Table of Contents
Introduction
In the dynamic landscape of business, small companies play a crucial role in driving innovation, fostering entrepreneurship, and contributing to economic growth. The Companies Act 2013 in India recognizes the significance of these entities and provides a regulatory framework tailored to their specific needs. Through this article we have tried covering the concept and advantages of a small company.
Definition of Small Company
Ministry of Corporate Affairs has amended the definition of small company by amending rule 2(1)(t) of Companies (Specification of Definition Details Rule 2014) wide its notification dated 15th September 2022.
As per new definition, “small company” means a company, other than a public company whose:
- paid-up share capital does not exceed Rs. 4 Crores or such higher amount as may be prescribed under the law which shall not be more than Rs. 10 Crores; and
- turnover for the immediately preceding financial year does not exceed Rs. 40 Crores or such higher amount as may be prescribed under the law which shall not be more than Rs. 100 Crores:
Provided that nothing mentioned above shall apply to:
- a holding company or a subsidiary company
- a company registered under section 8
- a company or body corporate which is governed by any special Act.
Privileges to Small Companies
Privileges to Small companies are outlined in various sections. Some of the privileges enjoyed by a Small company are given below:
Sl No. | Section in Companies Act, 2013 | Nature of Privileges |
1 | 2(40) – Cash Flow Statement Exemption | Small companies are relieved from including the cash flow statement in their financial statements, streamlining reporting requirements. |
2 | 67(2) – Financial Assistance for Share Purchase | Small companies have the flexibility to provide financial assistance for the purchase of their own shares or shares in their holding company, fostering financial maneuverability. |
3 | 92(1) – Annual Return Signature | The annual return, a key document, can be signed by the company director in the absence of a company secretary, eliminating the mandatory involvement of a company secretary. |
4 | 121(1) – Report on Annual General Meeting | Small companies are exempt from the obligation to prepare a report on the Annual General Meeting, reducing administrative burdens. |
5 | 134(3)(p) – Annual Evaluation Statement Exemption | Small companies need not prepare a statement detailing the formal annual evaluation of the Board, its committees, and individual directors. |
6 | 149(1) – Limited Directors Requirement | Small companies are only required to have a maximum of two directors on their board, promoting a streamlined decision-making process. |
7 | 149(4) – Independent Directors Exemption | Small companies are not obliged to appoint independent directors, allowing for more straightforward corporate governance structures. |
8 | 152(6) – Flexible Director Retirements | Small companies have the liberty to structure their board in a way that not all directors need to retire annually, enhancing continuity. |
9 | 164(3) – Additional Disqualification Grounds | Small companies can specify additional grounds for disqualification for the appointment of directors in their articles, tailoring eligibility criteria. |
10 | 165(1) – Directorship Limitations Exemption | Small companies are excluded from restrictive provisions on the total number of directorships a person may hold in a public company, simplifying directorship roles. |
11 | 167(4) – Additional Vacation Grounds | Small companies can introduce additional grounds for the vacation of the office of a director, allowing for a more tailored governance structure. |
12 | 173(5) – Board Meeting Requirements | Small companies are required to hold at least one board meeting in each half of a calendar year, ensuring regular governance without undue constraints. |
13 | 190(4) – Employment Contract Exemption | Small companies are exempt from certain provisions related to contracts of employment with managing or whole-time directors, promoting flexibility in management structures. |
14 | 197(1) – Managerial Remuneration Limit | The total managerial remuneration for small companies, including directors and managers, may exceed eleven percent of net profits, providing leeway for competitive compensation. |
Advantages and Exemptions to a Small Company
- Filing Annual Return in E-Form MGT-7A: A small company is required to file its annual return in E-Form MGT-7A with the Registrar of Companies. In case of a small company, E-Form MGT-7A does not require mandatory certification from a company secretary. The annual return of a small company can be certified and digitally signed by its director. [Ref: Section 92 and Section 92 (k) (proviso) of Companies Act, 2013]
- No Professional Certification in AOC-4: A small company is required to file its financial statements in E-Form AOC-4 with the Registrar of Companies. In case of a small company, E-Form AOC-4 does not require mandatory certification from a company secretary or chartered accountant. The E-Form can be certified and digitally signed by its director.
- Frequency of Board Meetings: It is sufficient for a small company to hold only two Board Meetings in a calendar year, one in every half calendar year with a gap of not less than 90 days between these meetings. [Ref: Section 173(5) of Companies Act, 2013]
- Cash Flow Statement: A small company is not required to prepare cash flow statements as a part of its financial statements. [Ref: Section 2 (40) Companies Act, 2013]
- Rotation of Auditors: A small company is not required to rotate their statutory Auditors. [Ref: Section 139 (2)) is not applicable on Small companies. (Chapter 10 (Audit and Auditors) Rule 5]
- E-Form Certifications: In most of the cases, certification is not necessary for the E-Forms of a Small Company from a practicing professional.
Conclusion
In conclusion, the Companies Act 2013 has paved the way for a more supportive ecosystem for small companies in India. By providing regulatory relief, the Act aims to empower small businesses to thrive, innovate, and contribute meaningfully to the economy. As the backbone of entrepreneurial spirit, small companies have the opportunity to chart their own path to success, unburdened by unnecessary regulatory hurdles.
In the ever-evolving business landscape, the Companies Act 2013 stands as a testament to India’s commitment to nurturing and promoting the growth of small businesses. Through its provisions, small companies can navigate the regulatory landscape with ease, unlocking a world of opportunities for innovation, expansion, and sustainable success.
