This article is written by Navneet R., a student of RGNUL, Patiala.

Companies Act, 2013 has introduced the concept of small companies in India. As per S. 2 (85) of the Companies Act, 2013 there are 4 essentials for being a small company:

1. It is not a public company, holding company or a subsidiary company.
2. It is not registered under S. 8 of the Act.
3. It is not governed by any other special Act.
4. With regards to share capital/turnover:
   1. It has a total paid up share capital of not more than 50 lakh rupees or any other prescribed amount not exceeding five crore rupees; or
   2. It has a turnover of not more than two crore rupees or any other prescribed amount not exceeding 20 crore rupees.

This means, for a company to be classified as a small company, it should not be a public company or a holding company or a subsidiary company. If a company falls under any of these categories, it cannot be a small company (no matter howsoever low is the turnover or total paid up share capital). Also, a company which is registered u/s 8 of the Act cannot be classified as a small company, i.e., a limited company which has charitable or other objectives (as specified u/s 8 (1) (a)) and intends to utilise its income for promoting its objectives without making the payment of any dividends to its members cannot be considered to be a small company. In case a company or the body corporate is governed by a special Act which is passed by the government, it cannot fall under the category of small company.

A company which is eligible to be known as a small company in one particular year might not be eligible to have the status of a small company in the subsequent year. This status is determined on the basis of the Annual return which is filed after the end of every financial year. This form needs to have an attached certificate (refer Form no MGT 7) which certifies the company to be a small company. If the company is no longer a small company; along with the change in status, the benefits which are accorded to a small company are also withdrawn. The moot question which remains unanswered here is regarding the benefits which are accorded to a small company. These benefits have been given in order to ensure that the interests of such companies are protected from the consequences of regulations designed to balance the interests of the stakeholders of large corporate blocs.

Exemptions & Benefits

Most of the benefits which are available to the small companies are the same as those which are available to a one person company. However, all the privileges which are available to a one person company are not available to a small company. The benefits which are accorded to a small company are:

1. Signatures in the Annual returns:

Company Secretary (CS) alone, or when there is no CS, a single director of the company can sign the annual returns of the Company. But since a small company need not have a CS, this section empowers the director to sign and authorise the annual returns.

2. Board meetings:

It may hold only two board meetings in an year. There should be a minimum gap of 90 days between the two meetings and they can be held in each half of the calendar year.

3. Financial statement:

The Company is not required to include the Cash Flow Statement as a part of its financial statement.

4. Auditor regulations:

The provision regarding mandatory rotation of the auditor or the maximum term of an auditor being 5 years in case of an individual and 10 years in case of a firm of auditors is also not applicable.

5. Merger Process:

The merger process of more small companies has to be approved on a fast track basis. Such merger also requires the approval of:

1. Official liquidator;
2. Registrar of Companies (ROC);
3. Members holding 90% of the total number of shares (or more); and
4. Majority of creditors who represent 9/10^th in value of the creditors or class of creditors of the respective companies which are indicated in the meeting convened by the company by giving a notice of 21 days along with the scheme to its creditors for the purpose, or have otherwise been approved in writing.

6. Consolidated financial statements:

As per S. 129 (3), it appears that small companies are not required to prepare consolidated financial statements. But, the small companies which have an associate company or joint venture have to prepare the consolidated financial statements.

7. Fees u/s. 403 of Companies Act, 2013:

Fees for filings and other formalities u/s. 403 of the Companies Act, 2013 is also comparatively lower for the small companies.

Conclusion

As mentioned above, a small company need not remain a small company throughout its existence. The year it fails to meet the essential requirements as mentioned above, the benefits will be withdrawn from next year onwards. The Act facilitates business-friendly regulations for the small companies and is a positive step taken towards promoting investments and small companies.

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