The concept of a small company was formally introduced in the Companies Act, 2013 with the objective of providing a separate classification of companies that required a more flexible compliance framework. India, as one of the fastest-growing economies, has a diverse corporate landscape dominated by micro, small, and medium enterprises. However, before 2013, there was no specific statutory category called a small company, and smaller entities often found themselves burdened with the same compliance obligations as large corporations.
Section 2(85) of the Companies Act, 2013 defined the term small company. However, this definition was not static. Over the years, the legislature and the Ministry of Corporate Affairs introduced a series of amendments, notifications, and rules to refine the scope of small companies and align the framework with the government’s Ease of Doing Business agenda. This legislative journey reflects the evolving understanding of the role small companies play in economic growth and the importance of reducing regulatory hurdles for them.
Background of the Companies Act, 2013
The Companies Act, 2013 replaced the six-decade-old Companies Act, 1956. It was intended to modernize corporate law in India by introducing simplified processes, enhanced governance mechanisms, and investor protection measures. Within this wide-ranging framework, the recognition of small companies was a progressive step aimed at striking a balance between regulation and flexibility.
The definition under Section 2(85) underwent multiple changes since its inception. These changes highlight the government’s efforts to continually calibrate the compliance thresholds so that more businesses could benefit from the reduced regulatory framework.
Definition of Small Company between 1 April 2014 and 12 February 2015
When the provisions of the Companies Act, 2013 came into effect on 1 April 2014, a company was considered a small company if it satisfied either of two conditions:
- The paid-up share capital did not exceed 50 lakhs.
- The turnover as per its latest profit and loss account did not exceed 2 crores.
During this period, the conditions were non-cumulative. A company was required to meet just one of these criteria to qualify. For example, a company with paid-up share capital of 25 lakhs and turnover above 2 crores was still recognized as a small company, because it met the capital condition. Similarly, if the paid-up capital was more than 50 lakhs but turnover was limited to 2 crores, the company also qualified.
Although this definition appeared to be inclusive, it gave rise to unintended situations. Companies with significant turnover but low capital could enjoy the benefits of a small company classification. The Act did prescribe an upper ceiling of 5 crores for capital and 20 crores for turnover, within which the government could notify higher limits. However, no such rules were introduced during this period.
Amendment by the Companies (Removal of Difficulties) Order, 2015
Recognizing the inconsistencies of the earlier definition, the government issued the Companies (Removal of Difficulties) Order, 2015 with effect from 13 February 2015. The amendment made the two conditions cumulative. From that date until 8 February 2018, a company had to simultaneously satisfy both requirements:
- Paid-up share capital not exceeding 50 lakhs.
- Turnover not exceeding 2 crores.
This modification was intended to avoid situations where large revenue-generating companies were able to enjoy the exemptions reserved for smaller businesses simply because their paid-up capital was low. The amendment effectively narrowed the scope of small companies. While it prevented misuse of the earlier definition, it also excluded some companies that might have benefited from reduced compliance requirements.
For instance, a company with paid-up capital of 40 lakhs but turnover of 5 crores was no longer eligible despite being modest in terms of financial resources. The statutory maximum thresholds of 5 crores for capital and 20 crores for turnover continued to exist but were not notified in this period.
Companies (Amendment) Act, 2017 and its Implications
The Companies (Amendment) Act, 2017, effective from 9 February 2018, brought significant changes to the definition of small company. The amendment operated on two key aspects:
First, the outer ceilings were raised. The maximum limit of paid-up capital that could be prescribed was increased from 5 crores to 10 crores, and the maximum turnover limit was raised from 20 crores to 100 crores. This was a clear recognition of the fact that inflation, growth in the economy, and increasing business costs required higher thresholds.
Second, the definition of turnover was modified. Earlier, turnover was determined on the basis of the company’s last profit and loss account. Post amendment, turnover had to be considered from the immediately preceding financial year. This brought greater clarity and removed ambiguities around the timeline for calculating turnover.
However, despite these broader limits, the operative definition continued to remain narrow. During the period from 9 February 2018 to 31 March 2021, a company could only be classified as a small company if its paid-up capital was up to 50 lakhs and its turnover for the immediately preceding financial year did not exceed 2 crores. The higher ceilings introduced by the 2017 amendment remained unused until 2021, when the government actively exercised its power under the Rules.
