Definition & Benefits of a Small Company under Companies Act

By CA. PRAMOD JAIN

Namaste

Ministry of Corporate Affairs has amended the Companies (Specification of definition details) Rules, 2014 w.e.f. 1st April 2021 to give effect to higher monetary limits for a private company to be considered as a small company. The limit of maximum Paid-up capital has been increased from Rs. 50 Lacs to Rs. 2 Crores and the maximum turnover limit has been increased from Rs. 2 Crores to Rs. 20 Crores to be a small company. The definition effect post-amendment and pre-amendment is given hereafter.

From 1st April 2021

From 1st April 2021, a Private Company, which is not a holding or subsidiary or section 8 company or a company governed by any special act and having its paid-up capital not exceeding Rs 2 Crores and having turnover for the immediately preceding year not exceeding Rs 20 crores shall be a small company.

Hence, the following would NOT be Small company w.e.f. 1st April 2021:

• Listed Company
• Public Unlisted company
• Section 8 Company under Company Law
• Holding Company
• Subsidiary Company
• Company or Body Corporate governed by any special act
• Private Company whose Paid-up capital exceeds Rs 2 crores
• Private Company whose Turnover for the immediately preceding year exceeds Rs 20 crores

Hence, from 1st April 2021, a private company (which is not a holding or subsidiary or section 8 company or a company governed by any special act) would be a Small Company if it would be having its:

• Paid-up capital not exceeding Rs 2 Crores;

AND

• Turnover for the immediately preceding year not exceeding Rs 20 crores

Upto 31st March 2021

Upto 31st March 2021, a Private Company, which was not a holding or subsidiary or section 8 company or a company governed by any special act and having its paid-up capital not exceeding Rs 50 Lacs and having turnover for the immediately preceding year not exceeding Rs 2 crores was a small company.

Hence, till 31st March 2021, the following were NOT a Small company:

• Listed Company
• Public Unlisted company
• Section 8 Company
• Holding Company
• Subsidiary Company
• Company or Body Corporate governed by any special act
• Private Company whose Paid-up capital exceeds Rs 50 Lacs
• Private Company whose Turnover for the immediately preceding year exceeds Rs 2 crores

Hence, till 31st March 2021, a private company (which is not a holding or subsidiary or section 8 company or a company governed by any special act) would be a Small Company if it is having its:

• Paid-up capital not exceeding Rs 50 Lacs;

AND

• Turnover for the immediately preceding year not exceeding Rs 2 crores

Benefits / Exemptions for a Small Company

Considering the change in the definition of a small company consequent to change in the paid-up capital and turnover limits, majority of companies could become a small company w.e.f. 1st April 2021.

For example, ABC P. Ltd. having paid-up capital of Rs. 1 Cr. and Turnover in FY 2019-20 and FY 2020-21 of Rs. 10 crores each year, would not be a small company in FY 2020-21. However, it would be a small company w.e.f. 1st April 2021 i.e., in FY 2021-22.

Certain compliances related to the financial year ending 31st March 2021 would be completed in FY 2021-22 like, issue of audit report, filing of annual forms with Registrar of companies, etc. For these compliances, it seems that it would not be a small company and it would have to make compliances as it is a normal company i.e., other than small company. However, from FY 2021-22, ABC P. Ltd. would be a small company.

We should be aware of various benefits or exemptions which are available to a small company. The benefits / exemptions for a small company includes:

• No Cash Flow Statement: – A small company need not include Cash Flow Statement as part of its financial statement. Proviso of Section 2(40) which relates to Financial Statement states that small company may not include the Cash Flow Statement in their financial statements.
• No Ind AS: – A small company is not required to comply with Ind AS to prepare its financial statements. It has to only comply with Companies (Accounting Standards) Rules 2006.
• No pre-certification by Professionals: – In case of a small company, there is no requirement of pre-certification by Professionals for filing of Forms with ROC including Annual Return.
• Exemptions for Board’s Report: – Certain matters to be included in Board’s Report mentioned in Rule 8 of companies (Accounts) Rules, 2014 do not apply for small company. Further the Central Government may prescribe an abridged Board’s report, for the purpose of compliance u/s 134(4A) by small company.
• Abridged Annual Return: – Annual Return of a Small Company is an abridged Annual Report u/s 92 in new Form MGT 7A instead of detailed annual report in Form MGT 7.
• Remuneration details in Annual Return: – According to Section 92(1)(g), small companies are required to provide only “aggregate amount of remuneration drawn by directors” instead of providing details of remuneration of directors and key managerial personnel of the company, which is required for other companies.
• Fewer Board Meetings: – Small companies are not required to hold 4 Board meetings in year, they may hold only 2 board meetings in a calendar year, i.e., one Board Meeting in each half of the calendar year with a minimum gap of 90 days between the two meetings. • Lesser Penalties: – Section 446B deals with the lesser penalty provision where a small company is under specific default. According to it , if a small company fails to comply with provisions of section 92(5) [Annual Return in MGT 7A], section 117(2) [Resolutions and Agreements to be filed in MGT 14] or section 137(3) [Copy of Financial Statement to be filed with Registrar in AOC-4], such company and officer in default of such company shall be punishable with fine or imprisonment or both, as the case may be, which shall not be more than ½ of the fine or imprisonment or both, as the case may be, of the minimum or maximum fine or imprisonment or both, as the case may be, specified in such sections.
• Fast Track Merger – Section 233 of the Companies Act deals with time-consuming process for mergers. However, for certain mergers like merger between two small companies, it lays down a simple a fast-track merger procedure without applying to NCLT.
• Low Filing Fee – Pursuant to Section 403 read with Rule 12 of the Companies (Registration of Offices and Fees) Rules, 2014, a relaxation has been given to small companies with respect to reduction in their filing fees with Registrar of Companies as compared to other companies.
• No IFC: – Auditors of small companies are not required to give report on Internal Financial Controls with reference to Financial Statements and the operating effectiveness of such controls in audit report. Section 134(5)(e) which deals with Internal Financial Controls states that an auditor of small companies is not required to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.
• No CARO: – Auditors of small companies are not required to give report on Companies Auditors report Order 2016 / 2020 i.e., CARO 2016 / 2020.
• No Rotation of company auditors: – Section 139(2) exempts small company from the mandatory rotation of auditors after a term of 5 consecutive years in case of an individual auditor and two consecutive terms of 5 years in case of an audit firm.
• Not to be counted for limit of No. of Audits: – A small company is not to be included to count in the limit of 20 audits per auditor, as per notification dated 5th June 2015.

I hope this document is of use to you. I Thank CA. Shreya Jain and Ms. Tanvi in compiling this document. Your suggestions and comments would be highly appreciated.

Best Regards

CA. PRAMOD JAIN

[email protected]

(Disclaimer: Though full efforts have been made to state the interpretations correctly, yet the author is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions)