Small Companies explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Only small companies and government companies sit outside Rule 9B. But section 2(85) disqualifies holding and subsidiary companies, section 8 companies and companies under a special Act from being small companies at all — so several companies inside the thresholds are still caught.
The exemption is narrower than the thresholds suggest
Rule 9B(1) applies to "every private company, other than a small company", and Rule 9B(6) provides that the rule does not apply to a government company. That is the entire exemption. There is no threshold of shareholder numbers, no turnover-based relief beyond the small company test, and no relief for a wholly owned subsidiary.
The handbook explains the policy at Q30: the government's decision not to link dematerialisation to specific shareholder counts or financial thresholds was aimed at universal implementation across a broad spectrum of private companies, prioritising transparency and accountability irrespective of company size or capital structure.
What a small company is — and what it can never be
A small company means a company, other than a public company, whose paid-up capital does not exceed Rs 4 crore and whose turnover does not exceed Rs 40 crore.
Section 2(85) then carves three categories out entirely. The following cannot be classified as small companies even if the thresholds are met:
- a holding company or a subsidiary company;
- a company registered under section 8; or
- a company or body corporate governed by any special Act.
Most Rule 9B questions in practice are decided by the second half of section 2(85), not the first. A company can be tiny — a few lakh of capital, negligible turnover — and still be outside the small companies category because it holds shares in one other company, or because it was incorporated under section 8.
The group point catches people hardest. Holding and subsidiary both disqualify, so a two-company family structure removes the exemption from both companies at once — the parent because it is a holding company, the child because it is a subsidiary. Neither is a small company, and Rule 9B applies to both.
The four edge cases the handbook answers
| Situation | Applicable rule | Why |
|---|---|---|
| Small private company that is a subsidiary of another private company | Rule 9B | A subsidiary cannot be classified as a small company, so it is deemed a normal private company |
| Small private company that is a subsidiary of an unlisted public company | Rule 9A | It loses the small company exemption as a subsidiary, and a subsidiary of a public company is deemed to be a public company under the proviso to section 2(71) |
| Section 8 private company meeting the thresholds | Rule 9B | A section 8 company cannot be a small company irrespective of paid-up capital and turnover |
| Company limited by guarantee | Neither | There is no capital or securities in such a company that could be dematerialised |
The second row is the one worth pausing on, because the outcome is not merely "yes, dematerialise" — it is "dematerialise under a different rule".
Two separate provisions stack. Section 2(85) strips the small companies exemption because the company is a subsidiary. Then the proviso to section 2(71) deems a private company that is a subsidiary of a public company to be a public company. Being deemed public, it falls under Rule 9A, with Rule 9A's own trigger date of 2 October 2018 rather than Rule 9B's eighteen-month clock — and, notably, with access to Rule 9A's wholly owned subsidiary exemption in sub-rule (11), which has no counterpart in Rule 9B.
Government companies
A government company means a company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments — and it includes a company which is a subsidiary company of such a government company.
The inclusion of subsidiaries matters here in the opposite direction from small companies: a subsidiary of a government company is itself a government company, and so is exempt under Rule 9B(6) in its own right. Government companies are equally outside Rule 9A, under sub-rule (11)(b).
If a company becomes small later
Rule 9B fixes status by reference to a company that, as on the last day of a financial year ending on or after 31 March 2023, is not a small company as per audited financial statements for that year. The handbook is asked what happens if such a company becomes a small company in a later year — can it revert to physical certificates?
Its answer at Q48 is candid, and should be passed on as candidly: the situation "is not specifically prescribed in the provisions of the Companies Act, 2013 read with the Rules thereunder", but "it can be presumed that the demat status will continue". It then advises that companies keep securities in dematerialised form in any event, as this reduces paperwork and enhances transparency and efficiency.
That is an inference by the authors, not a rule. There is no provision permitting rematerialisation of a whole company's securities on a later change of status, and none prohibiting it either. Advise on that basis, and do not present continuation as settled law — while noting that the practical case for staying dematerialised is strong regardless.
Practical checklist
- Test the section 2(85) disqualifications first, before the capital and turnover figures.
- Check whether the company is a holding or subsidiary company — that alone ends the small companies claim.
- Treat every section 8 private company as outside the exemption.
- For a subsidiary of a public company, apply Rule 9A, not Rule 9B.
- Use audited financial statements for the relevant year, as Rule 9B(2) requires.
- Remember a subsidiary of a government company is itself a government company.
- Confirm the entity actually has securities — a company limited by guarantee has none to dematerialise.
- Present the "became small later" position as unprescribed, not as settled.
Common mistakes
- Applying the Rs 4 crore and Rs 40 crore tests without checking the disqualifications.
- Exempting a parent company that is small on the numbers but is a holding company.
- Assuming a section 8 company is always exempt because of its non-profit character.
- Applying Rule 9B to a private company that is a subsidiary of a public company.
- Reading Rule 9A's wholly owned subsidiary exemption into Rule 9B.
- Advising rematerialisation on a later drop below the thresholds as if the rules allowed it.
Key Facts About Small Companies
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
Which companies are exempt from Rule 9B?
Small companies, under Rule 9B(1), and government companies, under Rule 9B(6). No other private company is exempt.
What are the small company thresholds?
A company other than a public company whose paid-up capital does not exceed Rs 4 crore and whose turnover does not exceed Rs 40 crore.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Small Companies: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.