The 2021 Expansion through the Companies (Specification of Definitions Details) Amendment Rules
The most notable change in the classification of small companies came into effect on 1 April 2021 through the Companies (Specification of Definitions Details) Amendment Rules, 2021. For the first time, the government exercised its powers to prescribe higher thresholds within the statutory ceiling.
The new limits were:
- Paid-up share capital up to 2 crores.
- Turnover of the immediately preceding financial year up to 20 crores.
This move was consistent with the broader policy vision of the Union Government to reduce the compliance burden on micro and small enterprises. The Finance Minister, in the Budget Speech of 2021-22, explicitly mentioned that this expansion would benefit over two lakh companies. By broadening the eligibility, the government allowed more businesses to access reduced filing requirements, exemptions from certain board procedures, and simplified compliance norms.
The 2021 amendment marked a turning point in the practical use of the small company category. It was no longer a narrow classification applicable to a limited number of entities but was now relevant for a wider pool of businesses forming the backbone of the Indian economy.
Further Expansion in 2022
Building on the momentum of 2021, the Ministry of Corporate Affairs issued the Companies (Specification of Definitions Details) Amendment Rules, 2022 with effect from 15 September 2022. This amendment doubled the threshold limits.
The revised criteria became:
- Paid-up share capital up to 4 crores.
- Turnover of the immediately preceding financial year up to 40 crores.
This expansion was a direct response to industry demands and aligned with the government’s Ease of Doing Business initiative. The higher limits recognized the evolving scale of business in India, where even small and medium-sized companies operate with larger turnovers due to digitalization, increased market access, and competitive scaling.
The effect of this amendment was significant. Thousands of companies that were earlier categorized outside the definition could now qualify as small companies and enjoy reduced compliance requirements. This not only saved costs but also encouraged formalization of businesses, as the fear of heavy compliance obligations often discouraged incorporation.
Legislative Journey and Policy Objectives
The legislative evolution of the small company definition illustrates the delicate balance between flexibility and regulatory oversight. Each phase of amendment reveals the government’s intention to either restrict misuse or expand coverage based on the contemporary economic needs.
Between 2014 and 2015, the focus was on inclusivity. However, this inclusivity allowed some unintended beneficiaries. The 2015 amendment corrected the anomaly by imposing cumulative conditions. The 2017 amendment broadened the outer statutory ceilings, though the actual operative thresholds remained unchanged. It was only in 2021 and 2022 that the government actively expanded the definition, bringing in a large number of companies within its ambit.
These changes are deeply connected with India’s policy narrative of improving the Ease of Doing Business ranking. By reducing the compliance load on smaller entities, the government not only ensured their survival but also facilitated their growth and contribution to employment generation.
Implications for Corporate Compliance
The classification of a company as a small company brings with it several compliance advantages. Some of the major benefits include:
- Exemption from preparing cash flow statements as part of financial statements.
- Reduced frequency of board meetings, requiring only two meetings per year.
- Lesser penalties for certain defaults compared to other companies.
- Simplified processes for filing returns and resolutions.
By expanding the eligibility criteria, the government effectively extended these benefits to a much larger number of businesses. The implications go beyond cost savings. It has encouraged more entrepreneurs to adopt the corporate form of business, which provides better access to funding and improves credibility.
Comparative Context with MSME Definition
It is important to note that the classification of small companies under the Companies Act is different from the definition of Micro, Small and Medium Enterprises under the MSME Development Act, 2006. While the MSME definition is based on investment and turnover criteria, the small company classification is rooted in corporate law considerations of paid-up capital and turnover.
Despite this difference, the expansion of thresholds under the Companies Act complements the government’s overall approach of supporting small businesses. Both sets of definitions aim at extending targeted benefits to enterprises that drive growth, innovation, and employment.
Small Companies and the Ease of Doing Business Agenda
The reform of the definition of small company is not merely a technical legislative adjustment. It is a policy decision that reflects India’s economic priorities and administrative reforms. The concept of a small company under the Companies Act, 2013 has become a significant part of the government’s larger Ease of Doing Business initiative, which aims at reducing regulatory burdens, simplifying procedures, and enabling enterprises to grow without excessive compliance obligations.
