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NEW DELHI : The government’s move to amend the definition of small companies in the Companies Act is set to benefit about 1.2 million businesses, or nearly 80% of all active companies, according to official estimates.
The businesses will now be eligible for lower penalties and a simplified compliance regime, said a person familiar with the development, requesting anonymity. “This will also be immensely beneficial for startups,” he added.
On 22 September, the ministry of corporate affairs issued an order saying that a business with up to ₹4 crore paid up capital and ₹40 crore sales will be classified as a small company, compared to the earlier ₹2 crore and ₹20 crore in paid up capital and sales, respectively. The move seeks to support small firms in growing their businesses in a simplified regulatory regime.
Covering 80% of India Inc. under the definition of small companies boosts ease of doing business, and encourages businesses in the informal sector to get incorporated as companies.
Despite India having about 1.5 million active companies, a majority operates in the informal sector. Proprietorships do not require to get registered under the Companies Act. According to official government data, based on a 2015-16 survey, there were 63 million unincorporated non-agricultural micro, small and medium enterprises in India, which are into manufacturing, trading and other services, representing about 110 million jobs. About half of the companies are in rural areas. A simpler compliance and penalty regime is expected to help the companies transition to the formal sector.
Entities classified as small companies, according to rules under the Companies Act, do not have to submit cash flow statement as part of financial statements. They are also allowed to file an abridged annual return. They are also not required to mandatorily carry out auditor rotation. The annual return of small companies can be signed by a company secretary and, where there is no company secretary, it can be endorsed by one of the directors of the company. Also, the auditor of a small company is not required to report on adequacy of internal financial controls and its operating effectiveness in his report.
Unlike other companies which need to hold four board meetings in a year, small companies have to hold only two.
The change in small company definition is expected to reduce litigation over penalties and will provide a huge boost to the startup ecosystem, the person said.
The government is strengthening technology-led statutory filing systems and compliance management systems so that there is real time oversight about the statutory filings by businesses and real-time verification of the identity of persons filing documents on behalf of the companies.
Email queries to a spokesperson of the ministry of corporate affairs on Sunday seeking comments for the story did not elicit any response till press time.
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John Miller has been writing about science, gaming, and tech culture for over a decade. He’s a top-rated reviewer with extensive experience helping people find the best deals on tech and more.
