LENS ON EASE OF DOING BUSINESS – BRINGING GREATER INCLUSIVENESS IN THE CATEGORY OF SMALL COMPANIES

 INTRODUCTION:

The Ministry of Corporate Affairs (hereinafter “MCA”) vide notification bearing reference G.S.R. 92(E), dated 1^st day of February 2021 introduced the Companies (Specification of Definitions Details) Amendment Rules, 2021 for amending the existing definition of ‘small company’ under the law for time being in force. The existence of the Companies Act, 2013 (hereinafter “the Act”) and subsequent amendments thereof supplemented with rules made thereunder is well established with the object to facilitate effective governance and promote simplicity in compliance for companies domiciled in the Indian soil. A holistic approach towards company law has been the mandate that growth of industries and the dynamic environment has posed.

Below elucidated is an observation made to highlight the intention of the law:

The Lok Sabha debate (December 16, 2014):

1.   A World Bank Report stated that that concerning ease of doing business in India, India was ranked at 142 among 189 countries. So, people found that it is difficult to do business here which is why the Act has undergone changes in order to promote easy business doing.

2.   After the detailed consideration, there were some minor amendments which were required in the Companies Act, 2013. Most of them are intended for one purpose, that is, for the ease of doing business.

SMALL COMPANIES – THE PRESENT POSITION:

Section 2(85) of the Act outrightly states that the companies which satisfy the following conditions, and which do not fall under the explicit categories are recognised as a small company:

·         The paid-up share capital of such company should not exceed 50 lakh rupees AND

·         Turnover of such company should not exceed 2 crore rupees.

It is imperative to understand that paid up capital (equity and preference together) in the above condition shall be taken on present specific date for ascertaining whether the entity is a small company and whereas turnover of a company shall be taken from the profit and loss account of the immediately preceding financial year.

However, the following class of companies are explicitly kept aside from being termed as a small company:

·         Public Company

·         a holding company or a subsidiary company

·         a company incorporated and registered under Section 8 of the Act

·         a company or body corporate registered and governed by any special Act.

PURPOSE OF CLASSIFICATION:

It is perceived in the eyes of law that a small company is characterised by the amount of funds deployed in its business and the quantum of revenue that such business essentially generates. The character of a small company is the one in which there are minimal operations with the number of resources available in hand. The rationale behind a bifurcation into a category known as a small company is to substantially reduce the compliance aspect and the associate cost which a company may incur had it been a company other than a small company. The Act confers certain benefits to small companies such as such companies may hold only 2 board meetings in a calendar year, i.e., one Board Meeting in each half of the calendar year with a minimum gap of ninety days between the two meetings, such companies need not comply with the law with respect to rotation of auditors, such companies need not prepare and attach a cash flow statement in addition to the financial statements, there are less penalties for small companies etc.

Below stated is an observation of the legislature that brings out the very intent of inclusion of a concept of a small company under the Act:

The Lok Sabha debate (July 27, 2017):

Compliance requirement which continues to be very high.  It is good; it is required.  But, if it is too high, it hits the ease of doing business. It can be high for large companies which have hundreds of employees and even they have the accounts and compliance departments.  But for a small company, to have such stringent compliance standards will actually reduce the ease of doing business. 

Therefore, an interpretation can be made out that the essence of a categorisation into a small company is well justified concerning the quantum of investment that a company shall incur on compliance.

AMENDING THE DEFINITION:

During the Indian Union Budget (2021-22), it was proposed to amend the existing definition of a small company to bring in greater inclusiveness in such a category to make departure from significant compliance requirement which was followed by a notification from the MCA amending the definition. This amendment brings in more companies into the umbrella of small companies thereby exempting them “legally” from compliance of various provisions of the Act and giving relief to such companies from incurring expenditure on compliance.

The paid-up capital slab of a small company has been enhanced from the existing limit of 50 lakh rupees to 2 crore rupees whereas the turnover limit has also been enhanced from 2 crore rupees to 20 crore rupees. Hence commencing from the effective date of the amendment, for a company other than specifically excluded companies, to be termed as a small company must satisfy the following conditions:

·         The paid-up share capital of such company should not exceed 2 crore rupees AND

·         Turnover of such company should not exceed 20 crore rupees.

EFFECTIVE DATE:

The amendment takes effect from the 1^st day of commencement of financial year 2021-22 i.e., 1^st day of April 2021.

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