of Corporate Affairs (“MCA”) has recently implemented a number of initiatives aimed at making it easier for companies to conduct their business and function with ease.
Pertains to: extending fast track mergers to start-ups, encouraging the incorporation of One Person Company (“OPC”), has widened the ambit of what is now defined as a ‘small company’.
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In this instance, details of the changes are given below briefly:
What is a Small Company?
Small businesses are corporations, partnerships, or sole proprietorships with fewer employees and/or less annual revenue than a regular-sized business or corporation. The Companies Act 2021, defines the rules and provisions regarding a Small Company.
Small Companies enjoy various advantages over other companies in terms of compliance requirements. For instance, a small company requires 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.
Further, Small Companies are not required to maintain their cash flow statement and their annual returns could simply be signed by a company secretary or a single director.
What does the new revision say?
The Ministry of Corporate Affairs notified an amendment in the Companies (Specification of Definitions Details) Rules, 2014 that came into force on 1st April 2021. According to it, the definition of “Small Companies” under the Companies Act, 2013 was revised by increasing their thresholds for paid up 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”.
According to the latest revision, the definition of ‘Small Companies’ has further been revised by increasing the thresholds for paid up Capital from “not exceeding Rs 2 crore” to “not exceeding Rs 4 crore”. Furthermore, the turnover has increased from “not exceeding Rs 20 crore” to “not exceeding Rs 40 crore”.
Subject: MCA revises the definition of Small Companies to facilitate ease of doing business
For greater details, appended below is the complete news item
A Move Towards Ease of Doing Business: Amended Definition of a Small Company – The Ministry of Corporate Affairs (“MCA”)
A Move Towards Ease of Doing Business: Amended Definition of a Small Company
The Ministry of Corporate Affairs (“MCA”) has recently implemented a number of initiatives aimed at making it easier for companies to conduct their business and function with ease, a few of these are as follows: extending fast-track mergers to start-ups, encouraging incorporation of One Person Company (“OPC”), decriminalizing certain aspects of the Companies Act, 2013 r/w the allied rules made thereunder (“Companies Act”) and other similar steps to facilitate ease of doing business. Following a similar objective, the definition of a ‘small company’ provided under the Companies Act has also recently been amended, wherein the MCA by way of issuing a notification (notification number G.S.R. 700(E)), dated September 15, 2022 (“Notification) and amending the Companies (Specification of Definitions Details) Rules, 2014, has widened the ambit of what is now defined as a ‘small company’. By doing so, small companies are said to include companies whose paid-up share capital is no more than Rs. 4 crores and a P&L account turnover for the immediately preceding financial year of no more than Rs. 40 crores (“Revised Threshold”). Given that small company in India, provide a significant contribution to the Indian economy, it appears that the intent of the government is to aid ease of doing business in light of the recently introduced amendment. This article seeks to highlight the potential advantages which the said Notification is likely to achieve.
It is to be noted that the definition of a ‘small company’ (defined under (Section 2(85) of the Companies Act)), has over the years seen a few amendments. The following paragraphs, broadly provide an overview of the same:
The Companies Act defined a small company as one which either had a paid-up share capital of less than Rs. 50 lakhs or such higher amount as may be prescribed but not more than Rs. 5 crores; or a last P&L account turnover of less than Rs. 2 crores or such higher amount as may be prescribed but not more than Rs. 20 crores. By way of an amendment (1) in 2015, the thresholds discussed were subsequently amended so that for a company to be considered as a small company, the requirements of a paid-up share capital and turnover both would need to have been met at the same time.
Subsequently, in 2017, by way of an amendment [2], (i) the prescribing power to increase paid-up capital was increased from 5 crores to 10 crores; (ii) the prescribing power to increase turnover was increased from 20 crores to 100 crores; and (iii) the turnover as per “the last P&L account” was amended to as P&L account for the immediately preceding financial year. With the amendment in 2021[3], the threshold of paid-up capital and turnover of a small company was increased from Rs. 50 lakhs to Rs. 2 crores and 2 crores to 20 crores respectively.
Advantages That Small Companies Get Under the Companies Act, 2013
Ease in preparing Financial Statements
Section 2(40) of the Companies Act provides the definition of the term ‘financial statement’ wherein it has been stated that: “The financial statement with respect to One Person Company, Small Company, and dormant company, may not include the cash flow statement”. Considering the Notification, given that the threshold of what constitutes a small company has been subsequently amended, this would mean that a larger number of companies would automatically fall under the definition of a ‘small company’ who would now not mandatorily be required to prepare cash flow statements as a part of the financial statements
What is a Small Company?
Small businesses are corporations, partnerships, or sole proprietorships with fewer employees and less annual revenue than a regular-sized business or corporation. The Companies Act 2021, defines the rules and provisions regarding a Small Company.
Small Companies enjoy various advantages over other companies in terms of compliance requirements. For instance, a small company requires 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.
Further, Small Companies are not required to maintain their cash flow statement and their annual returns could simply be signed by a company secretary or a single director.
What does the new revision say?
The Ministry of Corporate Affairs notified an amendment in the Companies (Specification of Definitions Details) Rules, 2014 that came into force on 1st April 2021. According to it, the definition of “Small Companies” under the Companies Act, 2013 was revised by increasing their thresholds for paid-up 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”.
According to the latest revision, the definition of ‘Small Companies’ has further been revised by increasing the thresholds for paid-up Capital from “not exceeding Rs 2 crore” to “not exceeding Rs 4 crore”. Furthermore, the turnover has increased from “not exceeding Rs 20 crore” to “not exceeding Rs 40 crore”.
Benefits?
The revised definition for small companies includes the following advantages in terms of compliance –
— No need to prepare a cash flow statement as part of the financial statement.
— Advantage of preparing and filing an Abridged Annual Return.
— Mandatory rotation of auditor not required.
— An Auditor of 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.
— Holding of only two board meetings in a year.
— Annual Return of the company can be signed by the company secretary, or where there is no company secretary, by a director of the company.
— Lesser penalties for small companies.
Measures towards ease of doing business
In the recent past, the Ministry of Corporate Affairs (MCA) has taken several measures towards ease of doing business and ease of living for the corporates. These measures include decriminalization of various provisions of the Companies Act, 2013 & the LLP Act, 2008, extending fast-track mergers to start-ups, incentivizing incorporation of One Person Companies (OPCs), and more.
The Government has been committed to taking measures to create a more conducive business environment for law-abiding companies, including a reduction of compliance burden on such companies. Small companies represent the entrepreneurial aspirations and innovation capabilities of lakhs of citizens and contribute to growth and employment in a significant manner. The latest revisions are in line with these objectives.