A small company, under the Companies Act 2013, plays a vital role in India’s business ecosystem but enjoys specific regulatory relaxations. This blog explores the legal concept, significance, and exemptions surrounding “small companies” in India as per Section 2(85) of the Act.
Why Was the Small Company Concept Introduced?
The government created this classification to ease the regulatory burden on genuinely small businesses functioning in the form of companies in the wake of goverment’s ease of doing business initiative. Small companies enjoy simpler compliance requirements, including:
- Exemption from certain compliance requirements of meeting
- Exemption from certain compliance requirements of financial statement requirements
- Reduced annual filing fees and simplified audit requirements
- Less rigorous reporting and disclosure norms compared to larger enterprises
What is Small Company as per Companies Act 2013?
The definition of the small company is provided under Section 2(85) of the Companies Act 2013 read with Rule 2(1)(t) of The Companies (Specification of Definitions Details) Rules, 2014, which is reproduced below:
Section 2 (85) “small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees, and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
Rule 2(1)(t) For the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act, paid up capital and turnover of the small company shall not exceed rupees four crore and rupees forty crore respectively.
From above definition the following can be the inclusions and exclusions from its purview
Inclusions in the Definition of Small Company
Companies which are not excluded irrespective of turnover (See Exclusions A) and whose paid up capital is Rs. 4 Crores or Less and Turnover is Rs. 40 Crores or less. It is important to note that to qualify as small company both the conditions of turnover and capital has to be satisfied.
Examples of Inclusions
- Company A Private Limited has a paid-up capital of Rs. 3.5 Crores and turnover of Rs. 35 Crores. It qualifies as a small company since both criteria are below Rs. 4 Crores and Rs. 40 Crores respectively.
Exclusions from the Definition of Small Company
A. Certain companies cannot qualify as a “small company,” regardless of their capital or turnover:
- Any Public Company
- Any holding company or subsidiary company
- Any company registered under Section 8.
- Any company or body corporate governed by a special Act (such as banks, insurance companies, etc.).
B. Certain other companies cannot qualify as a “small company,” based on their of their capital or turnover:
Any company whose paid up capital is more than Rs. 4 Crores or its Turnover is more than Rs. 40 Crores. It is important to note that if any of the specified limits of turnover or capital exceeds the threshold, then the company ceases to be a small company.
Examples of Inclusions
- Company A Limited has a paid-up capital of Rs. 3.5 Crores and turnover of Rs. 35 Crores. It does not qualifies as a small company since it is a public company.
- Company B Private Limited has a paid-up capital of Rs. 4.5 Crores but turnover of Rs. 30 Crores. Since the paid-up capital exceeds Rs. 4 Crores, it ceases to be a small company even though turnover is below threshold.
- Company C Private Limited has a paid-up capital of Rs. 3 Crores but turnover of Rs. 45 Crores. Here, even though the share capital is within limits, the turnover exceeding Rs. 40 Crores causes it to lose small company status.
- Company D Private Limited has both paid-up capital and turnover above limits (e.g., Rs. 5 Crores capital and Rs. 50 Crores turnover). It clearly does not qualify as a small company.
In summary, breaching either the paid-up share capital limit of Rs. 4 Crores or the turnover limit of Rs. 40 Crores disqualifies a company from being classified as a small company under the Act.
