More room for growth, ease of compliance: Here’s what MCA’s new definition of ‘small company’ means for entrepreneurs

Earlier this month, the Ministry of Corporate Affairs (MCA) raised the thresholds for classifying a company as a ‘small company’ under Companies Act, 2013. 

Under MCA’s notification G.S.R. 880(E) dated December 1, firms with up to Rs 10 crore in paid-up capital and Rs 100 crore in turnover now qualify as a ‘small company’. Earlier, the limits were Rs 4 crore capital and Rs 40 crore turnover. 

This shift carries significant potential for India’s growing MSME (micro, medium and small enterprises) sector. It could reshape how many mid-sized firms plan their growth, compliance, and long-term strategy. SMBStory asks industry experts to explain the impact of the rising threshold.

Increased scope for growth

For MSMEs that were already operating in the Rs 4 to 10 crore capital and Rs 40–100 crore turnover band, the previous classification forced them into ‘regular’ company status, subjecting them to heavier compliance burdens. With the new rule in place, they will be considered a ‘small company’. 

Cheruku Srikanth, Founder and CEO of DigitalCFO, notes that the new limits represent “A significant structural shift.” 

“For growing enterprises, this means they can continue to access the advantages of a corporate structure, like equity capital, ESOPs, and clear governance, without immediately incurring the heavier compliance overlay that was designed for much larger companies,” he explains. 

That means resources previously spent on compliance can now be channelled into building products, scaling operations, expanding distribution, or investing in tech. 

The change offers a “wider runway to reinvest, innovate, and focus on expansion,” for growth-stage businesses, agrees Rahul Singh, Co-founder and CEO, EcoSoul Home. 

Arun Poojari, CEO and Co-founder of Cashinvoice, echoes the same sentiment, arguing the reform supports steady growth by letting firms “retain small-company status longer.”

Compliance relief 

In practical terms, the classification as a ‘small company’ under the Companies Act now lets firms benefit from a lighter compliance regime, that is, fewer mandatory board meetings (two annually, instead of four); no requirement to include a cash flow statement in financial statements; simpler annual return forms (Form MGT-7A); exemption from CARO (Companies Auditor’s Report Order) reporting; relaxed internal control reporting; no mandatory auditor rotation; and reduced filing fees and penalties. 

These firms also get relief from mandatory dematerialisation of shares. Fast-track merger routes under Section 233 become available for small companies, simplifying restructuring for smaller groups. According to Srikanth, these are far from “cosmetic”. 

For a professionally run MSME, the reduction in filings, fewer interactions with regulators and advisors, and simplified year-end closure “directly reduce the number of filings, touchpoints with regulators and advisors, board-level time, and year-end closure complexity,” he adds.

For Poojari and Singh, these translate to “less paperwork, advisory fees, and daily compliance headaches”, thus, allowing entrepreneurs more time and resources to focus on business operations rather than regulatory formalities.

Reduced red flags

While this redefinition doesn’t directly alter how banks classify MSMEs (that still depends on the MSMED Act and norms set by the Reserve Bank of India), experts argue that the regulatory change improves the operating environment for a large set of borrowers and investee companies. 

As Srikanth explains, fewer compliance complexities and a lower risk of technical non-compliances reduce “governance red flags” that lenders and investors often flag during due diligence.

He highlights three ways in which the amendment will likely improve credit access and investor sentiment:

• Lower cost of staying compliant and formal: With simpler financial statements, fewer board meetings, reduced penalties, and easier annual returns, more MSMEs can afford to remain consistently compliant. Lenders and rating agencies value continuity of clean MCA, GST, and income-tax records, qualities that become easier to maintain under the new regime.

• Better alignment with MSME credit infrastructure: Schemes such as Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), along with other MSME credit programs, often support loans up to Rs 10 crore and offer collateral-free credit. For a “small company” operating in that range, transparent statutory accounts, Udyam registration, and digital footprints via GSTN, MCA and banking data can make credit underwriting faster and more objective.

• Data-driven credit via digital finance stacks: With over 2.2 billion accounts enabled by the Account Aggregator framework, digitally run small companies with clean books can leverage consent-based data sharing, thereby improving transparency, underwriting speed and possibly pricing.

Poojari notes that simpler compliance and governance norms lead to “cleaner financials,” making companies more attractive to investors. Singh adds that reduced compliance load strengthens financial stability, which investors and banks usually favour.

First impact

All three experts agree that the most immediate, measurable effects will be seen in finance and compliance costs through reduced audit requirements, fewer filings, lower professional fees, and less internal time spent on compliance. 

Next, governance and formalisation are expected to improve. For many growing MSMEs, incorporation and corporate governance may now happen earlier rather than later.

Operational costs like board logistics, audit complexity, and documentation overhead will also ease, especially for tech-enabled MSMEs which can redirect legal or accounting bandwidth toward analytics, planning, or operations. 

Over time, this could support expansion and risk-taking, as businesses feel more confident growing revenue, hiring talent, or exploring new geographies without an immediate ‘compliance shock.’ 

As Singh puts it, the change provides “Space to build sustainable business models with stronger operational resilience and long-term value creation.”

Final word 

As of FY2024, more than 7.26 crore MSMEs were registered on the Udyam portal. The sector provides employment to close to 29.7 crore people as of September 2024. In this context, the expansion of the ‘small company’ definition will accelerate the formalisation of growth-stage MSMEs, allowing them to take advantage of the compliance relief, get better access to capital, more transparent governance and operational scalability. 

However, all three experts flag that this change, while helpful, only addresses part of the larger challenge. 

Srikanth says India should use a common MSME definition across major laws, create a single digital compliance portal to avoid repeated submissions, and strictly enforce timely payments to MSMEs. He further adds that offering incentives for digital bookkeeping and secure data-sharing would also make credit approval faster and easier.

Poojari and Singh say GST and labour rules need to be easier, routine filings should be fully digital, and compliance requirements should increase gradually as a company grows instead of applying the same rules to everyone.