Centre has tightened definition of small company
The Corporate Affairs Ministry tightened the definition of a ‘small company’ in the new company law, to prevent misuse of the privileges available to this category.
The new company law enacted in 2013 had introduced this new category.
Under the earlier definition, a small company was one that met one of two criteria: paid-up share capital not exceeding Rs. 50 lakh or turnover not exceeding Rs. 2 crore.
The main difficulty was that companies that met the first criterion but exceeded the monetary limit in respect of the second criterion were also getting classified as a ‘small company’.
Now, a company will have to clear both the tests — paid-up capital as well as turnover norm — to qualify as a ‘small company’.
Consequently, it is likely that several entities that were previously classified as small companies will cease to be categorized as such.
Those companies that lose the ‘small company’ tag need to comply with all the general requirements applicable to companies.
Lalit Kumar, Partner, J Sagar Associates, a law firm, opined that the change in the definition of a ‘small company’ should have come through an amendment Bill in Parliament and not through a removal of difficulty order, as was the case now.
The substitution of the word “or” redefined Small
Companies Under The Companies Act, 2013
Ministry of Corporate of Affairs of India come up with the Removal of Difficulties Order, 2015 on 13th February, 2015 redefining the meaning of the Small Company by substituting the word “or” with the word “and” occurring at the end of the Clause (i) of section 2 (85) of the Companies Act ,2013.
After this clarification now it is clear that a company shall be treated as small company when it fulfill both the following criteria
1. The paid up share capital does not exceed Rs. 50 Lacs
2. Turnover does not exceed Rs. 2 crores
The change would surely force many companies to change its status of being a small company and would withdraw various privileges that they would have enjoyed before such change of status. The change also mandates those companies to get the forms compulsorily certified by the practicing professional and are required to get their Annual Returns certified by the Practicing Company Secretary and thereby also increasing the scope and responsibility of Practicing
According to section 2(85), a company may be treated as a ‘small company’ if it meets either of the conditions provided therein i.e. paid-up capital or turnover, thereby making the other limit unrestricted or inconsequential as certain companies which, though, meet only one of the criteria but exceed the other, are also getting classified as ‘small companies’.
Moreover in the absence of provisions under section 186 , providing exemption to a banking company or an insurance company or a housing finance company making acquisition of securities in its ordinary course of business, such companies were facing difficulty in acquisition of securities in their ordinary course of business.
Therefore vide the Companies (Removal of Difficulties) Order, 2015 dated 16th February 2015, MCA amended section 2(85) and 186 in the below given manner: Sec. 2(85) In sub-clause (i), for the word “or” occurring at the end, the word “and” shall be substituted Text of existing sub-section is given below :
‘‘small company’’ means a company, other than a public company,—
1. 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
2. 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:
Sec 186. In sub-section (11)(b) after item (iii), the following item shall be inserted, namely “(iv) made by a banking company or an insurance company or a housing finance company, making acquisition of securities in the ordinary course of its business.”.
Text of existing sub-section is given below
(11) Nothing contained in this section, except sub-section (1), shall apply —
(b) to any acquisition —
1. made by a non-banking financial company registered under Chapter IIIB of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities:
Centre has tightened definition of small company
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