The Companies Act, 2013 (‘Act’) introduced the concept of small companies to provide advantages for small businesses operating as private limited companies. Small companies have less annual revenue compared to regular-sized companies. In a developing country like India, small companies play a significant role in generating profits and boosting employment. Thus, they are the backbone of the economy.
Small companies do not have any separate procedure to obtain registration under the Act. It is registered as a private limited company. But the Act differentiates a private company as a small company based on its less amount of investment and turnover.
The Ministry of Corporate Affairs (MCA), on September 15th, 2022, issued the Companies (Specification of Definitions Details) Amendment Rules, 2022. The definition under the Companies Act for Small Companies has now been revised by increasing their thresholds for Paid-up capital and Turnover.
The paid-up Capital and Turnover of the small company shall not exceed Rupees 4 Crores and Rupees 40 Crores, respectively. Revisions to the definition were aimed at simplifying business and reducing compliance burdens for many companies. The current article briefs the Revised Definition of a Small Company as per Companies (Specification of Definition details) Amendment Rules 2022.
MCA Notification
The following amendment has been made in the Companies (Specification of Definition details) Amendment Rules 2022:
- A new clause 2(1)(t) has been substituted in Rule 2, which specifies the Definitions of Small Company.
- As mentioned above, the definition of a Small Company under the Companies Act, 2013 has now been revised by increasing the thresholds for Paid-up capital and Turnover.
- The said amendment is made effective from September 15th, 2022.
Small Companies
To provide advantages to small businesses operating as private limited companies, the Companies Act 2013 introduced the concept of small companies. The annual revenue of small companies is lower than that of regular-sized companies. India’s small companies are crucial to generating profits and creating jobs. Consequently, they are the economy’s backbone.
In accordance with the Companies Act, small businesses need not follow a separate company registration procedure, and it is registered as a private limited company. But the Act differentiates a private company from a small company based on its fewer amounts of investment and Turnover.
New Definition of a Small Company
The Finance Minister proposed a revised definition of a small company while presenting the Union Budget 2021. The revised definition came into effect on 1 April 2021. The MCA further amended the definition of a small company on 15 September 2022. The purpose behind the revised definition was to provide ease of doing business and reduce the compliance burden for many companies.
Accordingly, the Ministry of Corporate Affairs (MCA) notified the Companies (Specification of Definitions Details) Amendment Rules, 2022, to amend the old definition of a small company. The new definition is effective from 15 September 2022.
The new amended definition of a small company is provided under Section 2(85) of the Companies Act, 2013. The Act defines a small company as a company that is not a public company and has:
- A paid-up share capital equal to or below Rs.4 crore or such a higher amount specified not exceeding more than Rs.10 crores.
- A turnover equal to or below Rs.40 crore or such a higher amount specified not exceeding more than Rs.100 crore.
However, the concept of small companies does not apply to the following companies:
- A holding or a subsidiary company.
- A company registered under section 8 of Companies Act.
- A body corporate or company governed by any special act.
Most startups in India are classified as small companies as they will not have a paid-up capital of more than Rs.4 crores and an annual sales turnover of more than Rs.40 crores.
Comparison of Small Company New Definition with Old Definition
The amendment to the definition of a small company increased the maximum limit of paid-up capital and turnover. The limits were increased so that more companies could be covered within the ambit of a small company, making them eligible to get the benefits of a small company provided under the Companies Act 2013.
The comparison of the old and new definitions of a small company is provided below:
| Particulars | Old Definition Criteria | New Definition Criteria |
| Paid-up share capital | Maximum paid-up share capital of Rs.2 crore | Maximum paid-up share capital of Rs.4 crore |
| Turnover | Maximum turnover of Rs.20 crore | Maximum turnover of Rs.40 crore |
Benefits of Revised Definition of Small Companies
- Small companies are exempted from the essential to prepare cash flow statements as part of financial statements.
- Advantages of preparing and filing an Abridged Annual Return.
- The small company will not be required to have the compulsory rotation of auditors.
- An Auditor of a small company does not need to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.
- The small company can hold only two board meetings in a year.
- Annual company returns can be signed by the company secretary, or where there is no company secretary, by a company director.
- In addition, small companies are subject to fewer penalties.
Key Features of Small Company
- Financial Flexibility: Small companies, operating under the redefined thresholds, experience increased financial flexibility. With a maximum paid-up capital of Rs.4 Crores, these entities can strategically allocate resources to navigate economic fluctuations.
- Operational Agility: The adjusted turnover limit of Rs.40 Crores empowers small companies with heightened operational agility and allows for swift responses to market demands, fostering growth and expansion.
- Reduced Compliance: Small companies, defined by the new criteria, benefit from reduced and streamlined compliance processes. Navigating regulatory requirements becomes more straightforward, reducing administrative burdens and allowing a sharper focus on core business operations.
FAQs
What is the Small Company Definition for FY 2021-22?
The small company definition for FY 2021-22, as per the Companies Act, 2013, has been updated to incorporate new limits. It now sets thresholds for paid-up capital and turnover, as INR 4 Crores and INR 40 Crores respectively.
What Differentiates a Small Company from Other Business Entities?
A small company, as per the Companies Act, is distinguished by specific criteria of paid-up capital and turnover limits of INR 4 Crores and INR 40 Crores respectively. Unlike public companies, holding companies, subsidiary companies, and those registered under section 8 or governed by any particular act, small companies enjoy a unique classification under a Private Limited Company despite having reduced compliance burden.