Small, Dormant and Nidhi Companies
Chapter Nine
Syllabus topic 1, "FORMATION OF COMPANY"
Pages 41 to 45 of 998
In one line
Three statuses lighten the Act for companies that are small, inactive, or run as mutual benefit societies, and each is a deliberate exercise in proportionate regulation rather than an exemption from company law.
In exam wording: section 2(85) defines a small company by paid-up capital and turnover ceilings, excluding public companies, holding and subsidiary companies, section 8 companies and companies governed by special Acts; section 455 allows a company formed for a future project, or to hold an asset or intellectual property, with no significant accounting transaction, and an inactive company, to obtain dormant status from the Registrar; and section 406 empowers the Central Government to declare a company a Nidhi or Mutual Benefit Society and to disapply or modify provisions of the Act for it.
Why the law has this at all
A statute of this size imposes fixed costs, an audit, filings, board processes, that fall equally on a company with two crore rupees of turnover and one with two thousand. Fixed costs are regressive: they consume a far larger share of a small company's resources, and beyond a point they push small enterprise out of the corporate form altogether, which is the opposite of what a policy encouraging formalisation wants.
Each of the three statuses answers a different version of that problem. Small company status answers scale: the company is real and active but little. Dormant status answers time: the company is real but doing nothing yet, or nothing any longer, and there is no sense in auditing an empty shell every year. Nidhi status answers character: the entity is a mutual benefit society whose members lend to and borrow from each other, so provisions written for outside investors do not fit.
Section 2(85): the small company
A small company means a company, other than a public company, whose
- paid-up share capital does not exceed fifty lakh rupees or such higher amount as may be prescribed, which shall not be more than ten crore rupees; and
- turnover, as per the profit and loss account for the immediately preceding financial year, does not exceed two crore rupees or such higher amount as may be prescribed, which shall not be more than one hundred crore rupees.
The proviso excludes three classes outright: a holding company or a subsidiary company; a company registered under section 8; and a company or body corporate governed by any special Act.
Three things to be exact about. Both tests must be satisfied, the conjunction being "and", so a company under the capital ceiling but over the turnover ceiling is not small. Turnover is measured for the immediately preceding financial year on the profit and loss account, so status is reassessed annually and a company can lose it without doing anything except growing. And the exclusions are structural: a small subsidiary of a large group is not small, because the mischief, a company with limited means facing full compliance, is not present when the group stands behind it.
Small, Dormant and Nidhi Companies
The benefits of the status are scattered through the Act rather than collected: relief in the form of board-meeting frequency, simplified annual return, exemption from cash-flow statements in the financial statements, relief from auditor rotation, and, importantly for enforcement, the lesser penalties in section 446B, which caps penalties for small companies and one person companies at a reduced level, treated in [Offences, Fraud and Decriminalisation].
Section 455: the dormant company
Section 455(1) permits an application to the Registrar for dormant status by a company formed and registered under this Act for a future project or to hold an asset or intellectual property, which has no significant accounting transaction, and equally by an inactive company.
The Explanation defines both key terms, and the definitions are the section's working parts. An inactive company means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years. A significant accounting transaction means any transaction other than payment of fees by the company to the Registrar, payments made to fulfil requirements of this Act or any other law, allotment of shares to fulfil the Act's requirements, and payments for maintenance of its office and records.
The machinery follows in the remaining sub-sections. Under s.455(2) the Registrar, on considering the application, allows the status and issues a certificate; under s.455(3) he maintains a register of dormant companies. Section 455(4) adds a route the company does not choose: where a company has not filed financial statements or annual returns for two financial years consecutively, the Registrar issues a notice and enters its name in that register himself. Under s.455(5) a dormant company must have such minimum number of directors, file such documents and pay such annual fee as prescribed to retain the status, and may become active again on application. Section 455(6) obliges the Registrar to strike the name off the register of dormant companies where the company has failed to comply with the section, which connects to [Striking Off and Its Safeguards].
Two design points are worth examination sentences. Dormancy is a status conferred and policed, not a state of fact: a company does not become dormant by ceasing to trade, it applies, is certified, keeps a reduced compliance and can be removed. And the status can be imposed under s.455(4), which turns what looks like a concession into a tidying power over companies that have simply stopped filing.
Small, Dormant and Nidhi Companies
Section 406: Nidhis
Section 406(1) defines a Nidhi or Mutual Benefit Society as a company which the Central Government may, by notification in the Official Gazette, declare to be one. Sub-section (2) empowers the Government to direct by notification that specified provisions of the Act shall not apply to a Nidhi, or shall apply with exceptions, modifications and adaptations. Sub-section (3) requires a copy of every proposed notification to be laid in draft before each House of Parliament, with the ordinary machinery for approval and modification.
Two features are worth noticing at LL.M. level.
Status is conferred, not claimed. The Government declares a company to be a Nidhi; the definition in the section is circular precisely because the character of these companies, mutual benefit societies confined to members, is a matter of the conditions the Government imposes rather than of a test in the section.
