Exemptions In The Companies Act For Every Small Company

Cash flow declarations can be excluded from year-end reports for small companies.In this article, we take a look at the different exemptions offered to small companies under the provisions of the Companies Act.

Companies operating out of India are regulated by the provisions of the Companies Act, 2013 (previously Companies Act, 1956). While the main objective of the Act is to ensure robust corporate governance and regulations regarding the incorporation and formation of the company, the Act also has provisions that promote small businesses, solidifying the foundations of the country’s economic self-sufficiency and growth. Indigenous companies are crucial for that. The Companies Amendment Act of 2017 included a new definition of a small company. As per the Act, any company other than a public company whose paid-up share capital does not exceed ₹50 lakhs rupees or any such higher amount as may be prescribed, which shall not be more than ten crore rupees.

Furthermore, any company, the turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crores or any such prescribed amount up to 100 crore rupees as described under Section 2(85) of the Act also falls under the category of a small company. A negative list also lists the companies that are excluded from the list of small companies despite meeting the criteria above. These include:

• A holding company or a subsidiary company
• A company registered under Section 8
• A company or corporate body covered by any Special Act

The stature of a company as a small company is variable. A company considered to be small in a particular year can become a standard company the following year with all the provisions withdrawn and once again become a small company the succeeding year with the benefits being available again.

Provisional Benefits Of The Companies Act For Small Companies

There are many benefits granted to small companies, but three significant intents are behind classifying them separately. 

1. Firstly, considering the size in which they operate, small companies get to function under lighter regulatory oversight. 
2. Secondly, they could be offered lesser and more cost-effective compliances when compared with larger companies. 
3. Thirdly, small companies should be aware of the stringent regulations for maintaining stakeholders’ interests meant for the wider-ranging companies.

Special Legal Provisions

Small pvt ltd companies are also provided with a small set-up between two small companies that can function without the interference of a tribunal but with just the approval of the Central Government (Regional Director), as mentioned in the Companies Act,2013.

Exemptions

According to the Companies Act, certain relaxations apply to small companies. These are usually common to all of them. Some of the exemptions are listed below:

1. Financial record requirements: Small companies are not required to add their cash flow statement to their financial records.
2. Considerations for annual records: The annual records must contain information regarding the aggregate amount of remuneration drawn by directors, and these annual records can be signed by the company secretary alone or in case of the absence of a secretary, a single director can also take charge; whereas the other companies will have to get their records signed by both the secretary and the director.
3. Restrictions on the number of board meetings: A small company is only to have two board meetings per year, that is, one meeting each half of the calendar year. It is also required that the meetings be held with a least 90 days of gap between the two. However, in the case of a non-small company, there have to be four meetings held per year.
4. Rotation of company auditors: Small companies can follow the condition laid in Section 139(2) of the Company Act 2013, which mandates the rotation of auditors every five years (individual auditors) and every ten years (firm of auditors).
5. Exceptions in auditor’s reports: Auditors’ reports do not have to report about the adequacy of internal controls and their operational effectiveness in their reports.
6. Reduction in penalties: The non-compliance of any company with the provisions of Section 92(5), Section 117(2), and Section 137(3) of the Company Act shall be punished with imprisonment or fine or both, depending on the integrity of the offence. But small companies are exempted from the punishment or often given lesser penalties under Section 446 B of the Companies Act 2013.

Things To Be Noted About The Exemptions

• Audit exemption takes effect from the beginning of the next financial year after the company’s establishment.
• A company with corporate stakeholders who also fulfil the eligibility criteria to become a small company can be entitled to a small company audit exemption.
• Foreign companies are mostly not entitled to the audit exemption except for Singapore-based companies.
• Even though a company qualifies as a small company but the group to which it belongs doesn’t satisfy the conditions, the company cannot be entitled to avail of small company audit exemption.
• From here, you would have got to know that the Company Amendment Act has certain relaxations towards small companies. Well, some of these include considerations for annual records, financial record requirements, rotation of company auditors, limitations on the number of hosted board meetings, etc. There are many other conditions, and you will be under the same from here.

Conclusion

Understanding the benefits and exemptions available to a small company under the Companies Act can be challenging due to the way these Acts are structured. For instance, rather than having a separate section dedicated to “exemptions,” they are scattered throughout the regulatory provisions. This approach includes numerous cross-references to other sections, which can make navigating the complexities quite cumbersome. In such cases, seeking guidance from an expert in corporate law is crucial. An experienced professional not only understands these provisions but also knows the procedural formalities required for new company registration and to avail of these exemptions. If you have any queries regarding exemptions under the Companies Act, feel free to contact our legal experts. They are dedicated to resolving your concerns satisfactorily and ensuring that all necessary requirements for new company registration are met efficiently.