Lavanya G is a 4th year law student at Narsee Monjee Institute of Management Studies, Bengaluru, with an interest in Corporate law, Commercial & Tax practice.
In recent years, India’s economic policy has increasingly favoured regulatory relaxation to promote Ease of Doing Business (EoDB). The most recent step in this line of action is the Ministry of Corporate Affair’s Notification: G.S.R. 880(E), dated December 1, 2025. This amendment has effectively revised the statutory requirements for the classification and definition of Small Companies, by replacing Rule 2(1)(t) of the Companies (Specification of Definition Details) Rules 2014, of the necessary requirements in Section 2(85) of the Companies Act 2013. An entity would now remain small until its paid-up capital reaches Rs. 10 crores and its turnover reaches Rs. 100 crores. By widening the definition to such a huge extent, the law has unwarrantedly generated a governance vacuum for entities that are economically significant with extensive supply chains and sizeable bank liabilities, all in the name of the EoDB.
Against this backdrop, this blog examines the rationale underlying the revised threshold by analysing the governance implications of extending the exemptions to high-turnover entities, before proposing a graded accountability model as a more balanced regulatory alternative.
Regulatory History
This amendment cannot be considered as an isolated event, but rather a continuation of a trend of progressive relaxation. At the inception of the Companies Act in 2013, the category of Small Company, with thresholds set at a modest Rs. 50 lakh capital and Rs. 2 crore turnover, was introduced to aid and provide genuinely small business in the private sector by allowing them to operate without being subjected to the burden of corporate governance obligations intended for larger entities. However, post Covid, there were several revisions from the 2021’s Rs. 2cr/20cr threshold to the 2022 revision of Rs. 4cr/40cr, and finally to the current amendment in 2025. The policy rationale given remains consistent in the reasoning of insulating growing Micro, Small, and Medium Enterprises (MSMEs) from the compliance tax that stifles scalability.
The amendments undoubtedly reduce the regulatory burden on certain companies as compliance requirements impose costs on businesses, and these costs may be particularly burdensome for companies with limited resources. The amendment has also provided with measures such as reduced filing fees, lesser penalties and fewer compliance requirements among the benefits available to small companies. The concern, however, arises when the same relief is extended to companies with turnover as high as ₹100 crore. At that point, reducing compliance may also mean reducing the safeguards that are meant to keep such companies accountable.
The Governance Cost of Exemptions
The classification of a company as small is not a mere nomenclature shift; rather it effectively removes several layers of regulatory oversight. When companies with a turnover of ₹100-crores are exempted from the standard compliance requirements, the focus must also turn to the governance gap that follows. The significance of the revised definition becomes clearer when the exemptions available to small companies are examined.
The first is the loss of financial information. Section 2(40) exempts small companies from preparing Cash Flow Statement. While such an exemption may be justified for genuinely small entities, its application to companies with turnover approaching ₹100 crore raises a different concern. Cash flow statements provide an important picture of a company’s financial position by helping distinguish between paper profits from actual solvency. Without this information, creditors and other stakeholders may have fewer means to assess whether a debtor has sufficient liquidity or not. Therefore, while the exemption aids small companies from the burden of heavy-regulatory burden, it effectively impairs and reduces the reporting responsibility of larger entities.
The issue is further aggravated by the exemption from reporting on Internal Financial Controls (IFC) under Section 143(3)(i) and the complete exclusion of the (CARO) Companies (Auditor’s Report) Order. While IFC reporting provides assurance regarding the effectiveness of a company’s internal financial controls, CARO brings several financial and governance concerns to the attention of auditors and, consequently, other stakeholders. Removing such requirements can reduce the scrutiny applied to the financial affairs of companies falling within the small-company classification. The cumulative effect of these exemptions creates a critical gap in the financial oversight mechanism, thereby impairing the ability of investors and regulators to make informed assessment of an entity that qualifies as “small” only in form but not in economic substance.
Jurisprudential Critique
There is a strong argument in favour of retaining simplified compliance for growing businesses. Requiring extensive reporting at every stage of growth for a small company may impose costs that are disproportionate to the risks involved. At the same time however, the framework could arguably be said to contain more gaps than substance, as a business with 100 crores of turnover today, can no longer be meaningfully classified as small. This characterization of such companies as small, leads to a conceptual paradox where large economic entities with high stakes are incorporated into the governance structure that was originally intended to govern small corporate entities in the micro level. These companies are technically under the law but exist in a system that entails less disclosure and governance auditing. In practice, this is a critical gap, as in cases where such relaxations are made on firms that have high financial footprints, they have the potential to create systemic vulnerabilities in governance, especially by increasing the information asymmetry between insiders and external stakeholders including creditors, suppliers and minor shareholders.
Additionally, a notable paradox emerges between the judiciary’s approach to corporate accountability and the legislature’s step towards the amendment. The Bombay High Court in IMAX v. E-City Entertainment concluded that the corporate form was not a vehicle to frustrate and avoid legal obligations which are present. The judicial message was to clear that the corporate veil cannot be used as a shield to conceal misconduct or evade existing legal obligations.
Viewed against this backdrop, the legislative intent in the expansion of small companies creates a striking contrast, as while the judiciary has increasingly demonstrated the willingness to pierce the corporate veil to prevent the evasion of liability, the amendment aids the government to exempt companies with turnover as high as ₹ 100 crore. The effect of this may not be a direct evasion of liability, but a nuance and a subtle form of statutory opacity and practical conundrum. This is because on one hand when the judiciary is strongly emphasising that obscuring from responsibility must be strictly curtailed, the statutory amendments on the other hand risks providing the companies an easy hand to diminish their ethical corporate responsibility.
Way forward
The expansion of the definition of a Small Company reflects a legitimate policy objective: compliance should not become an unnecessary burden on businesses that are still developing. However, the broader concern lies in the potential regulatory risk it poses as a company with a turnover of ₹100 crore may satisfy a statutory definition of “small”, but its financial footprint, creditors, employees and other stakeholders may extend far beyond what would ordinarily be associated with a small enterprise. The concern, therefore, is not that companies should be denied regulatory relief altogether, rather it is that the present framework may grant the same degree of relaxation to companies with materially different levels of economic significance.
A more balanced approach would be to introduce different levels of compliance within the category of small companies. Smaller companies could continue to benefit from wider exemptions, while companies nearing or crossing the ₹100-crore turnover threshold could be required to follow additional requirements. Such an approach would preserve the objective of Ease of Doing Business while preventing regulatory relief from becoming so broad that companies with substantial economic interests are treated in the same manner as genuinely small businesses. Ultimately, broader policy issue is not just whether a company with a ₹100-crore turnover must fall within the legal definition of a “small company”, but whether that classification should determine the extent of its governance obligations.
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