All about Small Companies

The Companies act 2013 which came into effect from 1^st 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 30^th, then the next  Board meeting should be conducted on or after 29^th July 2015 and cannot be conducted prior to that.  Similarly, the next Board meeting should be conducted on or after 27^th 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

1.  Balance Sheet
2. Profit/Loss account or Income/expenditure statement
3. Cash flow statement
4.  A statement of change in equity
5. 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 28^th 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.