How Centre’s Revision Of Criteria For Small Companies Will Help Startups

The Ministry of Corporate Affairs (MCA) has revised upwards the criteria for entities to qualify as a small company. As per a notification issued by the ministry, an entity with a paid-up capital of INR 10 Cr and a turnover of INR 100 Cr will qualify to be a small company.

With the move, the entities which qualify to be a small company will see a sharp increase. The revision marks the government’s third threshold hike in under a decade, reflecting a continued emphasis on reducing compliance burdens to push growth upwards.

The rules were last amended in 2022, when the paid-up capital threshold for small companies was revised to INR 4 Cr from INR 2 Cr earlier and the turnover was increased to INR 40 Cr from INR 20 Cr previously. 

What Benefits Do Small Companies Receive?

Fewer Board Meetings: A small company is required to conduct only two board meetings in a financial year rather than four. They need to file their financial statements with the abridged director report within 30 days of the AGM meeting. 

No Cash Flow Statement: Small companies are not required to prepare a cash flow statement as part of their balance sheet. 

Rotation Of Auditors: A small company is not required to rotate auditors, unlike other companies which are required to do so in 5-10 years. 

Lower Cost: Small companies are required to pay lower fees for filing annual returns and other details on the MCA portal compared to large companies.

The CFO of a listed company, who didn’t want to be named, said that small companies also face lower scrutiny when it comes to compliance. “The actions are not very stringent, just a notice to start with asking to comply,” he said. 

How Will The Revision Help Startups?

The regulatory relaxation is estimated to add thousands of entities, especially high-growth startups, to the list of small companies.

“This enhanced headroom protects them (startups) at a crucial inflection point in the business, helping them accelerate growth while balancing compliance requirements,” said Ashwini Thulsaram, principal at 3one4 Capital. 

According to experts and investors, the move will bring a lot of funded startups, typically those who have raised Series A and Series B rounds, under the ‘small company’ category, allowing them to be more flexible under the lower compliance burden. 

“This will give breathing space to the founders to build their ventures rather than worrying about compliance issues. For startups in this phase, mostly the founders have to take care of the compliance themselves,” said Karthikeyan Madathil, partner at Yali Capital. 

“When they become a INR 400 Cr business, they can easily designate a compliance officer who can take care of such matters,” he added. 

The move is part of the Centre’s efforts to improve the ‘Ease of Doing Business’ in the country by reducing compliance requirements.

Edited By Vinaykumar Rai