The concept of a “Small Company” under the Companies Act, 2013 was introduced with a clear legislative intent — to reduce the compliance burden on smaller corporate entities and allow them to focus on growth rather than procedural formalities. Over the years, however, inflation, capital expansion, and business scale have outpaced the original thresholds prescribed under the law. Recognising this shift, the Ministry of Corporate Affairs (MCA) has revisited and expanded the definition of a small company, marking a significant regulatory reform.

This article examines the recent amendment to the definition of small companies, compares the earlier and revised thresholds, and analyses the practical compliance impact of this change for Indian corporates.

  1. Legal Framework Governing Small Companies

The definition of a “Small Company” finds its place under Section 2(85) of the Companies Act, 2013. While the Act provides the conceptual framework, the actual financial thresholds are prescribed through delegated legislation, namely the Companies (Specification of Definition Details) Rules.

A company qualifying as a small company enjoys multiple exemptions under the Act, Rules, and allied regulations. However, classification is not automatic by choice — it is purely threshold-based and compliance-driven.

Certain categories of companies are expressly excluded from being treated as small companies, irrespective of their financial size. These exclusions remain unchanged even after the amendment.

  1. Earlier Definition of a Small Company

Prior to the recent amendment, a private company was considered a small company if it satisfied both of the following conditions:

  • Paid-up share capital did not exceed ₹4 crores, and
  • Turnover as per the profit and loss account for the immediately preceding financial year did not exceed ₹40 crore

Additionally, the company should not be:

  • A holding or subsidiary company
  • A Section 8 (non-profit) company
  • A company governed by any special Act

These limits, although progressive at the time of introduction, gradually became restrictive for growing enterprises operating in capital-intensive or high-revenue sectors.

  1. Amended Definition: What Has Changed

The MCA has now substantially enhanced the financial thresholds, thereby expanding the universe of companies eligible for small company status.

Under the revised definition, effective from 1 December 2025, a private company shall be regarded as a small company if:

  • The company’s Paid-up share capital does not exceed ₹10 crore, and
  • The total turnover recorded in the immediately preceding financial year should not cross ₹100 crore.

Both conditions must be fulfilled simultaneously. If either limit is breached, the company ceases to be classified as a small company for that financial year.

  1. Comparative Analysis: Old vs New Definition

Particulars

Earlier Definition

Amended Definition

Paid-up Share Capital

Up to ₹4 crore

Up to ₹10 crore

Turnover

Up to ₹40 crore

Up to ₹100 crore

Nature of Company

Private company

Private company

Exclusions

Holding, subsidiary, Section 8, special Act companies

Same exclusions

The revised limits reflect a forward-looking policy approach, recognising the scale at which modern Indian businesses operate.

  1. Rationale Behind the Revision
  1. Alignment with Economic Reality

The cost of operations, employee expenses, and technology investments have increased significantly over the past decade. The revised thresholds acknowledge that companies with higher turnover may still function with limited resources.

  1. Ease of Doing Business

Compliance simplification remains a key government objective. Expanding the definition ensures that regulatory effort is focused on larger, systemically significant companies.

  1. Encouragement to Scale

Earlier, companies hesitated to expand beyond ₹40 crore turnover due to fear of heavier compliance. The amendment removes this psychological and regulatory barrier.

  1. Compliance Impact of the Revised Definition

The change in definition directly affects statutory obligations, filings, disclosures, and governance requirements. Key compliance-related implications include:

  1. Board Meeting Requirements

Small companies are permitted to conduct a minimum of two board meetings in a calendar year instead of four, provided the gap between meetings is maintained as prescribed.

  1. Simplified Annual Return

Eligible companies may file abridged annual returns, reducing disclosures and professional certification requirements.

  1. Cash Flow Statement Exemption

Small companies are not required to prepare a cash flow statement as part of their financial statements, simplifying accounting and audit processes.

  1. Auditor’s Reporting Relief

Certain detailed reporting obligations applicable to larger companies do not apply to small companies, resulting in reduced audit complexity and cost.

  1. Board’s Report Relaxations

Disclosure requirements in the Board’s Report are significantly fewer, allowing directors to focus on material governance issues rather than exhaustive statutory narration.

  1. Practical Compliance Considerations
  • Annual Re-evaluation: Classification as a small company is not permanent. Companies must reassess eligibility every financial year based on updated capital and turnover figures.
  • Automatic Applicability: No separate application or approval is required to avail small company status. The classification flows naturally from financial data.
  • Transition Planning: Companies crossing or falling below thresholds must align compliance requirements from the relevant financial year onward.
  1. Strategic Advantages for Businesses
  1. Cost Efficiency

Lower compliance leads to reduced expenditure on professional fees, audit costs, and internal governance resources.

  1. Management Focus

Promoters and directors can redirect time from procedural compliance to business development and operational strategy.

  1. Startup and MSME Boost

The amendment is particularly beneficial for venture-funded startups and MSMEs that experience rapid turnover growth without corresponding organisational scale.

  1. Categories Still Excluded

Despite the enhanced thresholds, the following entities cannot qualify as small companies:

  • Holding companies
  • Subsidiary companies
  • Section 8 companies
  • Companies formed under special statutes

These exclusions ensure that entities with broader public or group-level impact remain subject to stricter governance norms.

  1. Way Forward: What Companies Should Do
  • Review paid-up capital and turnover figures at year-end
  • Re-align compliance calendars based on eligibility
  • Update statutory registers and internal governance policies
  • Seek professional advice during transition years

Conclusion

The revision of the small company definition under the Companies Act, 2013, is more than a numerical change — it is a policy statement that reflects India’s evolving corporate ecosystem. By expanding eligibility, the law now better supports growth-oriented private companies while maintaining regulatory discipline.

For businesses operating near the earlier thresholds, this amendment presents a valuable opportunity to enjoy compliance flexibility without compromising scale. Proactive assessment and timely alignment with compliance will be key to fully leveraging the benefits of this progressive reform.