New Small Company Definition (Dec 2025): Expanded Relief, Hidden Gaps, and Critical Compliance Ambiguities

Effective Date: 1 December 2025

The Ministry of Corporate Affairs (MCA) has expanded the definition of a small company, aiming to simplify compliance for thousands of private companies. While the revised limits significantly broaden eligibility, the regulatory landscape still contains several unresolved grey areas that professionals cannot ignore.

 

This article provides a consolidated, practical, and deeply analytical understanding of the new framework — combining threshold changes, real-world issues, structural gaps, and actionable compliance strategies.

 

1. Revised Eligibility Criteria (December 2025)

 

A company qualifies as a small company if it is a private company and meets both financial thresholds:

 Permanent Exclusions (regardless of size):

- Public companies

- Holding companies

- Subsidiary companies

- Section 8 companies

- Companies governed by special Acts

 

Practical Upshot:

Hundreds of standalone private companies with turnover between ₹40–100 crore qualify for simplification for the first time.

 

2. Compliance Benefits (What You Actually Get)

 

2.1 Governance Simplifications

•  Only 2 board meetings per year (vs. quarterly for others)

•  No mandatory independent director requirement

•  Board’s Report requires significantly fewer disclosures

 

2.2 Financial Reporting Relief

•  Cash flow statement not required

•  No segment reporting obligations

•  Simplified director remuneration disclosures (totals only)

 

2.3 Audit & Filing Advantages

•  Exempt from CARO (Companies Auditor Report Order)

•  No mandatory auditor rotation (Section 139(2))

•  Abridged annual return (MGT‑7A) instead of full MGT‑7

•  Lower MCA filing fees and reduced penalty structures

 

2.4 Accounting Standards Flexibility

•  Certain exemptions under Accounting Standards (AS) for Small and Medium Companies (SMCs)

•  Critical caveat: Companies newly becoming “small” cannot claim AS exemptions until they remain small for two consecutive financial years

 

3. Structural Gaps That Still Need Policy Fixes

3.1 MGT‑8 Certification Ambiguity

Rule 11(2) mandates that companies with paid-up capital ≥ ₹10 crore or turnover ≥ ₹50 crore must certify their annual return in Form MGT‑8 (by Practising Company Secretary).

 

The Problem:

Small companies file MGT‑7A (abridged form), not MGT‑7. Most guidance treats MGT‑8 as inapplicable to MGT‑7A filers, but the rule’s literal wording doesn’t distinguish between forms.

 

Real-World Scenario:

- Company: ₹9 crore capital, ₹75 crore turnover → Qualifies as small company (MGT‑7A filer)

- Turnover exceeds ₹50 crore trigger → Rule 11(2) technically applies

- Does it need MGT‑8? Prevailing practice says no; literal rule says yes.

 

Result:

Companies in the ₹50–100 crore turnover band face uncertain compliance requirements.

 

Needed Fix:

- MCA clarification on MGT‑8 applicability to MGT‑7A filers.

- Or align MGT‑8 threshold with small company turnover limit (₹100 crore).

 

3.2 Holding/Subsidiary Exclusion: Growth Penalty

 

The Problem:

Any holding or subsidiary relationship terminates small company status, regardless of actual group size or compliance burden.

 

Example:
- A ₹25 crore turnover company acquires a ₹2 crore subsidiary.

- Instantly loses all small company benefits, despite minimal group complexity.

 

Impact:

Discourages legitimate M&A, joint ventures, and ESOP trust structures.

 

Needed Fix:

- Define “material subsidiary” thresholds (e.g., exclude only if subsidiary turnover >₹10 crore).

- Allow small holding companies if group turnover remains below ₹100 crore.

 

3.3 MSME vs. Small Company: Conflicting Overlaps

 

The Problem:

Both regimes now have ~₹100 crore turnover thresholds, but different investment criteria and exclusions.

 

Real Risk:

- The company qualifies as a small company but is a medium enterprise under MSME (or vice versa).

- No guidance on which regime takes precedence for overlapping benefits.

- Compliance calendars clash (MSME annual returns vs. MGT‑7A).

 

Needed Fix:

- Cross‑ministerial clarification on benefit hierarchy.

- Unified classification with consistent exclusions.

 

3.4 The ISIN Reversal Trap: Compliant Companies Now Exempt

 

The Problem:

Rule 9B mandates that non-small private companies obtain an ISIN and dematerialise shares. Small companies are explicitly exempt.

With the December 2025 threshold revision, companies that were previously non-small (and mandatorily obtained an a ISIN by June 30, 2025) are now reclassified as small.

 

The Gap:

- Example: Company with ₹8 Cr capital, ₹60 Cr turnover.

- Pre-Dec 2025: Non-small → ISIN mandatorily obtained (cost ₹50K–1.5L+)

- Post-Dec 2025: Now small → Technically exempt from Rule 9B

- But ISIN exists, depositories connected, shareholders’ holdings dematerialised.

 

Unresolved Questions:

- Can companies de-register ISIN?

- Are PAS-6 filings (half-yearly reconciliation) still mandatory?

- Do annual depository fees continue despite the exemption?

- What happens to shareholders’ dematerialised holdings?

 

Result:

Sunk compliance costs with no exit mechanism and ongoing fees for technically exempt obligations.

 

Needed Fix:

- MCA clarification on grandfathering for companies reclassified post-threshold revision.

- Voluntary ISIN deactivation/dormancy mechanism for newly small companies.

- PAS-6 form amendment allowing “Not Applicable - Small Company with pre-existing ISIN” option.

