Tag Archives: small company

annual return for small/ OPC company

MCA has vide its notification dated 5th March, 2021 amended the Companies (Management & Administration) Rules, 2014 as follows:

Rule 11(1) has been amended to provide that every company shall file its annual return of shareholders, directors, loans, etc .in form MGT-7 except small companies and one person companies which shall the same in form MGT-7A. The format of form MGT-7A has been given in the annexure.

Rule 12, which had the heading “Extract of annual return” has been replaced with a new rule having a new heading “Filing of annual return with the Registrar”. The earlier rule 12 required extract of annual return in form MGT-9. That form MGT-9 has ostensibly been eliminated. There is no mention of requirement of posting the contents of MGT-9 in the website of the company. That particular requirement has also apparently been done away with.

The next amendment is in Rule 20 which pertains to voting through electronic means.

A new explanation II has been added to proviso to sub-Rule (2) of Rule 20 which covers basically the definition of agency, cut off date, cyber security, electronic voting system, remote e-voting, secured system, voting by electronic means.

Cut off date means a date not earlier than seven days before the date of the general meeting, for determining eligibility to vote by electronic means or in the general meeting.

Other definitions are technical in nature and therefore not reproduced here.

Copy of the notification can be found on the MCA site. i.e. http://www.mca.gov.in

Simultaneously, the section 92 of the Companies act, 2013 has also been amended vide Companies Amendment Act, 2017 which was notified on 5th March, 2021. Vide this amendment, the requirement of inputting indebtedness of the company as on financial year end date has been removed. Secondly in the case of Foreign Institutional Investors, their names, addresses, countries of incorporation, registration & percentage of shareholding held by them need not be mentioned in the annual return. And then it has brought in a proviso giving powers to the central government to formulate a separate format of annual return for small companies and one person companies.

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merger/ amalgamation of small companies

MCA has vide its amendment to the Companies (Compromises, Arrangements & Amalgamations) Rules, 2016 provided for easy merger/ amalgamation between two or more start-up companies or one or more start up company with one or more small company.

This comes under section 233 of the companies act, 2013 which provides for an easy procedure for merger/ amalgamation of small companies without going through the cumbersome process of court/ tribunal etc. The process under clause 25 of the above regulations is by no means easy as it still involves considerable paper work, documentation and procedures but compared to the court/ tribunals, it is relatively easier.

So MCA has introduced a new sub clause 1A under clause 25 of the aforesaid Rules to provide for the said easy merger/ amalgamation.

So this is one more avenue for the company secretaries – to guide small companies/ start-up companies in the merger/ amalgamation under section 233 of the companies act, 2013 and the aforesaid regulations.

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small company

MCA has vide its notification dated 1st February, 2021 changed the definition of small company in the Companies Act, 2013.

Now small company will be a company which has a paid up share capital and turnover of not more than Rs.20 million and Rs.200 million respectively. Hitherto the limits were Rs.5 million and and Rs.2 million respectively.

Note that both the conditions should be satisfied for a company to be a small company ie.. the paid up share capital should not cross Rs.20 million AND the turnover should not cross Rs.200 million. If a company’s paid up share capital is more than Rs.20 million but the turnover is less than Rs.200 million, then it will still remain a small company.

There are a few benefits of a company being a small company under the companies act, 2013 such as

  • No need to prepare Cash flow statement as part of financial statement.
  • Where other companies require providing details of remuneration to directors and key managerial personnel, small companies are required to provide details of the only aggregate amount of remuneration drawn by directors in its Annual Return.
  • Mandatory rotation of auditor not required.
  • An Auditor of small companies is not required to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.
  • Hold only two board meetings in a year.
  • Annual Return of the company can be signed by the Company Secretary, or where there is no company secretary, by a single director of the company.
  • Lesser penalties for Small Companies.
  • Lesser filing fees for Small Companies.

The lesser filing fees for small companies has not been operationalised yet, but it is expected that MCA will bring that soon.

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Small company definition

Ministry of Corporate Affairs has brought in an amended definition of small company under the Companies Act, 2013.

Hitherto small company was a company which had a paid up share capital of upto Rs.50 lakhs or turnover of Rs.2 crores.

Now by the amendment, the “or” has been substituted with “and” so that a small company will now be a company which satisfies both clauses i.e. paid up share capital of upto Rs.50 lakhs and turnover of upto Rs.2 crores. Confusing!!

I frankly do not understand why they have brought in a definition of small company because the benefits of small company are only the following – (1) sec 2(40) they need not include cash flow statement (2) sec 92 annual return to be signed by a company secretary and if there is no company secretary by a director, which is a confusing section because the threshold limits for appointment of full time company secretary are above the small company limits. and (3) sec 173 they can hold only one Board meeting in each half of a calendar year.

Now they have amended definition to mean a small company as one which has both the elements i.e. paid up share capital and also turnover.
If there is no fundamentally huge difference between a small company and a normal company, then why complicate matters.

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Small Company in the Companies Act, 2013

The concept of “small company” has been introduced for the first time in the Companies Act, 2013. Here we take a look at the definition and what relaxations has been afforded to a small company under the Companies Act, 2013.

