Small Company Definition Widened, Related Party Transactions Tightened: Companies Act Amendments Explained
Thresholds for small company status rise, while related-party transactions above ₹1 crore need audit committee approval.
Key points
- The paid-up capital and turnover limits in the small company definition under Section 2(85) have been raised, bringing thousands more private companies within the lighter compliance regime.
- Every related party transaction above ₹1 crore now needs specific prior approval of the audit committee in companies required to have one; omnibus approval is confined to transactions below that amount.
- Both changes apply from the financial year beginning 1 April 2027, with the related party rule applying to transactions entered into after notification.
NEW DELHI — The Ministry of Corporate Affairs has notified two sets of amendment rules under the Companies Act, 2013 that move in opposite directions for the companies they touch: the thresholds for small company status rise, taking more private companies out of the full compliance regime, while every related party transaction above ₹1 crore in a company that must have an audit committee now needs that committee's specific prior approval, closing the omnibus route for larger dealings with promoters, group entities and relatives.
"The relief is real. So is the scrutiny," a Mumbai company secretary who advises mid-sized groups told The Counsel.
The small company definition
Section 2(85) defines a small company as a company, other than a public company, whose paid-up share capital and turnover do not exceed the limits prescribed by rules. The limits have been raised twice since the Act came into force — to ₹2 crore and ₹20 crore in 2021, and to ₹4 crore and ₹40 crore from 15 September 2022 — and the latest Companies (Specification of Definitions Details) Amendment Rules raise them again. Holding and subsidiary companies, companies registered under Section 8 and companies governed by a special Act are excluded whatever their size.
The status matters because of what it removes:
- no cash flow statement in the financial statements;
- an abridged annual return, signed by a director without a company secretary's certification;
- two board meetings a year, at least ninety days apart, instead of four;
- no mandatory rotation of auditors, and no auditor's report on internal financial controls;
- penalties under Section 446B capped at half the amount otherwise specified, subject to a ceiling of ₹2 lakh for the company and ₹1 lakh for an officer in default.
A company that crosses either limit in a financial year loses the status from the following year; a company that falls within both limits acquires it. The ministry's rationale, as in 2021 and 2022, is that the limits had not kept pace with the growth of the companies they were meant to describe.
Related party transactions: the law before the amendment
Three provisions govern dealings with related parties. Section 188 requires board approval for the listed categories of transaction — sale and purchase of goods and property, leasing, services, agency and the appointment of a related party to an office of profit — unless the transaction is at arm's length and in the ordinary course of business, and shareholder approval by ordinary resolution where the transaction exceeds the thresholds in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, such as ten per cent of turnover for sales and purchases. Section 177(4)(iv) requires the audit committee, in companies that must have one, to approve or ratify every related party transaction, with power to grant omnibus approval under Rule 6A for repetitive transactions within set limits. Section 189 requires a register of contracts in which directors are interested. For listed companies, Regulation 23 of the SEBI listing regulations adds prior audit committee approval of all related party transactions and shareholder approval of material ones.
What the amendment changes
- A ₹1 crore line. Any related party transaction, or series of transactions in a financial year with the same party, exceeding ₹1 crore needs specific prior approval of the audit committee. Omnibus approval under Rule 6A remains available only below that amount.
- Prior, not after. Ratification after the event is no longer available above the line; a transaction entered into without prior approval is voidable at the option of the board or the shareholders.
- Reasons on record. The committee's approval must record the basis on which it found the terms to be at arm's length, or, where they are not, the justification for proceeding.
- Disclosure. Transactions approved under the new rule must be disclosed in the board's report with the committee's reasons.
The rule applies to the companies that must constitute an audit committee: listed public companies and public companies with paid-up capital of ₹10 crore or more, turnover of ₹100 crore or more, or outstanding loans, debentures and deposits of ₹50 crore or more. Private companies, including newly eligible small companies, are outside it unless they are subsidiaries of such public companies.
The relief is real. So is the scrutiny.
A company secretary, to The Counsel
Why the ministry has moved on both fronts
The two amendments respond to different complaints. Small private companies have argued, with support from the ministry's own committees, that compliance designed for widely held companies is disproportionate for family-owned businesses with no public money. The related party rule responds to the opposite experience: inspection reports and insolvency cases in which value was moved to promoter entities through transactions approved in bulk, on omnibus resolutions, by committees that never saw the individual contracts. The ₹1 crore line is the ministry's answer to both — relief for companies without public stakeholders, and specific scrutiny where there are.
What companies should do
- Check status. Private companies should test paid-up capital and turnover against the new limits and, if newly eligible, update the annual return form, board meeting calendar and auditor appointment terms from the next financial year.
- Reset omnibus approvals. Audit committees should withdraw omnibus approvals for transactions above ₹1 crore and schedule specific approvals, with the arm's-length analysis documented.
- Aggregate. Repeated transactions with the same related party count together within the year; monitoring must be continuous, not quarterly.
- Align with SEBI. Listed companies already operate under Regulation 23 and the industry standards on minimum information for related party approvals; the new rule changes the omnibus limit, not the approval architecture.
What is a small company under the Companies Act, 2013?
A company other than a public company whose paid-up capital and turnover do not exceed the prescribed limits — ₹4 crore and ₹40 crore since September 2022, now raised by the latest amendment. Holding and subsidiary companies, Section 8 companies and companies under a special Act are excluded.
What benefits does a small company get?
No cash flow statement, an abridged annual return, two board meetings a year, no auditor rotation or internal financial controls reporting, and penalties capped under Section 446B.
Which related party transactions need audit committee approval?
Every related party transaction in a company required to have an audit committee, under Section 177(4)(iv). Omnibus approval is now available only below ₹1 crore; transactions above that need specific prior approval. Section 188 separately requires board and, above the Rule 15 thresholds, shareholder approval for transactions not at arm's length or not in the ordinary course.
What happens if a related party transaction lacks the required approval?
It is voidable at the option of the board or shareholders; the director or employee responsible must indemnify the company for any loss and is liable to a penalty under Section 188(5) — ₹25 lakh in a listed company and ₹5 lakh in any other.
The Counsel will publish the ministry's clarifications as they issue. Companies near the small company limits, or with significant related party dealings, should take advice from a qualified company secretary or corporate lawyer before the next financial year.
Dev Patel
Dev writes on company law, FEMA and the compliance burden on growing businesses.
This report is for general information only and does not constitute legal advice. Readers should consult a qualified lawyer about their own circumstances. Case citations are to The Counsel Reports (TCR) unless otherwise stated.