 

3.5 Consolidated Financial Statements (CFS) Dilemma

 

The Problem:

Section 129(3) imposes CFS on a company if it has even one associate or JV, even if immaterial.

 

Paradox:

- Small company gets simplified standalone financials (no cash flow).

- But CFS requires full consolidation - complex equity method, intercompany eliminations, segment data.

 

Result:

Small companies with minority investments lose simplification benefits where they matter most.

 

Needed Fix:

- Exempt small companies from CFS if associate/JV investment is immaterial (<₹5 crore).

- Allow line‑item disclosure instead of full consolidation.

 

3.6 Threshold Yo‑Yo & Transition Limbo

 

The Problem:

Companies fluctuating around limits face annual status changes with no transition grace period.

 

Example:

- FY 2025: Turnover ₹99 crore → Small company, MGT‑7A, 2 board meetings

- FY 2026: Turnover ₹101 crore → Loses status, MGT‑7, quarterly meetings, full audit scope

 

Issues:

- Auditor engagement letters must be re‑scoped annually.

- Board meeting cadence changes mid‑year.

- No “safe harbour” or 2‑year averaging.

 

Needed Fix:

- Buffer threshold (e.g., ₹105 crore) before status loss.

- 12‑month grace period after first breach.

- Or allow a 2‑year average turnover test.

 

3.7 Sector‑Blind Compliance

 

The Problem:

The definition is purely financial, ignoring sector‑specific regulatory load.

•  ₹90 crore trading company and ₹90 crore pharma company get identical relief.

•  Pharma faces drug licensing, clinical trial reporting, supply chain traceability - none addressed by small company exemptions.

 

Needed Fix:

- Sector‑specific carve‑outs or additional burdens explicitly acknowledged.

- Or targeted small company benefits for high‑regulation sectors.

 

3.8 Two‑Year SMC Transition Trap

 

The Problem:

Accounting standard relief starts only after two consecutive small-company years. This delays relief when companies need it most: during downsizing or financial stress.

 

Needed Fix:

- Remove 2‑year lockout; apply exemptions immediately upon classification.

 

3.9 Auditor Rotation Exemption Reset

 

The Problem:

Small companies are exempt from mandatory auditor rotation. But if status is lost even once, the rotation clock resets.

 

Example:

- Small for 10 years (same auditor) → Loses status for 1 year → Regains status → Rotation now applies (clock reset).

 

Needed Fix:

- Rotation exemption survives temporary status loss if regained within 2 years.

- Or grandfather historical auditor tenure.

 

4. Practical Compliance Checklist (Post‑December 2025)

 

✅ Annual Classification Review

- Re‑compute paid‑up capital and turnover every FY.

- Document classification determination in board minutes.

 

✅ Form Selection

- Small company/OPC → MGT‑7A (abridged).

- Non‑small → MGT‑7 (full).

- If turnover ≥₹50 crore and filing MGT‑7A → Document MGT‑8 position (prevailing practice vs. literal rule).

 

✅ MGT‑8 Decision Matrix

 ✅ ISIN Status Check

- If ISIN obtained before December 1, 2025, and the company now qualifies as small → Document position in board minutes.

- Conservative approach: Continue PAS-6 filings and depository maintenance until MCA clarification is issued.

 

✅ Group Structure Audit

- Check if any entity is a holding/subsidiary → Excludes small company status.

- Review associate/JV holdings → Triggers CFS requirement.

 

✅ MSME vs. Companies Act Alignment

- Map both classifications separately.

- Ensure compliance with both frameworks where applicable.

 

✅ Transition Planning

- If near thresholds, model scenarios (₹95 Cr vs ₹105 Cr turnover).

- Prepare compliance budget for potential status loss.

 

5. Conclusion & Recommendations

 

The December 2025 small company threshold revision is a substantial expansion of eligibility - genuine relief for thousands of private companies in the ₹40–100 crore turnover band.

 

However, it also amplifies long‑standing structural gaps:

 

1.       MGT‑8 ambiguity now affects a much larger set of companies (₹50–100 crore turnover).

2.       Holding/subsidiary ban penalises legitimate growth via M&A.

3.       MSME overlap creates dual‑framework confusion.

4.       ISIN reversal trap leaves compliant companies with sunk costs and no exit.

5.       CFS requirement for associates/JVs contradicts simplification intent.

6.       Threshold yo‑yo lacks transition grace periods.

7.       Two‑year SMC lockout delays relief when most needed.

8.       Sector‑blind design doesn’t account for regulatory complexity.

9.       Auditor rotation exemption reset punishes temporary status loss.

 

For Companies

•  Document your MGT‑8 position if turnover crosses ₹50 crore and you file MGT‑7A.

•  Track ISIN status if obtained under previous thresholds; adopt conservative compliance approach pending clarification.

•  Re‑evaluate group structures before acquiring subsidiaries or becoming one.

•  Map both MSME and small company criteria to avoid missed benefits or compliance gaps.

 

For Regulators (MCA)

•  Clarify MGT‑8 applicability to MGT‑7A filers immediately.

•  Issue ISIN grandfathering guidance - confirm whether the exemption applies retroactively to reclassified companies.

•  Harmonise small company and MSME definitions with cross‑ministerial guidance.

•  Introduce transition buffers (e.g., ₹105 crore turnover, 12‑month grace period).

•  Rethink holding/subsidiary exclusion—make it size‑based, not absolute.

 

Until then, companies and professionals must navigate these gaps with prudent documentation, proactive board oversight, and close coordination with auditors and PCS professionals.