Section 2(85) defines a Small company as 

‘‘small company’’ means a company, other than a public company,—
(i) 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
(ii) 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:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;

As can be seen it is a very complicated definition. In the first sentence itself a public company has been removed from the definition of a small company. Therefore a public company with 7 shareholders and minimum of Rs.5 lakhs share capital will not be considered as a “Small Company” 

Secondly the proviso states that a Private company which is a holding company or a subsidiary company will also not be considered as a “Small Company”.  Public Company has anyway been eliminated from the definition of a Small Company so the proviso (A) applies only to a private company which is a holding or subsidiary company. In case of subsidiary private company, it obviously means subsidiary to another private company because a private company which is subsidiary to a public company is considered as a public company as per the definition of “public company” in section 2(71) of the Act. 

Coming back to the definition of Small Company, any company which has a paid up share capital of not exceeding Rs.50 lakhs or such higher amount as may be prescribed but not exceeding Rs.5 crores OR turnover as per last profit and loss account which does not exceed Rs.2 crores or such higher amount as may be prescribed but does not exceed Rs.20 crores. So the criteria for inclusion of a company as a small company is on the dual basis of either paid up share capital or turnover as per last profit & loss account. So if the company breaches any one limit, it goes out of the ambit of Small Company, for eg. if the paid up share capital is only Rs.25 lakhs but if the turnover goes to Rs.2.5 crores then it automatically gets struck off as a Small Company. A piquant situation could arise whether the company could yo-yo from Small Company to Non-Small Company on a yearly basis if the turnover keeps fluctuating below and above the limits.

Now let us look at what are the benefits of being a small company under the companies act, 2013

Section 2(40) defines “Financial Statement”. The exemption given to a Small Company is that a Financial Statement need not include Cash Flow statement for the financial year.

 

2(40) “financial statement” in relation to a company, includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement;

The next reference to small company is in Proviso to Section 92(1) of the Companies Act, 2013. It provides that the annual return of a small company can be signed by a Company Secretary or where there is no Company Secretary by the Director of a company. It is a very surprising provision because Small Companies are not required to appoint Company Secretary who are included in the definition of Key Managerial Personnel as per section 2(51) of the Act. The limits of Key Managerial Personnel are to be found in Draft Rule 13.6 which stipulates that every listed company and every other company with a paid up share capital of Rs.5 crores shall appoint a Key Managerial Personnel. So where is the necessity for a Small Company to appoint a Key Managerial Personnel in the form of Company Secretary. So basically it means the annual return of a Small Company should be signed by a Director of the company. Hitherto companies which had paid up share capital exceeding Rs.10 lakhs were required to submit a Compliance Certificate as per Section 383A of the Companies Act, 1956. The concept of Compliance Certificate which was originally for companies with share capital between Rs.10 lakhs to Rs.50 lakhs but later the upper limits were enhanced, first to Rs.2 crores, then to Rs.3 crores and now to Rs.5 crores. The Compliance Certification system brought about a lot of compliance discipline in the small companies because by force of law, small companies were required to maintain statutory registers, minutes books, and properly comply with all the rules and regulations governing a corporate entity in India. Unfortunately with the removal of Compliance Certificate and the requirement that the annual return of a small company need be effectively signed by a Director, all that compliance system which was so meticulously infused in small companies will simply fall by the way side. So much for an economy which seeks to move up the economic ladder of developing nations and aspires to be a super power in the near future!!!

The provisions of section 92(1) are as follows:

92. (1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—
(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
(c) its indebtedness;
(d) its members and debenture-holders along with changes therein since the close of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year;
(f) meetings of members or a class thereof, Board and its various committees along with attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment;
(i) matters relating to certification of compliances, disclosures as may be prescribed;
(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses, countries of incorporation, registration and percentage of shareholding held by them; and
(k) such other matters as may be prescribed,
and signed by a director and the company secretary, or where there is no company secretary, by a company secretary in practice:
Provided that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.

The next mention of Small Company is to be found in Section 173 relating to Meetings of Board of Directors and the requirement of holding at least four Board meetings in a year and the gap between two Board meetings not to be more than 120 days. Section 173(5) specifies that Small Company need hold only one Board meeting in each half of a calendar year and the gap between two Board meeting is not less than 90 days. 

Remember that for Normal Companies the gap between two Board meetings should be not more than 120 days whereas for Small Companies the gap between two Board meetings should be not less than 90 days. Which means basically there should be a three month gap between two Board meetings of a Small Company.  

173 (5) A One Person Company, small company and dormant company shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days:

So that summarises the concept of Small Company. So effectively Small Companies get to hold two less Board meetings during the year and a Single Director can sign the annual return and they need not produce the Cash Flow statement. Other than that I did not find any mention of Small Company in the Companies Act, 2013. They still have to maintain statutory registers, minutes Books, books of account, common seal, hold an annual general meeting, have a registered office, have minimum of two directors and two shareholders. 

So whether it was a wise move on the part of the Ministry of Corporate Affairs to carve out a definition of Small Company with so little exemptions provided to them under the Companies act, 2013. 

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