Benefits for Small Companies under Companies Act, 2013

The Companies Act, 2013 brought about several significant reforms to the corporate sector in India. One such reform was the introduction of the concept of “small companies.” 

This move was intended to ease the regulatory burden on genuinely small businesses, enabling them to operate more efficiently while ensuring transparency and accountability. In this article, we will explore the benefits available to small companies under the Companies Act, 2013. 

What is a Small Company?

The term “small company” was introduced for the first time in the Companies Act, 2013. This concept is designed to help small private companies by giving them a special status and certain exemptions from compliance requirements that apply to larger companies.

According to Section 2(85) of the Companies Act, 2013, a “small company” is a private company that satisfies both of the following criteria:

• The paid-up share capital of the company does not exceed ₹2 crore, or such higher amount as prescribed (but not exceeding ₹10 crore).
• The turnover of the company in the previous financial year does not exceed ₹20 crore, or such higher amount as prescribed (but not exceeding ₹100 crore).

It is important to note that the definition excludes certain types of companies, such as:

• Public companies
• Holding or subsidiary companies
• Companies registered under Section 8 of the Act (which are companies with charitable objectives)
• Companies governed by any Special Act

These exclusions mean that even if a company meets the capital and turnover thresholds, it will not be treated as a small company if it falls under any of the above categories.

Why Was the Concept of Small Companies Introduced?

The idea of small companies was introduced following recommendations from the expert committee headed by Dr J.J. Irani. The committee observed that the compliance requirements applicable to large companies were disproportionately heavy for smaller enterprises.

The objective behind introducing the small company category was to:

• Reduce the compliance burden on small businesses
• Simplify corporate governance norms for them
• Provide exemptions that would lower costs and administrative work
• Allow these companies to focus on growth and operations rather than regulatory compliance

By doing so, the Act intended to foster a more conducive business environment for small companies without compromising on the transparency and accountability essential in the corporate sector.

Eligibility and Dynamic Nature of Small Company Status

The status of a company as “small” is not permanent and must be assessed every financial year. A company that qualifies as a small company in one year might lose that status if it crosses the prescribed limits of capital or turnover in subsequent years. Similarly, it might regain the status if it falls back within the prescribed limits.

This status is certified annually in the company’s annual return, filed in Form MGT-7, which must include a certificate confirming whether the company qualifies as a small company for that year.

Benefits and Exemptions Available to Small Companies

Small companies enjoy various privileges and exemptions under the Companies Act, 2013. These benefits help reduce the compliance burden, lower costs, and simplify governance. The major benefits are discussed below:

Exemption from Preparing Cash Flow Statement

Under the Companies Act, 2013, companies are required to prepare and attach a cash flow statement along with their financial statements. However, small companies are exempt from this requirement.

This exemption simplifies the accounting process, reduces the cost of financial statement preparation, and makes compliance easier.

Signing of Annual Returns

The annual return of a company typically needs to be signed by the company secretary. For small companies, if there is no company secretary appointed, the annual return can be signed by any one director of the company.

This is a practical relief for small companies that may not appoint a company secretary due to cost or resource constraints.

Reduced Requirement for Board Meetings

Usually, companies must hold at least four board meetings in a financial year. Small companies are allowed to hold only two board meetings per year, with a minimum gap of 90 days between the two meetings. One meeting must be held in each half of the calendar year.

This reduces the administrative effort and time spent on board meetings, which can be significant for smaller businesses.

Relaxation in Board Composition

Small companies enjoy certain relaxations regarding the composition and functioning of their board of directors:

• They can have a minimum of two directors, instead of the usual three required for private companies.
• There is no requirement to appoint independent directors.
• Small companies are exempt from the requirement of retiring directors by rotation.
• They can include additional grounds for director disqualification and vacation of office in their articles.

These provisions allow greater flexibility and reduce compliance costs related to board management.

Audit and Auditor Rotation Exemptions

While most companies are required to rotate their auditors after a fixed tenure, small companies are exempt from this requirement. This means that a small company can retain the same auditor for an indefinite period if it wishes.

Further, the auditor’s report of small companies need not comment on the adequacy or operating effectiveness of internal financial controls, which simplifies the audit process.

Additionally, small companies are exempt from the detailed reporting requirements under the Companies (Auditor’s Report) Order, 2020 (CARO 2020), further reducing audit-related burdens.

Managerial Remuneration

Unlike public companies, where the total managerial remuneration payable is capped at 11% of net profits, small companies are allowed to pay managerial remuneration exceeding this limit without requiring central government approval.

This gives small companies flexibility in rewarding their directors and key managerial personnel.

Exemption from Preparing a Report on Annual General Meeting (AGM)

Small companies are not required to prepare a report on the proceedings of their Annual General Meeting. This reduces documentation and compliance work during the AGM.

Financial Assistance for Purchase of Own Shares

Small companies are permitted to provide financial assistance by way of loans, guarantees, or security for the purchase of their own shares or those of their holding company.

This provision supports small companies in undertaking share buybacks or restructuring their capital efficiently.

Fast-Track Merger Procedure

Small companies benefit from a fast-track merger process which requires approval from:

• The Official Liquidator
• Registrar of Companies
• Members holding at least 90% of the total shares
• Creditors representing at least 90% in value

This fast-track merger process allows small companies to consolidate quickly, benefiting from economies of scale and operational efficiencies.

Reduced Filing Fees

Under Section 403 of the Companies Act, the Registrar of Companies charges lower fees for various filings and registrations by small companies compared to other companies. This reduces their cost of compliance and encourages formalisation.

Lesser Penalties for Non-compliance

Small companies face reduced penalties for non-compliance with the Act. The maximum penalty payable by the company is capped at half the usual amount, with a ceiling of ₹2 lakh. For officers in default, the maximum penalty is capped at ₹1 lakh.

This mitigates the financial risk for small companies and encourages compliance while recognising their limited resources.

Conclusion

The introduction of the “small company” category under the Companies Act, 2013 is a welcome reform that acknowledges the unique challenges faced by small businesses in India. By offering targeted exemptions and privileges, the law has created a more supportive environment for these companies to thrive.

Small companies benefit from simplified reporting requirements, relaxed governance norms, audit exemptions, and reduced penalties. These concessions reduce costs, administrative burden, and compliance complexity, allowing small companies to focus on business growth and operational efficiency.