In this blog post, Nandish Shah, a student pursuing his BLS LLB from Rizvi Law College, Mumbai and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, gives a brief overview of regulations pertaining to small companies. 

Introduction

Small Companies are new forms of private companies under the Companies Act, 2013. A classification of private companies into small companies is based on its size, i.e., paid up capital and turnover. In other words, such companies are termed as small-sized private companies. The concept of small companies has been introduced in the Companies Act, 2013 as recommended by the Dr. JJ Irani Committee. The recommendation of the Irani Committee in this regard was as under:

“The Committee sees no reason why small companies should suffer the consequences of regulation that may be designed to ensure balancing of interests of stakeholders of large, widely held corporates. Company law should enable simplified decision-making procedures by relieving such companies from select statutory internal administrative procedures. Such companies should also be subjected to reduced financial reporting and audit requirements and simplified capital maintenance regimes. Essentially the regime for small companies should enable them to achieve transparency at a low-cost through simplified requirements. Such a framework may be applied to small companies through exemptions, consolidated in the form of a Schedule to the Act.”

The new Companies Act identifies some companies as small companies based on their capital and turnover for the purpose of providing relief/ exemption to these companies. Most of the exemptions provided to small companies are same as that of One Person Company.

As per Ss.2(85) of Companies Act,2013 “small companies” means a company, other than a public company—

1. 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 five crore rupees; or
2. Turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this definition shall apply to:

1. a holding company or a subsidiary company;
2. a company registered under section 8; or
3. a company or body corporate governed by any special Act;

So, according to Ss.2(85) only a private company can be classified as a small company. Even a holding company, a subsidiary company, a charitable company and a company governed by Special Act cannot be classified as a small company. For a small company, both conditions have to be fulfilled, i.e., the paid up capital should not exceed Rs.50 Lakhs or the turnover as per the last statement of profit and loss should not exceed Rs. 2 Crore.

It is also a statutory rule that the status of a “small company” may change from year to year. Thus, the benefits which are available to a company during a particular year may stand withdrawn in the next year and become available again in the subsequent year. For qualifying as a small company, it is enough if both the capital and turnover are less than the prescribed limit. It is not sufficient if only one of the requirement is met without meeting the other requirement.

As per the recommendation of Dr. J.J. Irani Committee the concept of “Small Company” was introduced to give them certain privileges and compliance exemption under the new Companies Act.

Privileges And Exemption To Small Companies

The privileges and exemption enjoyed by a small company or its advantages over other companies are as follows:

1. According to Ss.2(40), small companies have the privilege that as part of their financial statement with regards to small companies they may not include the cash flow statement;
2. According to Ss. 67(2), small companies are given financial assistance for purchase of or subscribing to its own shares or shares in its holding company;
3. According to Ss. 92(1), the annual return of the small company shall be signed by the company secretary, or where there is no company secretary, by the director of the company. In other words, it need not be signed by the company secretary in practice;
4. According to Ss.121(1), a small company need not prepare a report on Annual general meeting;
5. According to Ss. 134(3)(p), a small company need not prepare a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors;
6. According to Ss. 149(1), a small company need not have two directors on its Board;
7. According to Ss. 149(4), the law provides that small companies need not appoint independent director on its board;
8. According to Ss. 152(6), the law provides that in a small company a proportion of directors need not retire every year;
9. According to Ss. 164(3), the law provides that additional grounds for disqualification for appointment as a director may be specified in the articles.
10. According to Ss. 165(1), the law provides for restrictive provisions regarding total number of directorships which a person may hold in a public company do not include directorships held in small company which are neither holding nor subsidiary company of a public company;
11. According to Ss. 167(4), the law states that additional grounds for vacation of office of a director may be provided in the Articles.
12. According to Ss. 173 (5), the law provides that a small company is required to hold at least one meeting of the Board of Directors in each half of a calendar year, and the gap between the two meetings should not be less than ninety days.
13. According to Ss. 190(4), the law provides that the provisions relating to the contract of employment with managing or whole-time directors do not apply to a Small Company
14. According to Ss. 197(1), the law states that the total managerial remuneration payable by a small company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year may exceed eleven per cent. of the net profits.

Laws Relating to Small Companies

The term “Small Companies” was introduced in Companies Act, 2013. According to the provisions of the Companies Act, small companies have to be a private company. Hence, laws pertaining to small companies is governed by Companies Act 2013.

Conclusion

Due to the introduction of the concept of small companies on the recommendation of the J.J. Irani Committee, there are many benefits given to a small company in terms of annual filings, board meetings, cash flow statement and rotation of auditors. So, since most of the startups will have a paid-up capital of less than Rs.50 lakhs and an annual sales turnover of less than Rs.200 lakhs, they will be classified as small companies. Thus, the benefits under the provision of Companies Act for small companies will help the startup to grow.