The Companies act 2013 which came
into effect from 1st April 2014 has brought lots of changes in the
way business is being carried in India.
It demands more transparency in our
business dealings, stricter punishments for non-compliance and ultimately has
a sole aim of protecting the interest of investors and the public resources.
One of the attractive benefits
available in this act is the classification of companies into different types
for the sake of reducing compliance burden.
- One Person Company (OPC)
- Small Companies
- Dormant Companies
- Private Companies
- Public companies
Small Companies
A Small company is a private company
that is small in size in terms of its capital and revenue.
The Section 2(85) of the companies
defines a small company as follows:
“Small company” means a company, other than a
public company:-
Paid-up share capital of which does
not exceed fifty lakh rupes or such higher amount as may be prescribed which
shall not be more than five crore rupees or
Turnover of which as per its last
profit and loss account does not exceed two crore rupees or such higher amount
as may be prescribed which shall not be more than twenty crore rupees.
Provided that nothing in this clause
shall apply to –
- a holding company or a subsidiary company
- a company registered under Section 8 or
- a company or body corporate governed by any special act.
Provisions from Companies Act:
The following are the privileges
available to a Small company under the Companies act, 2013.
Board meeting: The provisions of Board Meetings as
specified in Section 173 of the Companies Act, 2013 is said to have been
complied by the Small Companies, if one meeting of the Board has been conducted
in each half of a calendar year and the gap between the two meetings is not
less than ninety days.
This provision has reduced the
compliance burden on the small companies from carrying out minimum of four
board meetings in a financial year as per the Companies Act, 1956.
This is highly beneficial for Small
Start ups, as they can focus their energy on their business development,
instead of incurring costs for conducting Board meetings.
Calculation:
FY 2015-16:
In a calendar year there has to be 2
Board meetings (minimum). So, from January to June there has to be a Board meeting.
Suppose the company conducts the first board meeting in April 30th,
then the next Board meeting should be
conducted on or after 29th July 2015 and cannot be conducted prior
to that. Similarly, the next Board
meeting should be conducted on or after 27th October 2015.
Though this provision seems to make
the compliance simple, it also restricts the board from meeting, during urgent
or emergency issues, which might arise or which requires the approval of the
board “at the meeting” within the 90 days gap.
Annual return:
The Companies (Management and Administration) Rules 2014 has prescribed
form MGT-7 as format for Annual Return. This Annual return must be certified by
one Director of the company in case of Small Companies and a Certification to
the effect that the company continues to be a Small company must be given by
the Director of the company.
Financial Statement: The
financial statement of a Small company may not include a Cash Flow Statement. As per the definition of financial statement [section
2(40)]- the term financial statement includes
- Balance Sheet
- Profit/Loss account or Income/expenditure statement
- Cash flow statement
- A statement of change in equity
- Any explanatory notes annexed to or forming part of the documents specified above.
It is at the discretion of the company
whether to include Cash flow Statement in their financial statements .
Merger or Amalgamation of Small companies:
- Two or more Small companies can merge together by following the conditions
and procedures outlined in Section 233 of the Companies Act, 2013
Let us analyze the definition of
Small Company in order to identify the pros and cons hidden in
a. Paid-up share capital of which does
not exceed fifty lakh rupees or such higher amount as may be prescribed which
shall not be more than five crore rupees or
b. Turnover of which as per its last
profit and loss account does not exceed two crore rupees or such higher amount
as may be prescribed which shall not be more than twenty crore rupees.
Benefits
This definition which classifies the
companies with minimum paid up capital of less Rs.50 lacs or Turnover of less
than Rs. 2 crores is a boon to many of
the new entrepreneurs who are eager to start their business in a small level,
as they are not much burdened with compliance cost and procedures. When the company
wishes to expand by further issue of shares, it has to comply with the
provisions applicable for a private company.
The proviso to Section 2(85) is
reproduced below,
Provided that nothing in this clause
shall apply to –
a. a holding company or a subsidiary
company
b. a company registered under Section 8
c. a company or body corporate governed
by any special act.
Detailed explanation of
non-applicability in certain cases:
The following types of companies
will not get covered under Small Company definition.
ü
Holding
or Subsidiary Company
Eg. A pvt ltd - Holding company
B pvt ltd
-subsidiary company for A & holding company for C
C pvt ltd -subsidiary company (for both A
& B)
The relationship of holding and
subsidiary is established in the following manner.
I.
If
‘A’ controls composition of Board of Directors of B. ie., if it can appoint or
remove all or majority of the directors of ‘B’
II.
If
a company can control more than half of
the Share Capital (more than 50%) either solely or together with its
subsidiaries. Eg. If ‘A’ holds more than 50% shares in B solely; and if ‘A’
holds more than 50% shares in ‘C’ either solely or together with its subsidiary
‘B’.
Company ‘C’ is to be deemed to subsidiary
of ‘A’ (ultimate holding company), as ‘B’ the Holding company of ‘C’ and it is
the Subsidiary of ‘A’.
In this case, if C or B or A , all
or any of the company will not be considered as a Small Company even when their
paid up capital is less than Rs. 50 lacs or their Turnover is less than Rs. 20
Crore. This means, all the 3 companies should comply with the provisions of a
Private company.
In the definition of Subsidiary
company, as per Section 2(87), Explanation (c) to first proviso says that the word
“Company” appearing in the definition of Subsidiary includes a body corporate.
Let us look at the definition of
body corporate:
Section 2(11) – “body corporate” or “corporation”
includes a company incorporated outside India, but does not include-
i.
a
co-operative society registered under any law relating to co-operative
societies; and
ii. any
other body corporate (not being a company as defined in this Act), which the
Central Government may, by notification specify in this behalf;
Based on the combined reading of the
Definitions on ‘Small Company’, ‘Subsidiary company’ and ‘Body corporate’ , it
is clear that a company which has a Wholly Owned Subsidiary outside India,
cannot enjoy the privileges of a Small Company even if its Paid up capital and
turnover is as prescribed under the act.
ü
Company
registered under Section 8 – companies that are formed with charitable objects
as
defined in Section 8 (1) of the Companies Act, 2013.
ü
A
company or a body corporate governed under any Special Act. Eg., a Insurance company,
Banking company etc,.
Will foreign investment affect small
company status?
The status of a Small company will
get affected, foreign investment is received by the company in the form of
subscription to its Share capital exceeding 50% , this will make the company a
Subsidiary company and so it loses its status as a Small company.
As long as the Foreign Investment is
within the limit, the company will enjoy the status of Small Company.
Conclusion:
Thus incorporating a company as a
Small company has the above said benefits and hindrances in doing the business.
Most of the companies are incorporated with the minimum paid up capital of Rs.
1 lacs which makes them a Small company. Only when a company is becoming a
Subsidiary or holding company or when it’s paid up capital or turnover exceeds
the prescribed limit, it has to comply with provisions for a Private company.
Even the relaxations applicable for Small companies are with respect to holding
Board meetings, Financial Statements and Annual Returns.
With the Companies (Registration
Offices and Fees) Amendment Rules, 2014 notified on 28th April 2014,
the requirement of getting the forms certified by practicing professionals has
been done away with for Small Companies, for certain e-forms.
Thus, the new Companies act ensures sufficient
disclosures and demands greater responsibility on the part of the company, than
shifting the burden of authentication of documents on the professionals.
