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Section 2(85) of the Companies Act, 2013 is the go-to document when looking for a concrete definition of small company. With changing times and socio-economic landscapes, the meaning and scope of a small company has also been updated. As such, vide a Notification GSR700 (E) dated 15 September, 2022 the old small company definition underwent an amendment and now includes higher thresholds for paid-up capital and small company turnover limit.
In the next sections we will look at the new definition of a small company as per Companies Amendment Rules, 2022, the revised thresholds as defined in Section 2(85) of the Companies Act, 2013 and how it will impact businesses.
What is a small company in India?
Let us first take a look at the meaning of a small company.
The term small company was defined in the Companies Act, 2013 to distinguish private limited companies. The aim was to identify characteristics and provide benefits to small sized businesses with lesser manpower and revenue.
Revised small company definition (as per Section 2(85) of the Companies Act, 2013)
In 2021, when the Union Budget was being presented, the proposal for having a new definition of small companies was proposed. The MCA or Ministry of Corporate Affairs, on 15 September, 2022 amended the old definition and the new small company definition is provided under Section 2(85) of the Companies Act, 2013.
Key highlights of the new definition include:
- Not a public company, holding or subsidiary company, company registered under Section 8, or a company governed by any special act
- Paid up share capital not exceeding ₹4 crores (equal to or below)
- Turnover not exceeding ₹40 crore (equal to or below)
Note – A small company as per the Companies Act, 2013 should not be confused with a small scale industry, where the investment and annual turnover should not exceed ₹10 crores and ₹50 crores respectively, as per the MSMED Act, 2006).
New vs Old definition of small company – Paid-up capital & turnover limit
Before learning more about a small company, its characteristics and how the revised definition will benefit them, here’s a brief comparison of the old and new classification of small companies as per the paid-up capital share and the turnover limit.
|Paid-up share capital limit
|Small company Turnover limit
|Up to ₹2 crores maximum
|Up to ₹20 crores maximum
|Up to ₹4 crores maximum
|Up to ₹40 crores maximum
How the revised definition benefit small companies?
In the previous sections we have taken a detailed look at the new definition and along with it, the revised small company turnover limit and paid-up capital share limit, and the exemptions to the definition.
The changes incorporated has impacted small companies and opened doors to new opportunities and advantages.
1. Minimum regulatory burdens
The threshold has reduced regulatory burdens on small companies. Previously, with lower thresholds, even small companies with basic revenue and turnover had to comply with stringent requirements including audit and reporting.
With the threshold being increased, many small companies with limited manpower, resources and revenue, can now focus on growing their business and be exempted from statutory compliances that only took up their time and efforts. (This is similar to the GST registration threshold limit which was increased to ₹40 lakhs to keep up with changing times).
2. Ease of doing business
With the new small company turnover limit established, small businesses can focus on their core competencies and growth operations, rather than on compliance. It also allows them to allocate resources intelligently and make strategic plans.
3. Access to credit and funding
Small companies are eligible for certain credit facilities from the government and banks that large businesses cannot avail. These incentives and funds attract lesser interest rates and are essential for business expansion and innovation. Funding also allows small companies to take calculated risks, so as not to go overboard with spending on areas with no or minimum returns. (Also read – Government loan schemes for SMEs).
4. Scale reasonably
The new small company definition as per Section 2(85) of the Companies Act, 2013 has given many small companies the flexibility to maintain their entity and grow in a planned manner. Many small businesses prefer to keep to grow slowly, they keep to their niche and do not want to scale exponentially. By increasing the thresholds, these companies can still function optimally without having to keep up with changing regulations and compliance requirements.
5. Formal business registration
With the thresholds increased, many small companies now prefer to register their businesses and not operate as an unregistered business. Small businesses recognise that by registering as a legal entity/company, they will be able to reap certain benefits and acquire additional certificates (e.g., Udyam MSME registration, trademark registration, ISO registration, etc.) there’s little resistance. This formalisation safeguards the interests of the business and contributes to the overall transparency and accountability.
Key characteristics of small companies in India
A look at the difference between small and large scale industries will enable you to understand how small businesses and their counterparts differ. Also, do keep in mind that both large and small businesses can operate out of the same industry.
For instance, in logistics there can be large businesses and logistics startups, both operating in the same sector. But while the former has an established entity, the latter is starting out.
On that note, here’s a look at some of the key characteristics that distinguish a small company:
- Limited workforce and resources – Small companies function with limited funds, workforce and resources. This is because their scale of work/production does not require a large team. Employment is therefore generated for a modest number of people. However, as the company grows in size, it expands its scale and scope. It adds more people, investments and resources, to scale production or provide additional services.
- Lower revenue generation – The small company turnover limit makes it natural for small businesses to generate a lower turnover/revenue. This does not imply they have to be non-profitable. This means that to fit the small company definition their turnover has to be within the prescribed limit to leverage the perks that come with it.
- Small market size – Small companies usually sell their products to a smaller audience. This can be in their local areas, region, or even globally. They keep to a smaller geography as there’s a demand-supply match.
Closing thoughts – Business impact of revised small company definition
In the previous sections we have understood the general benefits of being a small company. Let us now take a look at how the new small company definition impacts business.
- Small companies do not have to mandatorily rotate their auditors
- Annual company returns can be signed by the Company Secretary or Director
- The number of annual board meetings can be limited to two
- Additional benefits can be reaped on filing an abridged annual return
- As a part of financial statements, small companies are exempted from preparing cash flow statements
- Small companies have to pay lesser fees/charges when filing forms with ROC
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