Broadening the Small Company Net: Implications of the New Threshold

On December 1, 2025, the Ministry of Corporate Affairs (“MCA“) via Notification G.S.R. 880(E) (“Notification“), introduced pivotal amendment to the definition of a “Small Company” under Section 2(85) of the Companies Act, 2013 (“Companies Act“), through the Companies (Specification of Definitions Details) Amendment Rules, 2025.

The revision has increased the thresholds for paid-up share capital and annual turnover of a company for it to be considered a Small Company. This change holds considerable promise for India’s expanding micro, small, and medium enterprises (“MSMEs“). It has the potential to transform how numerous mid-sized businesses approach their growth, compliance, and long-term strategic planning, thus, reshaping the regulatory framework for the MSME sector.

Pre-Amendment Parameters

Since the Companies Act’s inception, ‘Small Company’ was a category conceived to afford regulatory leniency to nascent and scaling enterprises and boost the growing start up culture in India. As per the previous amendment to the definition, Small Companies were characterized by paid-up share capital not exceeding Rs. 4,00,00,000/- (Rupees Four Crore Only) and annual turnover not surpassing Rs. 40,00,00,000/- (Rupees Forty Crore Only), both assessed basis the immediately preceding financial year.

This framework catered to MSMEs in an economy that was at the time valued at a GDP of approximately USD 2 Trillion. However, by 2025, with India’s GDP exceeding USD 4 Trillion and persistent inflationary pressures, these parameters had become obsolete. Startups and businesses operating in sectors like retail, IT services, and manufacturing often outgrew these caps within 2-4 years, prematurely driving them into rigorous compliance regimes, ill-suited to their scale. This rigidity stifled growth since it required companies to divert resources from core operations into keeping up with their compliance burdens.

The 2025 Amendment

The Notification, effective from December 1, 2025, resets the benchmark for Small Companies to having paid-up share capital ceiling at Rs. 10,00,00,000/- (Rupees Ten Crore Only) and annual turnover at Rs. 1,00,00,00,000/- (Rupees One Hundred Crore Only). Previously, under the definition of Small Companies, MSMEs with capital between Rs. 4,00,00,000/- (Rupees Four Crore Only) and Rs. 10,00,00,000/- (Rupees Ten Crore Only) were classified as ‘regular’ companies, which subjected them to more stringent compliance requirements. With the Notification, these businesses will now fall under the ‘Small Company’ category, significantly reducing their compliance burden.

This shift is projected to benefit over 50,000 (fifty thousand) additional companies and cut compliance costs by 20-30% (twenty to thirty percent) for companies that now qualify as Small Companies, thereby, freeing up revenue for reinvestment in operations and R&D. The legislative intent, as articulated in Ministry of Corporate Affairs notifications and Budget 2025 announcements, stems from easing the regulatory burden on MSMEs, which are the backbone of 30% (thirty percent) of India’s GDP, 45% (forty-five percent) of exports in the country, and 35% (thirty-five percent) of manufacturing^[1].

Compliance Implications

The substantive impact of the Notification lies in widening the number of companies that can lawfully avail themselves of these long-standing exemptions by revising the thresholds under Section 2(85) of the Companies Act. Consequently, drawing more private companies into this lighter regime where companies now stand reclassified as Small Companies, thereby allowing ones that previously faced the full weight of obligations suited to larger entities to become eligible for a differentiated, proportionate compliance regime. The principal section-wise implications are set out below.

1. Dematerialization of Shares: Companies are mandatorily required to facilitate dematerialization of securities, a process that entails engagement with depositories, appointment of intermediaries, and recurring compliance costs. This obligation is particularly onerous for closely held private companies with limited shareholder movement. Small Companies sidestep this entirely, free to issue and transfer shares in physical form. The expanded threshold now pulls more such companies into this exemption, thereby, easing transactional hurdles without compromising investor protection.
2. Frequency of Board Meetings: Under Section 173(1) of the Companies Act, companies are ordinarily required to convene a minimum of 4 (four) board meetings each year, with prescribed intervals. This requirement reflects governance expectations for entities with dispersed ownership or complex operations. Section 173(5), however, eases this to 2 (two) board meetings annually for Small Companies. With the revised thresholds, more companies, particularly those companies that are closely held or family-owned can save time, effort, and costs associated with organizing these meetings.
3. Reports and Financial Statement Requirements: For regular companies, the Companies Act mandates comprehensive financial reporting, including preparation of cash flow statements, consolidated financials (where applicable), and an expansive board’s report addressing governance, risk, internal controls, and policy disclosures.

   Small Companies benefit from multiple statutory carve-outs which are much less resource-intensive to prepare, including: (i) Section 129 of the Companies Act which permits the filing of abridged financial statements, exempting Small Companies from preparing cash flow statements and consolidated accounts; (ii) Section 134 of the Companies Act which significantly curtails the contents of the board’s report, limiting disclosures to a core set of items; and (iii) Section 92 of the Companies Act which provides for a simplified annual return with reduced disclosure requirements. The Notification effectively transitions a number of regular companies from the full disclosure regime to this streamlined framework, materially lowering compliance effort while preserving financial transparency proportionate to scale.

4. Penalties for Non-Compliance: Section 446B of the Companies Act provides that where a Small Company defaults, it is liable to only one-half of the penalty prescribed for regular companies, subject to specified caps. This section of the Companies Act recognizes that uniform penalties can operate disproportionately against smaller entities and hence caps exposure to suit their scale. By expanding the definition of Small Company, the Notification brings a broader class of entities within this lighter penalty regime, therefore, mitigating the risk of excessive exposure for more entities in early or growth stages.
5. Fast-Track Mergers and Exemption from NCLT Approval: Ordinarily, mergers require the sanction of the National Company Law Tribunal (“NCLT“) under Section 232 of the Companies Act, a process that is procedurally intensive, time-consuming, and costly. For mergers involving Small Companies, Section 233 creates a fast-track mechanism, dispensing the need for NCLT approval in favour of a simplified approval process through the regional director.

   The Notification’s expansion of the threshold of Small Companies enables more companies to access this expedited restructuring route. Certain MSMEs that are reclassified as Small Companies under the Notification, looking to expand through mergers or acquisitions, can use the fast-track approach without being deterred by the lengthy and expensive NCLT approval process.

6. Other Regulatory Ease- CSR and Secretarial Compliance: Regular companies are subject to Corporate Social Responsibility (CSR) obligations and mandatory secretarial audits. The Companies Act, however, allows Small Companies to be exempted from these requirements. The Notification will thus allow greater number of entities to avail themselves of these exemptions and redirect resources towards business and operational growth.

Conclusion: A Progressive Shift Towards MSME Growth

In conclusion, the amendment to the definition of Small Companies represents a calibrated and context-responsive reform within India’s corporate regulatory framework. By revising the financial thresholds to reflect prevailing economic conditions and inflationary realities, the legislature has acknowledged the structural growth of enterprises without equating such growth to an increased capacity to absorb regulatory burden.

More significantly, the Notification via the expanded thresholds enables a wider segment of MSMEs to access the simplified compliance regime already envisaged under the Companies Act, thereby reducing disproportionate procedural and cost burdens.

^[1] Union Minister of India (2025) MSME Sector, Ministry of Micro, Small & Medium Enterprises. Available at: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2142170&reg=3&lang=2 .