The reforms introduced in 2021 and 2022 are particularly relevant when analyzed through this policy lens. They align with India’s ambition of improving its global standing in business environment indices, as well as nurturing domestic enterprises that act as engines of employment and innovation.
We analyze how the small company reforms interact with the Ease of Doing Business framework, what specific advantages they bring to companies, and how they contribute to broader economic and administrative objectives.
The Ease of Doing Business Context in India
Ease of Doing Business is a policy priority that emerged strongly in the last decade. For years, India had been perceived as a difficult jurisdiction for entrepreneurs due to lengthy compliance processes, rigid regulatory structures, and the high cost of legal adherence.
In response, the government initiated a series of reforms that targeted corporate law, taxation, insolvency, foreign investment, and dispute resolution. One significant dimension of this reform agenda was the rationalization of compliance requirements for smaller businesses. The recognition of small companies under Section 2(85) of the Companies Act, 2013 and the subsequent expansion of its scope fits squarely within this policy trajectory.
Small companies form the backbone of India’s corporate ecosystem. Yet, prior to reforms, they were required to meet the same obligations as large corporations. By tailoring a separate compliance framework, the government aimed to remove unnecessary bottlenecks and encourage greater participation of entrepreneurs in the formal corporate sector.
The 2021 and 2022 Amendments in the Ease of Doing Business Framework
The Companies (Specification of Definitions Details) Amendment Rules, 2021 raised the limits for classification of small companies to a paid-up capital of 2 crores and turnover of 20 crores. The 2022 amendment further doubled these thresholds to 4 crores and 40 crores respectively.
These reforms were not isolated. They were part of the broader structural simplification measures intended to make incorporation and compliance more user-friendly. Alongside, the government introduced web-based company registration, integrated digital platforms for filing, and eased requirements for financial statement preparation.
The expansion of thresholds meant that many companies previously categorized outside the small company bracket could now qualify. This substantially increased the number of companies eligible for simplified compliance benefits, thereby making the business environment more accessible.
Compliance Benefits as Drivers of Business Environment Reforms
The advantages granted to small companies under the Act directly reduce the cost of doing business. Some of these include:
- Exemption from preparation of cash flow statements, which simplifies financial reporting.
- Reduced board meeting requirements, allowing management to focus more on operations.
- Simplified filing procedures, with fewer mandatory resolutions needing to be filed with the Registrar of Companies.
- Lesser penalties for defaults compared to other companies, minimizing financial stress in case of minor lapses.
By extending these benefits to a wider range of companies, the government has effectively reduced regulatory friction. For entrepreneurs and promoters, this translates into savings in professional fees, administrative overheads, and compliance timelines.
From the perspective of Ease of Doing Business, these benefits are highly significant. They not only improve domestic perceptions of corporate law but also send a signal internationally that India is committed to rationalizing its business regulations.
Encouraging Formalization of Businesses
One of the persistent challenges in the Indian economy has been the large presence of informal businesses that avoid incorporation due to perceived compliance burdens. Many entrepreneurs prefer operating as proprietorships or partnerships rather than private companies, despite the latter offering better access to credit and limited liability.
By expanding the definition of small company and providing compliance relaxations, the government has lowered the entry barriers for incorporation. More businesses can now adopt the corporate structure without being overwhelmed by regulatory costs. This contributes to greater formalization of the economy, which in turn improves tax compliance, data availability, and credit flows.
Formalization also enhances transparency and accountability in business practices. As more companies enter the formal corporate network, they contribute to a more organized and resilient economy.
Linkages with MSME Policy Framework
Although the definition of small company under the Companies Act differs from the criteria used to classify Micro, Small and Medium Enterprises under the MSME Development Act, 2006, both frameworks are interconnected in terms of policy goals.
MSME classification is based on investment in plant and machinery and turnover, while small company classification is based on paid-up share capital and turnover. Despite these differences, both seek to provide targeted support to enterprises that require protection and flexibility.
The recent expansion of small company thresholds ensures that a significant overlap exists between companies classified as MSMEs and those recognized as small companies. This overlap strengthens the policy coherence between corporate law and industrial policy. Together, they create a supportive ecosystem where businesses can grow without disproportionate regulatory burdens.
