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MCA amends definition of Small Company under Section 2 (85)

Ministry of Corporate Affairs (MCA) has defined the concept of ˜Small Company in the Companies Act 2013. Under section 2 (85) of the Companies Act, 2013 a Small Company means a company other than a Public Company that satisfies either of the following conditions:

  • Paid-up share capital which does not exceed 50 lac rupees or such higher amount as may be prescribed which shall not be more than 5 crore rupees
    Or

     

  • Turnover of which as per its last profit and loss account does not exceed 2 crore rupees or such higher amount as may be prescribed which shall not be more than 20 crore rupees.

Provided that nothing in this clause shall apply to

(A) A Holding Company or a Subsidiary Company;

(B) A company registered under section 8; or

(C) A company or body corporate governed by any special Act.

However there were difficulties faced to ascertain whether a company is a Small Company based on the paid share capital or turnover as per last profit and loss account. MCA has listed some of the challenges as follows:

If the company breaches any one criterion for Small Company, it will not be eligible for the benefits of Small Company, for ex: a company that has a paid up capital Rs. 25 lacs and the turnover for a particular year is Rs 2.5 crores will not be classified as Small Company. The status of a company as a Small Company may change from year to year.

Holding Company and Subsidiary Company being exempted from the definition of Small Company will never be able to avail the special privileges of a Small Company even if they fulfill either 1/ paid up share capital or 2/ turnover requirements  of a Small Company.

In order to overcome these difficulties, MCA passed an order Companies (Removal of Difficulties) Order, 2015 on 13th Feb, 2015 to amend the definition of ˜Small Company as a company (other than Public Company) whose paid up capital does not exceed Rs. 50 lacs and turnover as per last profit and loss account does not exceed Rs. 2 crores.

With the change in the definition of Small Company, some of the companies who were falling under Small Company category will now move to non-small company category. As a result the exemptions which were provided to these companies will not be applicable as mentioned below:

  • The company which does not fall under Small Company category as per amended definition will have to prepare the cash flow statement as a part of their financial statement.
  • The company which does not fall under Small Company category as per amended definition or which is not a One Person Company (OPC has one shareholder), will have to get their annual returns signed both by the Director and the Company Secretary. In the case of Small Company, One Person Company or Unlisted Company, either the Company Secretary or the Director can sign the Annual Returns.
  • The company which does not fall under Small Company category as per amended definition will have to ensure the mandatory rotation of auditor, which is 5 years in the case of individual auditor and 10 years in the case of a firm of auditors. This is exempted for Small Company as per amended definition.
  • The company which does not fall under Small Company category is required to hold at least 4 meetings every year and the gap between two consecutive meetings should not be more than 120 days. Small Company, One Person Company or Dormant Company may hold only two board meetings in a year, i.e. half-yearly board meetings with a minimum gap of 90 days between two meetings.

As mentioned earlier, a company which is categorized as Small Company may move to non-small company category through its life term. In case a particular company does not meet the requirement as mentioned above, for one year, the benefits and exemptions will be withdrawn from the subsequent year.

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