Introduction:
The Companies Act, 2013, is a comprehensive legislation governing the functioning of companies in India. Among its provisions, there are specific regulations that cater to the needs of small companies, aiming to ease compliance burdens and promote entrepreneurship. In this blog, we will explore the key aspects of the small company provisions under the Companies Act, 2013, to help you understand the benefits and obligations associated with being classified as a small company.
Definition of a Small Company:
Paid-up Capital: A company with a paid-up capital of not exceeding Rs. 50 lakhs or such higher amount, not exceeding Rs. 2 crores, as may be prescribed.
Turnover: A company with an annual turnover not exceeding Rs. 2 crores or such higher amount, not exceeding Rs. 20 crores, as may be prescribed.
Net Worth: A company with a net worth not exceeding Rs. 1 crore or such higher amount, not exceeding Rs. 10 crores, as may be prescribed.
Exclusions from Small Company Definition:
Holding and Subsidiary Companies: If a company is a subsidiary of another company or has subsidiaries, it does not qualify as a small company.
Section 8 Companies: Companies registered under Section 8 of the Companies Act, which are established for charitable purposes, are not eligible for small company classification.
Companies engaged in Financial Activities: Companies engaged in activities such as banking, financial services, insurance, or collective investment schemes are not considered small companies.
Key Benefits of Small Company Classification:
Reduced Compliance Requirements:
a. Financial Statements: Small companies are required to prepare and file abridged financial statements containing simplified information compared to larger companies.
b. Board Reports: Small companies have the flexibility to prepare a simpler board report, focusing on key aspects of their business operations.
c. Audit Committee and Related Parties: Small companies are exempt from constituting an audit committee and complying with related party transaction disclosure requirements.
d. Internal Audit: Small companies are not required to maintain an internal audit system.
e. Secretarial Audit: The provision of mandatory secretarial audit does not apply to small companies.
Exemptions from Certain Provisions:
a. Annual General Meetings (AGMs): Small companies can conduct AGMs through the written resolution method instead of a physical meeting.
b. Managerial Remuneration: Small companies have more flexibility in determining managerial remuneration, with fewer restrictions on maximum limits.
c. Related Party Transactions: The stringent requirements regarding related party transactions are relaxed for small companies.
d. Corporate Social Responsibility (CSR): Small companies are exempt from the mandatory CSR spending obligation.
Specific Obligations and Considerations for Small Companies:
A. Maintenance of Books of Accounts and Financial Statements:
Format and Requirements: Small companies must maintain proper books of accounts and prepare financial statements in accordance with the prescribed accounting standards.
Financial Year and Filing Timelines: Small companies must follow the stipulated financial year-end and ensure timely filing of financial statements with the Registrar of Companies (RoC).
Board Composition and Meetings:
Minimum Number of Directors: Small companies must have a minimum of two directors, with at least one director being an Indian resident.
Board Meetings and Quorum Requirements: Small companies are required to hold at least two board meetings in a calendar year, with a maximum gap of 120 days between two consecutive meetings. The quorum for board meetings must be either two directors or one-third of the total number of directors, whichever is higher.
Loans to Directors:
Prohibited Loans and Investments: Small companies are prohibited from granting loans to directors or making any investments, except as permitted by the Companies Act, 2013.
Exceptions and Compliance: In certain cases, small companies may provide loans to directors subject to compliance with specific requirements and approval from the board or shareholders.
Statutory Auditor Appointment:
Rotation and Compliance Requirements: Small companies are not required to follow the mandatory rotation of auditors. However, they must ensure compliance
with the auditor appointment and reporting requirements.
Audit Committee Composition: Small companies are exempt from constituting an audit committee, but they must comply with the composition requirements if they have more than one director.
Transition from Small Company to Other Categories:
A. Change in Classification Criteria:
Increase in Paid-up Capital, Turnover, or Net Worth: If a small company crosses the prescribed limits of paid-up capital, turnover, or net worth, it ceases to be classified as a small company and becomes subject to the compliance obligations applicable to the new category.
Consequences and Compliance Obligations: Upon reclassification, the company must comply with the reporting, audit, and other requirements applicable to the new category.
B. Voluntary Upgradation:
Procedure and Legal Requirements: Small companies have the option to voluntarily upgrade their status by passing a special resolution and complying with the necessary legal requirements.
Advantages and Implications: Voluntary upgradation may provide access to additional resources, funding opportunities, and enhanced credibility, but it also entails increased compliance obligations and scrutiny.
Conclusion:
The small company provisions under the Companies Act, 2013, aim to provide relief to entrepreneurs by reducing compliance burdens and offering exemptions from certain provisions. Small companies enjoy benefits such as simplified financial reporting, flexible board meetings, and exemptions from audit committee requirements and related party transaction disclosures. However, small companies must fulfill their specific obligations regarding financial statements, board composition, loans to directors, and statutory auditor appointments. Timely compliance and a thorough understanding of the provisions are essential to maintain the small company status or transition to a different category as the business grows. Seeking professional advice can be instrumental in ensuring compliance and making informed decisions to maximize the advantages of being a small company under the Companies Act, 2013.
Frequently Asked Questions (FAQs)
Q: How is a small company defined under the Companies Act, 2013?
A: A small company is defined based on criteria such as paid-up capital, turnover, and net worth. It must meet certain thresholds prescribed by the Act.
Q: What are the benefits of being classified as a small company?
A: Small companies enjoy reduced compliance requirements, exemptions from certain provisions, and flexibility in areas like financial statements, board meetings, managerial remuneration, and related party transactions.
Q: Are there any exclusions from the definition of a small company?
A: Yes, holding and subsidiary companies, section 8 companies, and companies engaged in financial activities are excluded from the small company definition.
Q: What are the compliance obligations for small companies regarding financial statements?
A: Small companies must maintain proper books of accounts and prepare financial statements in accordance with the prescribed accounting standards. They also need to file the statements with the Registrar of Companies (RoC).
Q: Do small companies have to appoint an auditor?
A: Yes, small companies are required to appoint a statutory auditor, but they are exempt from the mandatory rotation of auditors.
Q: Can small companies grant loans to directors?
A: Small companies are generally prohibited from granting loans to directors, except in certain cases permitted by the Companies Act, 2013, and subject to compliance with specific requirements.
Q: What are the board composition requirements for small companies?
A: Small companies must have a minimum of two directors, with at least one director being an Indian resident.
Q: Are small companies required to hold annual general meetings (AGMs)?
A: Small companies can conduct AGMs through the written resolution method instead of a physical meeting, providing more flexibility in fulfilling the AGM requirements.
Q: Can a small company transition to a different category?
A: Yes, if a small company surpasses the prescribed limits of paid-up capital, turnover, or net worth, it ceases to be classified as a small company. The company must comply with the obligations applicable to the new category.
Q: Can a small company voluntarily upgrade its status?
A: Yes, small companies have the option to voluntarily upgrade their status by passing a special resolution and fulfilling the legal requirements associated with the new category.
