MCA Amends the Definition of Small Companies

The Ministry of Corporate Affairs (MCA) in accordance with the changes proposed by our Union Finance Minister, Ms. Nirmala Sitharaman has notified amendments in the provisions of the Companies Act 2013. These changes relates to definition of a Small Company.

Further, such an amendment has been bought by way of the Companies (Specification of Definitions Details) Amendment Rules 2021. Also, it shall be significant to take into consideration that these amended regulations will come into effect from 01.04.2021.

In this blog, we will discuss in detail the amendments proposed by Union Budget 2021 in the provisions concerning small companies.

Amendments Made in the Definition of Small Companies

The definition of the term Small Company is given under section 2 (85) of the Companies Act 2013. Further, to understand the amendments made in the definition of small companies, it necessary to compare the earlier definition with the new one. The same can be summarised as:

Old Definition of Small Company

Based on the old definition, the term Small Company means a company other than a public limited company, which fulfils the conditions as follows:

• Paid up Share Capital of this company must not be more than Rs 50 lakhs or such a higher amount as may be specified which must not be more than Rs 5 crores;
• Based on the Profit and Loss Account of the previous Financial Year, the Turnover of this company must not exceed Rs 2 crores or such a higher amount as may be specified which must not be more than Rs 20 crore;

New Definition of Small Company

Based on the new definition notified by MCA (Ministry of Corporate Affairs), the term Small Company means a company other than a public limited company, which fulfils the conditions as follows:

• Paid up Share Capital of this company must not be more than Rs 2 crore;
• Based on the Profit and Loss Account of the previous Financial Year, the Turnover of this company must not exceed Rs 20 crores;

Also, Read: Customs Tariff Amendment Rules 2021 by CBIC

Reasons for Amending the Definition of Small Companies

To provide benefit to more than 2 lakh small companies that are incorporated in India, MCA has notified a change in the definition of small company, and has increased the limit of paid up share capital and annual turnover from Rs 50 lakhs and Rs 2 crore to Rs 2 crore and Rs 20 crores respectively.

Privileges offered to Small Companies

Based on the provisions of the Companies Act 2013, the privileges offered to Small Companies are as follows:

• It is mandatory for every type of company registered under the provisions of the Companies Act 2013 to hold 4 Board Meetings in a year. However, in the case of a Small Company, it needs to hold only 2 Board Meetings in a calendar year, i.e., it must hold 1 Board Meeting in each Half Year. Further, it shall be taken into due consideration that the gap between two meetings must not exceed the period of 90 days;
• In the case of a Small Company, the Annual Returns can only be signed by a Practising Company Secretary. However, if there is no CS available, then, in that case, a Director can sign the same;
• There is no need for a Small Company to maintain Cash Flow Statements as the same is part of the Financial Statements;
• It is compulsory for every type of company registered under the provisions of the Companies Act 2013 to change its Auditors by way of Rotation as specified under section 139 (2) of the Companies Act 2013. However, it shall be significant to take into consideration that there is no need for a small company to change its Auditors by way of Rotation and the same is exempt from this requirement;
• There is no need for a small company to report its Internal Financial Controls and the Operating Effectiveness in its Audit Report;
• In the case of a Small Company, there are Lesser Penalties prescribed in comparison to any other company incorporated under the provisions of the Companies Act 2013.

Conclusion

In a nutshell, the amendment made by MCA was in consonance to the announcement made by our Finance Minister in the Union Budget 2021. Further, the said amendment was made in the rules named Companies (Specification of Definitions Details) Rules 2014, which will become effective from 01.04.2021.

The main aim behind the amendment made in the definition of small company was to provide the benefits and coverage of such a concept to 2 lakh companies operating in the economy as well. Therefore, we can state that the decision to amend the definition of small company is a pragmatic and growth oriented step of the government.

Official Copy of the MCA Notification

Small-Companies-Notification

Also, Read: Companies (CSR Policy) Amendment Rules 2021 notified by MCA