A Move Towards Ease Of Doing Business: Amended Definition Of A Small Company

The Ministry of Corporate Affairs ("MCA") has recently implemented a number of initiatives aimed at making it easier for companies to conduct their business and function with ease, a few of these are as follows: extending fast track mergers to start-ups, encouraging the incorporation of One Person Company ("OPC"), decriminalizing certain aspects of the Companies Act, 2013 r/w the allied rules made thereunder ("Companies Act") and other similar steps to facilitate ease of doing business. Following a similar objective, the definition of a 'small company' provided under the Companies Act has also recently been amended, wherein the MCA by way of issuing a notification (notification number G.S.R. 700(E)), dated September 15, 2022 ("Notification"), and amending the Companies (Specification of Definitions Details) Rules, 2014, has widened the ambit of what is now defined as a 'small company'. By doing so, small companies are said to include companies whose paid-up share capital is no more than Rs. 4 crores and a P&L account turnover for the immediately preceding financial year of no more than Rs. 40 crores ("Revised Threshold"). Given that small companies in India, provide a significant contribution to the Indian economy, it appears that the intent of the government is to aid ease of doing business in light of the recently introduced amendment. This article seeks to highlight the potential advantages which the said Notification is likely to achieve. It is to be noted that the definition of a 'small company' (defined under (Section 2(85) of the Companies Act)), has over the years seen a few amendments. The following paragraphs, broadly provide an overview of the same: The Companies Act defined a small company as one which either had a paid-up share capital of less than Rs. 50 lakhs or such higher amount as maybe prescribed but not more than Rs. 5 crores; or a last P&L account turnover of less than Rs. 2 crores or such higher amount as maybe prescribed but not more than Rs. 20 crores. By way of an amendment in 2015[1], the thresholds discussed were subsequently amended where for a company to be considered as a small company, the requirements of a paid-up share capital and turnover both would need to have been met at the same time. Subsequently, in 2017, by way of an amendment[2], (i) the prescribing power to increase paid-up capital was increased from 5 crores to 10 crores; (ii) the prescribing power to increase turnover was increased from 20 crores to 100 crores; and (iii) the turnover as per "the last P&L account" was amended to as P&L account for the immediately preceding financial year. With the amendment in 2021[3], the threshold of paid-up capital and turnover of small company was increased from Rs. 50 lakhs to Rs. 2 crores and 2 crores to 20 crores respectively.Advantages That Small Companies Get Under The Companies Act, 2013 Ease in preparing of Financial StatementsSection 2(40) of the Companies Act provides the definition of the term 'financial statement' wherein it has been stated that: "The financial statement, with respect to One Person Company, Small Company, and dormant company, may not include the cash flow statement". Considering the Notification, given that the threshold of what constitutes a small company has been subsequently amended, this would mean that a larger number of companies would automatically fall under the definition of a 'small company' who would now not mandatorily be required to prepare cash flow statements as a part of the financial statements. Exemption to Companies (Auditor's Report) Order, 2020 Reporting The Companies (Auditor's Report) Order, 2020 ("CARO 2020")[4] was released by the MCA and is applicable to every report issued by auditors of a specified class of companies under Section 143 of the Companies Act, for financial years beginning on or after April 01, 2021. CARO 2020 states that the following entities are exempt from its application: banking companies; insurance companies; companies licensed to operate under Section 8 of the Companies Act;one-person companies as defined in Section 2(62) of the Companies Act; small businesses as defined in Section 2(85) of the Companies Act; and private limited companies that are not subsidiaries or holdings of public companies. Given that the definition of a 'small company' has by way of the Notification, seen more companies getting covered under its ambit, this would mean that more companies can now benefit from the exemption provided by way of CARO 2020. Mandatory rotation of auditor not required According to Section 139(2) of the Companies Act, there needs to be a mandatory rotation of individual auditors every five years and for firms of auditors, it is every ten years; the said requirement however does not apply to small firms/ small companies. Given that in light of the Notification, there has been a relaxation in the definition...

A Move Towards Ease Of Doing Business: Amended Definition Of A Small Company

Aseem Sahni

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A Move Towards Ease Of Doing Business: Amended Definition Of A Small Company

Aseem Sahni

This is a premium content Available exclusively to Our subscribers

INR 1099+GST

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This is a premium content
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