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Impact on Annual Compliances for Small Companies From 1 December 2025:

With effect from 1 December 2025, the Ministry of Corporate Affairs (MCA) has expanded the eligibility criteria for small companies under the Companies Act, 2013.

This reclassification brings significant compliance relief for thousands of businesses across India. If your company now qualifies as a small company, understanding the updated annual compliance requirements is crucial to ensure smooth operations and full legal compliance - while also reducing the costs.

1. Cash Flow Statement Exemption for Small Companies: Under the Companies Act, financial statements of small companies no longer need to include a Cash Flow Statement.

Why this matters:

. Reduces paperwork and compliance complexity

. Saves professional preparation and audit costs

. Ideal for companies with simple financial structures

2. Reduced Board Meetings: Small companies are required to hold only two board meetings annually with at least 90 days gap between meetings.

Compliance Advantage:

. Easier governance and scheduling

. Reduced administrative work

. Less pressure on smaller boards and founder-led companies

3. Annual Return filling simplified: Small companies can file MGT-7A, an abridged version of the annual return, instead of the full MGT-7

Advantages of MGT-7A:

. Fewer disclosures

. Easier and quicker to prepare

. Lower compliance burden for directors and professionals

4. No Mandatory Dematerialisation of Shares: Small companies are not required to dematerialise their shares, unlike larger private limited companies.

Practical Advantages:

. No need to maintain demat accounts

. Avoids dematerialisation fees and procedural work

. Simplifies shareholding structure for promoter-led businesses 

5. Fast-Track Merger Facility Available: Small companies can avail the Fast-Track Merger (FTM) route under Section 233 of the Companies Act.

Why Fast-Track Mergers Matters:

. No requirement of NCLT approval

. Shorter merger timeline

. Lower legal and professional costs

. Ideal for group restructurings or internal reorganisations 

6. Lower Penalties for Small Companies: One of the biggest advantages of being classified as a small company is the substantially reduced penalties under the Companies Act.

Key Benefits:

. Penalties for many non-compliances are capped

. Penalties are often reduced to half of what other companies pay

. Lower financial impact for minor or procedural lapses

. This makes compliance more forgiving and supports smaller entities with limited financial resources

7. CARO, 2020: Not Applicable to Small Companies. The Companies (Auditor’s Report) Order, 2020 (CARO) imposes detailed audit reporting obligations. CARO does not apply to small companies.

Benefits of CARO Exemption:

. Shorter and simpler audit reports

. Reduced audit time and cost

. Lower compliance risk for small businesses

8. Internal Financial Controls (IFC) Reporting: IFC Reporting is not required for small companies. Auditors of small companies are not required to report on Internal Financial Controls over Financial Reporting (ICFR).

How this helps:

. Significant reduction in audit procedures

. No need for extensive internal control documentation

. Lower compliance costs for early-stage and growing businesses

The reclassification effective from 1 December 2025 offers transformative compliance benefits to companies now classified as small companies. These changes align with India’s commitment to Ease of Doing Business, helping small companies focus on growth rather than compliance heavy processes.

If your company now qualifies as a small company, the updated compliance framework can significantly reduce your annual statutory workload and professional costs. Understanding and leveraging these relaxations can strengthen compliance efficiency while allowing the management to prioritise business expansion.

Contact us for detailed assistance on assessing your company’s status or navigating the new compliance landscape.