Small is Big
History
Companies have been in existence in India since the 18th century. Until early nineteenth century, the British company law was followed in India as well. The Companies Act enacted in 1913 was the first Indian company law which governed the registration, incorporation, functioning and winding up of companies. This was replaced by the Companies Act 1956 which remained in force until being replaced by the Companies Act 2013.
The 1956 Act introduced the classification of companies based on number of members, liabilities and place / situation:
Classification
Types of Companies
Defining feature(s)
Liability
Company Limited by Shares
The company has members / shareholders. The Liability of the members / shareholders is limited to the amount (if any) unpaid on the shares held by them. Profit may be declared as dividend and distributed to members / shareholders.
Company Limited by Guarantee
There are no shareholders. There are guarantors who agree to pay a certain amount in the event of winding up of company. Profits earned are ploughed back into further company’s business.
Unlimited Company
Liability of members is unlimited – They will be liable for the company’s debts in proportion to their respective interests in the company.
Place / Situation
Indian Company
Companies incorporated / registered in India and fulfil all statutory obligations in India
Foreign Company
Companies incorporated / registered outside India and have a place of business in India.
Members / Shareholders
Public Company
Company that has limited liability and offers shares to public. Mandatory to have at least 3 directors and 7 members / shareholders.no restriction on maximum number of members.
Private Company
Company that is closely held. Mandatory to have at least 2 directors and 2 members / shareholders. Restricts transferability of shares and maximum number of members to 200.
The Companies Act 2013 that the introduced further categorization of companies in addition to Private and Public companies.
Further categorization
Defining feature(s)
One person Company (OPC)
- Company formed as a private company
- has only one person as member
- has only one director
- being only one person, such person must choose a nominee who may become its member in the event of death of the death of the sole member
- enjoys several privileges exemptions from compliance under the Companies Act
Small company
- company formed as company other than public company
- classification based on minimum paid up capital AND turnover
- enjoys several privileges exemptions from compliance under the Companies Act
Government company
Company in which 51% of the paid- up share capital is held by
- Central government OR
- State Government(s) OR
- Partly by Central government and partly by State government(s) and includes a subsidiary of such government company
- Paid up share capital shall be construed as ‘total voting power’ where shares with differential voting rights are issued.
Subsidiary company
A company (including a body corporate) in which a ‘holding company’
- Controls the composition of Board of directors OR
- Exercises or controls more than half of the total power either on its own or together one or more of its subsidiary companies
- Provided such holding companies may not have more than 2 layers of subsidiary companies
Holding company
A company (including a body corporate) in which such company(s) are subsidiary companies as stated above
Associate company
- A company, in relation to another company is one which has ‘significant influence’ in that other company, but that other company it not its subsidiary of company having significant influence
- Includes a joint venture company
- Significant influence means: control of at least 20%of total voting power or control or participation in business decisions under an agreement
- For ex: if Company A controls 20% of the total voting power in Company B, then Company B will become the Associate company of Company A
Producer company
- A company which is legally recognized body for exclusively producing, marketing, selling of produce of its primary members. Mainly the activities relate to agricultural produce. Several conditions are stipulated for carrying on business as producer company
Dormant company
- A company not having any accounting transactions for at least 2 years but has prospects in future or holds substantial intellectual property, it will be considered inactive and such company can make an application to the concerned Registrar and obtain a “dormant” status.
Evolution of the concept of ‘Small company’
The small company has probably undergone most changes since its classification under the Companies Act 2013. In India there are several family run businesses, businesses led by women. First time entrepreneurs start small companies and then scale up consistently. Currently there are almost 15 lakh companies classified as small companies.
The classification as a small company depends upon its paid-up capital and turnover. the thresholds have been periodically revised, the latest amendment being in September 2022. A look at the thresholds and their amendments:
Small company – thresholds / amendments
Threshold limits
w.e.f 01.04.2014
w.e.f 01.04.2021
w.e.f 15.09.2022
Paid up capital
Not more than 50 lakhs
Not more than 2 Crores
Not more than 4 Crores
Turnover (as per its last P&L Account)
Does not exceed 2 Crores
Does not exceed 20 Crores
Does not exceed 40 Crores
Note: for a company to be a small company, both paid up capital AND turnover threshold limits must be met.
Highlights – Small company
1. A private company will be considered as small company as long as it is within the thresholds mentioned above. Once it crosses the threshold limits, it will cease to be a small company and lose it privileges / relaxation under the Companies Act 2013.
2. The following companies will not be classified as small company:
- A holding or subsidiary company
- A Section 8 company (‘Not for profit’ company)
- A body corporate or governed by any special Act
3. A small company enjoys several relaxations from compliance under the Companies Act 2013:
- A small company need not hold 4 Board meetings in a year. It is sufficient to hold 2 meetings every year in such a way that the minimum gap between two board meetings should be at least 90 days. A small company can hold 1 board meeting in each half of the calendar year
- E- Forms filed by a small company does not require certification by a practicing professional. An annual return can be signed either by 1 director or a company secretary, if there is one.
- The Board of directors’ report contain lesser disclosures. A small company need not report on adequacy of internal financial controls. Cash flow statement need not be included as part of financial statements.
- Rotation of auditors after two consecutive 5 year term is not applicable to a small company.
- Small companies enjoy lesser penalties for non- compliance of any provisions of the Act.
India (Inc.) shining
The paid up capital and turnover thresholds for a small company have been periodically revised and raised. This has been done to bring in more companies under the small company ambit. This allows more companies to enjoy benefits / relaxations under the Companies Act. This ease of doing business will encourage more entrepreneurial ventures / companies to commence thereby increasing employment generation. This will further make the start up eco system attractive. India Inc will be strengthened.
