Threshold Limit under Companies Act, 2013

Have you ever wondered how certain rules and regulations under the Companies Act of 2013, apply differently to various companies? The answer lies in “Threshold Limit under Companies Act.” These limits are specific monetary or operational values set by the government to classify companies based on their size, turnover, or other parameters. Understanding threshold limits helps determine which provisions and compliance requirements apply to different types of companies, making the business environment more transparent and conducive to growth.

In this article, we will discuss the threshold limit under Companies Act, 2013.

What is Threshold Limit under Companies Act, 2013?

Threshold limits under the Companies Act, 2013 refer to the minimum and maximum values ​​or limits that companies must adhere to comply with the law. It refers to the prescribed limit beyond which certain provisions of the Act become applicable to a company. It defines the company’s size and capacity to determine the extent of its obligations, reporting requirements, and legal compliances. The threshold limits vary based on different parameters, including the company’s turnover, paid-up capital, number of shareholders, and borrowing capacity.

Benefits of Threshold Limits under Companies Act, 2013

Here are some important benefits of threshold limits under the Companies Act of 2013:

• Simplified Compliance for Small Companies: The Act provides certain exemptions and relaxations for small companies based on their size, turnover, and paid-up capital. This simplifies compliance requirements and reduces the regulatory burden on small businesses. It allows small companies to focus on their core operations without being overly encumbered by complex regulatory obligations.
• Enhanced Corporate Governance: Threshold limits help in promoting better corporate governance practices. Larger companies, which have a greater impact on the economy and stakeholders, are subject to stricter regulations. This ensures transparency, accountability, and ethical behavior in their operations, enhancing investor confidence and trust.
• Encouragement for Startups and Entrepreneurs: The Act’s threshold limits provide a conducive environment for startups and entrepreneurs. The introduction of One Person Companies (OPCs) allows single entrepreneurs to start and operate a company with limited liability. This enables more individuals to venture into business without the need for multiple stakeholders.
• Investor Protection: The Act’s threshold limits for shareholder approvals and related party transactions protect the interests of minority shareholders. Major decisions and transactions that may significantly affect minority shareholders require their consent, to ensure their rights are safeguarded.
• Focus on Regulatory Oversight: By applying different rules based on the size of the company, regulatory authorities can better allocate their resources and focus their efforts on monitoring larger entities that have a more significant impact on the economy. This targeted oversight can lead to more effective regulation and enforcement.

Types of threshold limits as per Companies Act, 2013

The types of threshold limits used in law include-

• Financial limits: These limits are based on the company’s financial situation, such as its turnover, net worth, or paid-up capital. 
• Shareholding Limits: These limits are based on the percentage of shares held by a particular shareholder or group of shareholders. 
• Time-based Thresholds: The basis of these limits is the length of the company’s existence. 
• Turnover-based Limits: These limits are based on the turnover of the company. 
• Employee-based limits: These limits are based on the number of employees of the company. 

It is important to note that these threshold limits may be changed by the Government through a notification in the Official Gazette based on needs and circumstances.

Understanding Threshold Limit Value

Threshold limit value plays a significant role in various aspects of the Companies Act, and they vary for different provisions. Here are a few examples of how threshold limit values are used under the Companies Act:

• Small Company: A company qualifies as a “Small Company” if it meets the following criteria:
• Paid-up share capital does not exceed Rs. 50 lakhs or such higher amount as may be prescribed (not exceeding Rs. 10 crores).
• Turnover in the previous FY is up to Rs. 2 crores or higher as may be prescribed (not exceeding Rs. 100 crores).
• Audit Requirements: There are no specific threshold limits for mandatory audits; all companies, irrespective of their size, need to get their financial statements audited by a Chartered Accountant. However, the Companies Act prescribes different threshold limits for statutory audits, which determines when a company needs to rotate its auditors.
• Managerial Remuneration: The Act sets different threshold limits based on the size of the company and its profits for the payment of managerial remuneration. Certain approvals and restrictions apply if the remuneration exceeds these limits.
• Related Party Transactions: Threshold limits are prescribed for related party transactions. Transactions beyond these thresholds require approval from the Board of Directors and sometimes also require shareholders’ approval.
• Minimum Number of Directors: The Act sets a minimum number of directors required for different types of companies, ensuring that companies have adequate governance representation.

This threshold limit valuation is subject to change by the government through amendments and updates to the Companies Act. Companies must stay updated with the latest regulations and thresholds to ensure compliance with the applicable provisions. The purpose of this threshold limit valuation is to provide clarity, promote ease of doing business, protect the interests of minority shareholders, and encourage responsible corporate behavior based on the scale and impact of the company’s operations.

Key Provisions Affected by Threshold Limits under Companies Act, 2013

The key provisions affected by threshold limits under Companies Act, 2013 are-

• Mandatory Audits: As per the Companies Act, 2013, companies that cross a certain threshold of turnover or paid-up capital are required to conduct mandatory audits by qualified auditors. These audits help ensure financial transparency and accuracy in the company’s financial reporting.
• Appointment of Company Secretary: The Act mandates companies above a specific paid-up capital to appoint a full-time Company Secretary to ensure compliance with corporate laws and regulations.
• Annual General Meetings (AGM): Threshold limits determine the frequency and compliance requirements for holding AGMs. Larger companies are required to conduct AGMs more frequently to involve shareholders in the decision-making process.
• Board of Directors: The number of directors required on the company’s board is determined by the Act based on its size, turnover, and share capital.
• Related Party Transactions: Companies surpassing a certain threshold need to adhere to more stringent regulations concerning related party transactions to prevent conflicts of interest.
• One Person Company (OPC): The Act allows the formation of OPCs with a relaxed threshold for smaller businesses, providing them with legal identity and limited liability protection.

Wrapping Up

Understanding the threshold limit under the Companies Act, 2013, is crucial for all businesses operating in India. Companies need to monitor their growth and compliance status continuously to ensure they meet the relevant threshold limits. Compliance with the Act’s provisions not only fosters transparency and accountability but also fosters investor confidence and strengthens the Indian corporate sector as a whole. Consulting legal and financial experts can help companies navigate the complexities of the Act and ensure seamless operations within the prescribed limits.

In case of any query regarding the threshold limit under Companies Act, 2013, a team of expert advisors from Legal Window is here to assist you at every step. Feel free to reach us at admin@legalwindow.in.