Small Companies and Digitalization of Compliance
Another crucial dimension of Ease of Doing Business is the integration of technology into corporate compliance. Over the last few years, the Ministry of Corporate Affairs has digitized many processes, including incorporation through SPICe+ forms, e-filing of returns, and web-based monitoring.
Small companies benefit more from such digitalization because they often lack the resources to maintain large compliance departments. Online systems reduce paperwork, lower costs, and speed up approvals. By expanding the eligibility criteria for small companies, the reforms ensure that more entities can take advantage of digitalized compliance pathways that are simpler than traditional procedures. This convergence of legislative relaxation and digitalization is a powerful tool for enhancing the business climate. It addresses both the substantive and procedural dimensions of compliance.
Economic Impact of Expanding the Small Company Category
The expansion of small company thresholds has direct economic implications. First, it allows more enterprises to reinvest their resources into productive activities rather than spending on compliance management. This leads to improved efficiency, higher profitability, and greater competitiveness.
Second, the relaxation encourages more risk-taking by entrepreneurs. With lower compliance penalties and reduced obligations, entrepreneurs feel more secure in experimenting with new business models. This fosters innovation and diversification in the economy.
Third, the reforms indirectly promote employment generation. As companies save costs and expand operations, they require more human resources, thereby contributing to job creation.
Finally, from a macroeconomic perspective, the move aligns with the government’s vision of making India a global manufacturing and service hub. Small companies, once empowered through relaxed regulatory frameworks, are better positioned to integrate into larger supply chains, attract investment, and contribute to exports.
Administrative Advantages and Reduction of Regulatory Backlog
The classification of more entities as small companies also has administrative benefits for regulators. With simplified compliance requirements for a larger number of companies, the burden on the Registrar of Companies and other authorities is reduced. They can focus their oversight efforts on larger corporations where the risks and stakes are higher.
This rational allocation of regulatory attention enhances efficiency in monitoring and reduces delays in approvals. It also ensures that enforcement actions can be more targeted and effective, improving overall governance.
Global Comparisons and Policy Lessons
Globally, many jurisdictions recognize the need to treat smaller companies differently from large corporations. For example, the United Kingdom has provisions for small companies that are exempt from certain reporting requirements under the Companies Act 2006. Similarly, the United States provides special compliance regimes for small businesses under its corporate and securities laws.
India’s progressive expansion of the small company category aligns with these international practices. However, the Indian approach has been gradual, reflecting the balance between economic realities and regulatory concerns. The 2021 and 2022 reforms place India on par with jurisdictions that recognize proportional regulation as a key component of business environment reform. The policy lesson is clear: reducing compliance burden without compromising governance standards is a sustainable way to foster entrepreneurship and economic growth.
Sectoral Relevance of Small Company Reforms
While the reforms apply broadly to all eligible companies, their impact is particularly significant in certain sectors. Technology startups, professional service firms, and family-owned enterprises often operate with modest paid-up capital but significant potential for turnover. The expanded thresholds allow such entities to remain categorized as small companies longer, giving them time to stabilize and scale before facing more stringent compliance requirements.
Similarly, in manufacturing and trading sectors, businesses often require higher working capital, leading to increased turnover. Under earlier definitions, they would lose small company status quickly. The 2022 reforms ensure that these companies can still enjoy compliance relaxations during their early years of growth.
Potential Risks of Regulatory Arbitrage
One major criticism of the expanded definition of small company is the possibility of regulatory arbitrage. As thresholds increase, larger enterprises may attempt to artificially structure themselves into smaller units in order to avail compliance relaxations.
This can be achieved through fragmentation of operations, multiple incorporations with divided turnover, or by keeping capital contributions at controlled levels. Such practices undermine the spirit of the law and may lead to unfair competitive advantages for entities that exploit the relaxed regime.
Regulatory arbitrage also complicates monitoring, as authorities need to identify whether companies genuinely qualify as small or are deliberately maintaining thresholds below the prescribed limits.
Concerns about Corporate Governance Standards
Simplified compliance is a welcome step for genuine small companies, but critics argue that excessive relaxation may dilute governance standards. Certain obligations such as board meetings, disclosure norms, and filing requirements exist to ensure transparency and accountability.
