Date: 24 May 2024

What is the Definition of a small Company as per the Companies Act 2023

What is a Small Company as per Companies Act 2013?

A Small Company is one of the type of private limited company. The Companies Act, 2013 (‘Act’) brought the concept of small company to give advantage to small entrepreneurs which are doing businesses by incorporating private limited company.

Small company requires less investment and generates less revenue as compared to private limited company and public limited company. Small company has same procedure of incorporation as a private limited company in other words a small company is first incorporated as a private company and later on it is classified as a small company based on introduced capital and annual turnover of the company as prescribed by MCA (refer below New Definition of Small Company under the Companies Act 2013).

New Definition of Small Company under the Companies Act 2013

Ministry of Corporate Affairs (MCA) notified the Companies (Specification of definition details) Amendment Rules, 2022 via notification dated 15th September, 2022 to amend the definition of small company. 

The amended definition of small company is given in Section 2(85) of the Companies Act, 2013, and revised definition of small company (Small Company Limit) is:

A small company is a company which is not a public company and has
 
Paid Up Capital: Paid-up share capital is less than or equal to Rs. 4 Crore or such higher amount as may be prescribed but not exceeding  Rs. 10 crore and
 
Turnover*: Turnover is less than or equal to Rs. 40 crore or such higher amount as may be prescribed but not exceeding Rs. 100 crore rupees.

*Note: Turnover is as per last year per profit and loss account.

Provisions of small company shall not apply to following categories of companies: 

  • a holding company or a subsidiary company;
  • a company registered under section 8; or
  • a company or body corporate governed by any special Act;

Tabular presentation of New Definition of Small Company VS Old Definition of Small Company

Ministry of Corporate Affairs (MCA) made the amendment to the exiting definition of a small company by increasing the maximum limit of paid-up capital and turnover. This amendment was made to bring more companies within the scope of a small company. Below is the comparison of both the definitions:

Parameters New Definition Old Definition
Turnover Maximum new turnover limit of Rs. 40 crore Maximum old turnover limit of Rs. 20 crore
Paid-up capital Maximum new paid up share capital of Rs. 4 crore Maximum old paid up share capital of Rs. 2 Lac

Compliance benefits for a Small Company under the Companies Act, 2013

Exempt from maintaining Cash Flow Statement (CFS) 

A small company is not required to prepare and maintain a cash flow statement (CFS) as a part of financial statements as mandatorily required for all companies under companies Act 2013.

Exempt from holding minimum number of board meetings in a year

Every company must hold minimum of 4 meetings in a year whereas a small company is required to hold a minimum of 2 board meetings only to comply with law.

CARO 2020 is not applicable

Caro 2020 is an additional reporting required under companies act 2013 and same is issued by Statutory Auditors along with Audit reports for the companies audited by them. A small company is exempt from CARO 2020 reporting requirements.   

Abridged form of Annual Return - Form MGT-7A

As per Company Act, 2013, Every company is required to prepare and file Annual return in form MGT-7 but a small company shall file the same annual return in the abridged from MGT-7A.  

Relaxation in certification of Annual Return by the company secretary or the company secretary in practice 

As per section 92 of Companies Act, 2013, Annual return to be filed by company shall be signed by a director and the company secretary or company secretary in practice. 
But if the company is a small company, the Annual return can be signed by the company secretary if available otherwise by a director of the company.

Lesser Fees and Penalties

MCA forms filing fees and penalties in case of any violation for the small companies are less in comparison to other companies.   

Exemption from Rotation of Auditor

All listed and some certain class of companies are required to comply with mandatory rotation of statutory auditors. A Small company is exempt from such mandatory rotation of statutory auditors.

Conclusion

Small companies represent the entrepreneurial ambitions and innovative capabilities of number of citizens and contribute to growth and employment in a significant manner. Small enterprises play a great role in generating revenue and employment in a developing country like India.  Recent amendment in the definition of small company is a great move of the government towards ease of doing business and ease of living for the corporates. This amendment was made to widen the scope of definition of small company and to bring more companies in the ambit small company. Because the small companies are exempted from some of the legal compliances as discussed above. Knowledge of reduction in compliance burden will help them to focus on the business development and to take the advantage of benefits provided by the law.

Official Notification Link:

PIB - Small Company

MCA Notification - Small Company