Benefits Granted to Small Companies

Companies Act 2013 introduced the concept of small companies in India, which have less stringent compliances under the Act. As per Section 2(85) of the Companies Act 2013, there are 4 essential criteria are to be simultaneously met for being a ‘small company’:

1. Not being a public company does not have a parent holding company and not a subsidiary of any other company.

2. Not being an NGO registered as Section 8 Company

1. Not governed by any other special Act
2. With regard to the share capital/ turnover:

a. It has a total paid-up share capital of less than Rupees 10 crore

b. It has a turnover of less than Rupees 100 crore.

5. Further, the turnover should be as per profit and loss account for the immediately preceding financial year and not as per its last financial year.

A company while is eligible to be known as a small company in one particular year might not be eligible to have the status in the subsequent year. This status is determined on the basis of annual return filed. This form needs to have an attached self-certificate (as per the format in MGT-7) which declares the company is a small company. The concept was introduced to encourage entrepreneurship in the nation and provide benefits to those who are already in the markets. The provisions have enabled the segregation of those which are held by big corporate houses from those genuinely require the aid of the government to prosper and contribute to the economy and growth.

What are the exemptions & benefits granted to a small company?

A small company is entities to many benefits which are available to OPC, most of which are provided to reduce the burden of compliances since they operate on a much smaller scale i.e. it does not have many members or transaction made by the company are relative of lower amounts. The benefits as provided to the small company are:

1. Board Meetings: It may hold only two board meetings in a year instead of four for ordinary companies. There must be a minimum gap to 90 days between the two meetings and they can be held in each half of the calendar year.
2. Financial Statements: The Company is not required to include the cash flow statement as a part of its financial statements.
3. Rotation of Auditors: The provisions regarding mandatory rotation of the auditor or the maximum term of an auditor being restricted to a 5 year in case of an individual and 10 years for an audit firm is not applicable.
4. Merger Process: As per Section 233 of the Companies Act, the merger process of two or more small companies has to be approved on the fast track basis. Such merger shall require the approval of :

a. Official Liquidator;

b. Regional Director of Companies;

c. Members holding 90% of the total number of shares (or more), and

d. Majority of creditors who represent 9/10th in the value of the creditors or class of creditors of the respective companies which are indicated in the meeting convened by the company after giving a notice of 21 days along with the scheme to its creditors for the purpose, or have otherwise been approved in writing.

5. Internal Financial Controls: The auditors of small companies need not report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.

1. Signatures in Annual Returns: Company Secretary alone, or when there is no CS, then a single director of the small company can sign the annual returns of the company.
2. Remuneration of directors: As per MCA notification in June 2015, the small companies instead of providing details of remuneration of directors and key managerial personnel of the company shall provide details of the aggregate amount of remuneration drawn.
3. Lesser Penalties: Under Companies Amendment Act, 2013, relief has been provided to Small Company in case of failure to comply with the provisions of section 92 (5) for Annual Return, section 117(2) for Resolutions and agreements to be filed, section 137 (3) for Copy of financial statement to be filed with Registrar. In event of default, the company and officer in default would be subject to levy of fine or imprisonment or both, as the case may be, not being more than half of the fine or imprisonment or both, as the case may be, of the minimum or maximum specified in such sections.

As mentioned above, a small company need to retain the status throughout its existence the year it fails to meet the essential requirements as stated, the benefits shall be withdrawn from eh next year onwards. The act facilitates business-friendly regulations for small companies and is a positive step taken to promote investments and small companies.

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