The power is a dispensing power subject to parliamentary control. Section 406(2) lets the executive switch off parts of a statute for a class of company, which is constitutionally significant, and s.406(3) is the safeguard: the draft is laid before both Houses, which may approve or modify. This is delegated legislation of the strongest kind, and it belongs with the material in [Delegation, Exemptions and Rule-making], where s.462's power to exempt classes of companies is treated alongside it.
A worked example
Meghna Ceramics Private Limited has paid-up capital of forty lakh rupees. In the year ended 31 March 2025 its turnover was one crore eighty lakh rupees; in the year ended 31 March 2026 it was two crore forty lakh rupees. It is not a subsidiary, not a section 8 company, and not under any special Act.
For the financial year 2025-26, status is tested on the immediately preceding year's profit and loss account, which shows one crore eighty lakh rupees, under the section's two crore base. Capital is under the fifty lakh base. Both tests are satisfied, and Meghna is a small company for that year, with the benefits and s.446B's lesser penalties. For the financial year 2026-27, the preceding year's turnover is two crore forty lakh rupees, above the section's base figure. Whether Meghna remains small then depends on the prescribed higher amount, if any, and this is exactly where an answer must stop and say so rather than assert a number: the section fixes only the base and the outer cap.
Now suppose that in 2026 Meghna is acquired by Sagar Foods Limited, a public company, taking sixty per cent. Two things happen at once, and both are worth stating. It becomes a subsidiary, so the proviso to s.2(85)(A) excludes it from small-company status whatever its figures; and because its holding company is not a private company, the proviso to s.2(71) deems it a public company, which excludes it a second time over, since s.2(85) is available only to a company other than a public company.
Small, Dormant and Nidhi Companies
Finally, suppose the business closes and the company keeps only its trademark, paying nothing but Registrar's fees and office maintenance for two years. It is then an inactive company on the Explanation to s.455, since it has made no significant accounting transaction, those excluded payments not counting, and it may apply for dormant status rather than continuing full compliance or risking strike-off.
Distinctions
| Small company, s.2(85) | Dormant company, s.455 | Nidhi, s.406 | |
|---|---|---|---|
| Basis | Size: capital and turnover, both | Inactivity, or formation for a future project or to hold an asset | Character: mutual benefit society |
| How obtained | Automatic on the facts, tested yearly | Applied for and certified by the Registrar | Declared by Central Government notification |
| Excluded | Public, holding or subsidiary, s.8, special-Act companies | Not applicable | Not applicable |
| Effect | Scattered reliefs; lesser penalties under s.446B | Reduced filings, minimum directors, annual fee | Provisions disapplied or modified by notification |
| Loss of status | On crossing a threshold or becoming a subsidiary | On becoming active, or on the Registrar striking the name off for non-compliance, s.455(6) | By notification |
What it does NOT mean
Small does not mean private. Every small company is non-public, but most private companies are not small; the tests are different and the consequences are different.
Dormant does not mean struck off. A dormant company exists, has directors, files and pays a fee. What s.455(6) strikes off is a dormant company that has failed to comply with the section, not one that has merely remained dormant.
Nidhi status is not a licence to take public deposits. Nidhis deal with their members; the deposit regime in [Public Deposits] and the notified Nidhi conditions govern what they may do, and nothing in s.406 authorises public fundraising.
Quick revision
s.2(85): not a public company; capital up to fifty lakh (prescribable up to ten crore) and turnover, on the immediately preceding year's profit and loss account, up to two crore (prescribable up to one hundred crore); excluded: holding or subsidiary, s.8, special-Act companies. s.455: future project, asset or IP holder with no significant accounting transaction, or inactive company (no business, or no significant accounting transaction, or no filings, for two financial years); significant accounting transaction excludes Registrar's fees, statutory compliance payments, allotments to meet the Act, and office maintenance; s.455(2) certificate, (3) register, (4) Registrar may enter a two-year non-filer himself, (5) minimum directors, documents and annual fee with revival on application, (6) strike-off for non-compliance. s.406: Central Government declares a Nidhi and may disapply or modify provisions, drafts laid before both Houses.
Small, Dormant and Nidhi Companies
Test yourself
1. A private company has paid-up capital of thirty lakh rupees and preceding-year turnover of three crore rupees. Small? Not on the section's own base figures, since both conditions must be satisfied and turnover exceeds two crore; whether it is small depends on any higher amount prescribed by rule, which the section does not itself state.
2. Why can a subsidiary never be a small company? Because the proviso to s.2(85) excludes holding and subsidiary companies outright, the rationale being that the group's resources remove the compliance-burden mischief.
3. Define "significant accounting transaction" and explain why the definition is by exclusion. It means any transaction other than Registrar's fees, payments to fulfil statutory requirements, allotments made to fulfil the Act, and payments for maintaining the office and records; by excluding compliance costs the definition ensures a company is not disqualified from dormancy by the very filings dormancy requires.
4. What is the constitutional interest of s.406? It confers a dispensing power on the executive to switch off or modify parts of an Act for a class of company, subject to the safeguard in s.406(3) that draft notifications are laid before both Houses.
5. Does a company become dormant automatically when it stops trading? No. Dormancy is applied for under s.455(1) and certified under s.455(2); ceasing to trade only makes the company eligible. The one route the company does not choose is s.455(4), where the Registrar enters a company that has not filed statements or returns for two consecutive financial years.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.