[Opinion] Do NBFCs Qualify as Small Companies?

Mahak Agarwal – [2024] 163 taxmann.com 496 (Article)

1. Introduction

Recently, there has been considerable discussion regarding whether NBFCs can qualify as small companies. This debate erupts from point (c) of the proviso to Section 2(85) of the Companies Act, 2013 (‘the Act’), which excludes “a company or body corporate governed by any special Act” from being eligible as a small company.

2. Small is simple

Small companies are private companies operating on a small scale, having paid-up share capital and turnover limits not exceeding Rs.4 crs and Rs.40 crs, respectively. These companies contribute significantly to the economy, carrying the potential to become large corporations. The idea behind providing various relaxations to small companies was to remove the burden of additional compliances otherwise applicable to large publicly listed companies. The same has also been discussed in the 2005 Report on Company Law by Dr. J.J. Irani:

“Small companies have to be enabled to make quick decisions, be adaptable and agile in the changing economic environment, and be encouraged to comply with the essential requirements of the law through low cost of compliance. The Government may prescribe special regime for such companies through a system of exemptions.”

Currently, several provisions of law, such as the preparation of a cash flow statement, the requirement of holding four meetings in a financial year, the rotation of auditors, and the appointment of independent directors, are exempt for small companies. The most significant exemptions are the dematerialisation of shares and CARO reporting. These exemptions are crucial as they significantly reduce the compliance burden on small companies, allowing them to focus more on their core operations.

The requirement of dematerialisation of shares, earlier applicable only to public companies, was later extended to private companies. (See our article on Diktat of demat for private companies.) However, despite being private companies, small companies are exempt from this requirement. Further, the requirement of a CARO report—a report containing additional requirements for reporting by statutory auditors—is also exempt for small companies.

Having discussed the privileges enjoyed by a small company, the crucial question is whether NBFCs fall under the definition of being “governed by a special Act,” thereby placing them outside the scope of small companies? If an NBFC were to be treated as a company “governed by a special Act”, then the same would deny it of all the exemptions and relaxations otherwise available to a small company despite meeting the prescribed requirements. This article deals with our views on this issue.

3. Understanding the meaning of ‘governed by special Act’?

The term ‘company governed by special Act’ has long-standing roots in legal frameworks, not only under Section 2(85) of the Companies Act, 2013, but also under Section 1(4)(e), which extends the Act’s applicability to such entities, provided it does not conflict with their particular Act. This concept also existed in the erstwhile Companies Act, 1956. The idea originated under Halsbury’s Laws of England, where companies were created under a Royal Charter (a particular Act of Parliament which defines the Corporation’s objects, constitution and powers). Over time, the Companies Act became the general governing law for companies incorporated in India, and the companies specifically incorporated under the Royal Charter became companies ‘governed by special Act’. The same has also been discussed in Para 7 of Ranjit Narayan Haksar v. Surendra Verma on 7 September, 1994 as under:

“In Halsbury’s Laws of England, Fourth Edn., Vol. 7 at page 11, it is stated as follows : The second category (which is a large and growing one and which is economically very important) is companies that are known as public corporations. These are each the creation of a royal charter or, more commonly, a special Act of Parliament which defines the objects, constitution and powers of a Corporation. They are created to fulfil some special social or economic purpose in each case.”

Therefore, the intent of the existing company law in referring to companies ‘governed by a special Act’ was to provide a carve-out for such companies that were incorporated and governed by the Royal Charter as opposed to those governed by the general law, i.e., the Companies Act.

In the context of NBFCs, it is pertinent to note that NBFCs were far from existence in the era of Royal Charters. Therefore, there is no possibility of entities ‘governed by a special Act’ referring to NBFCs.

Click Here To Read The Full Article