By exempting a large number of companies from these obligations, there is a risk of creating a parallel class of corporations that operate with limited oversight. This could potentially reduce investor confidence and weaken creditor protections.
Moreover, as companies grow, their operational risks and stakeholder engagements also increase. If they continue to enjoy small company exemptions for extended periods, their governance structures may not evolve in tandem with their size, leading to vulnerabilities in decision-making.
Balancing Compliance Reduction with Stakeholder Protection
The challenge lies in striking a balance between reducing compliance burdens and safeguarding stakeholder interests. Small companies deal not only with shareholders but also with employees, creditors, and customers. While simplified compliance reduces costs, it should not compromise basic safeguards that protect these stakeholders.
For example, creditors rely on timely and accurate financial statements to assess a company’s solvency. Excessive exemptions in financial reporting could impair their ability to make informed decisions. Similarly, employees may face risks if governance systems are too relaxed to address grievances or ensure fair practices.
Interaction with Other Legal Frameworks
The definition of small company under the Companies Act is not harmonized with similar classifications under other laws. For instance, the MSME Development Act uses different parameters, while taxation laws have their own thresholds for reliefs and obligations.
This lack of uniformity often creates confusion among entrepreneurs and professionals. A company may qualify as a small company under the Companies Act but not as an MSME, or vice versa. The overlapping yet divergent frameworks can complicate strategic decisions regarding registration, compliance, and benefits. A coordinated approach across corporate, industrial, and taxation laws would provide clarity and ensure that businesses can navigate the system without unnecessary complexity.
Administrative Challenges for Regulators
Although expanding the definition of small company reduces compliance burdens for enterprises, it simultaneously increases the responsibility of regulators to monitor a wider pool of entities under relaxed rules.
Authorities must ensure that companies do not misuse their status to conceal non-compliance or fraudulent practices. With the expansion in scope, regulators may need to adopt more sophisticated data analytics and risk-based monitoring systems to identify red flags.
The challenge is further compounded by the limited capacity of regulatory institutions, which are already tasked with overseeing a large and growing corporate sector. Without adequate resources, the effectiveness of reforms could be undermined.
Limited Awareness and Accessibility Issues
Another practical challenge is that many entrepreneurs are not fully aware of the benefits available under the small company regime. Lack of awareness means that eligible businesses may continue to comply with unnecessary obligations, losing out on potential savings.
Further, access to professional advice remains uneven across regions. While urban companies benefit from easy access to chartered accountants and company secretaries, smaller enterprises in semi-urban or rural areas may not receive adequate guidance on how to take advantage of the reforms. This creates an uneven playing field where the intended benefits of reforms are not uniformly realized across the corporate ecosystem.
Criticisms from Larger Corporates
Some stakeholders argue that the small company reforms create a form of regulatory inequality between different categories of enterprises. Larger corporations often feel that the compliance requirements imposed on them are disproportionately high compared to the relaxations enjoyed by small companies.
While the rationale for differentiated regulation is sound, the concern is that an overly generous regime for small companies could discourage enterprises from scaling up. Companies may prefer to remain small in order to avoid heavier compliance, which is counterproductive to the goal of encouraging growth and competitiveness.
Future Prospects of Small Company Reforms
Despite these criticisms, the small company regime is expected to evolve further in response to India’s dynamic economic environment. Several future prospects can be identified:
Harmonization with MSME Policies
One likely development is greater harmonization between the Companies Act and the MSME Development Act. By aligning definitions and thresholds, the government can create a more consistent framework that allows companies to avail both compliance relaxations and financial incentives without confusion.
Risk-Based Regulation
Going forward, India may adopt a more risk-based approach to regulation. Instead of applying the same relaxations to all small companies, exemptions may be tailored based on risk factors such as industry, size, ownership structure, and public interest exposure.
Such a model would allow genuine small businesses to enjoy reliefs while ensuring that companies with higher risk profiles remain subject to stricter governance norms.
Integration with Digital Platforms
The future of compliance will likely be dominated by digitalization. By integrating the small company framework with advanced digital platforms, authorities can automate many compliance checks, reducing both the burden on companies and the workload of regulators.
Artificial intelligence and data analytics can be deployed to monitor patterns, detect anomalies, and flag potential misuse of small company status. This would enhance oversight without imposing additional manual compliance burdens.
Periodic Review of Thresholds
Another important prospect is the periodic review of thresholds for classification. Economic conditions change over time, and what qualifies as a small company today may not be appropriate tomorrow. Regular revisions ensure that the law remains relevant and reflects ground realities.
The recent doubling of thresholds in 2022 demonstrates the government’s willingness to adapt. It is expected that further reviews will continue in response to inflation, economic growth, and changing business structures.
Encouraging Transition Mechanisms
One area that requires attention is the transition of companies from small to non-small status. At present, when a company crosses the threshold, it immediately becomes subject to stricter compliance. A phased or graded transition mechanism could be introduced to ensure smoother adjustment.
Such a mechanism would encourage growth by removing the fear that scaling up will suddenly impose a heavy compliance burden. It would also align with the government’s broader goal of promoting entrepreneurship and expansion.
Strengthening Awareness Campaigns
To ensure that reforms are effective, the government may need to invest in stronger awareness campaigns. Workshops, online resources, and regional outreach programs can help small entrepreneurs understand the benefits of small company classification and how to avail them.
Professional bodies can also play a larger role in spreading awareness and guiding businesses through the compliance landscape.
Enhancing Stakeholder Protection
While compliance reduction is central to the small company framework, future reforms must also strengthen stakeholder protection mechanisms. This may include mandatory grievance redressal mechanisms, minimum disclosure requirements, or enhanced creditor rights that do not impose heavy costs on companies.
By balancing reliefs with protections, the government can ensure that reforms are sustainable and inclusive.
International Policy Inspirations
Looking at international practices provides valuable insights for the future of small company reforms. In many developed jurisdictions, small companies enjoy simplified compliance but are still subject to core governance standards such as maintaining accurate accounts, timely filing, and basic transparency.
For instance, in the European Union, small enterprises benefit from reduced reporting obligations, yet they must comply with essential accounting standards. Similarly, in the United States, small businesses are given exemptions under securities laws but remain accountable for certain disclosures. India can draw on these models to refine its framework, ensuring that while compliance is simplified, essential governance is not compromised.
Sector-Specific Opportunities
The expansion of the small company category also presents opportunities for sector-specific policy interventions. For example, technology startups can benefit from longer durations under the small company category to stabilize before taking on heavier compliance. Family-owned businesses may use the relaxations to professionalize their management structures.
In sectors like manufacturing, the relaxations can encourage formalization of supply chains by bringing ancillary units into the corporate fold. Similarly, in services, compliance relief can help professionals such as consultants, designers, and educators to incorporate and expand their practices.
Integration with National Economic Goals
Finally, small company reforms must be viewed in the context of India’s larger economic goals. The vision of a self-reliant India, the ambition to become a five-trillion-dollar economy, and the drive to integrate into global value chains all require a vibrant, formal, and competitive corporate ecosystem.
By empowering small companies with compliance relief, the government is not only supporting entrepreneurship but also contributing to these strategic objectives. However, sustained policy attention is necessary to ensure that the reforms remain relevant, effective, and equitable.
Conclusion
The evolution of the small company definition under the Companies Act, 2013 reflects India’s effort to align corporate law with economic priorities and the ease of doing business agenda. Initially restrictive, the scope gradually expanded through successive amendments, with major revisions in 2021 and 2022 that significantly raised thresholds for paid-up capital and turnover.
This widened the coverage, allowing many more enterprises to enjoy simplified compliance, reduced costs, and operational flexibility. These reforms promote entrepreneurship, encourage formalization, and support business growth by enabling companies to focus on expansion rather than procedural burdens.
However, challenges remain, including risks of regulatory arbitrage, dilution of governance, and confusion arising from inconsistent definitions across laws. Limited awareness and oversight capacity also pose difficulties. Future reforms must balance simplification with accountability, harmonize with MSME policies, and integrate technology-driven compliance. If carefully managed, the small company framework can strengthen India’s corporate ecosystem, foster innovation and employment, and contribute significantly to sustainable economic growth.