This article is written by Kapil Nikam, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here he discusses “Conversion of Public Limited Company into Private Limited Company”.
There are largely two types of Companies, One is a Private Limited Company and the other is Public Limited Company. Public Company is defined in S. 2 (68) of the Companies Act, 2013 and Private Company is defined Under S. 2 (69) of the Companies Act, 2013. For our understanding, we can derive that Private Companies are those Companies whose articles of association restricts the transferability of shares and prevent the public at large for subscribing to them. This is the basic and important difference between a Private Company and Public Company. Private Companies can now have a minimum paid-up capital of any amount. Public Company means a Company that is not a Private Limited Company and has a minimum paid-up capital of five lakh rupees or such higher paid-up capital as may be prescribed.
Conversion of Public Limited Company into Private Limited Company is mentioned in the Companies Act, 2013 and Incorporation of Companies Rules, 2014. Prior to that, we need to see why it is necessitated to the conversion of Public Limited Company into a Private Limited Company. Being a Public Limited Company it required and mandated to follow various statutory guidelines as provided under the provisions of Companies Act, 2013 and rules made thereunder. Apart from this, there are various types of compliance to be done under the provisions of Companies Act, 2013 (Act) and SEBI Act. Private Limited Company has fewer compliances compared to Public Limited Company so that generally it is a tendency to convert Public Limited Company into Private Limited Company.
Earlier, the National Company Law Tribunal (NCLT) has a power pertaining to the conversion of Public Company into Private Company. There are several amendments that took place in Companies Act, 2013 and NCLT has a lot of assignments. Since 2013 Act came into effect NCLT has a jurisdiction to entertain the winding-up Petitions earlier same were entertained by the High Courts in view of this
Now we are going to see the procedure for the conversion of Public companies into Private companies.
We need to go through certain provisions of Companies Act, 2013 which are associated with the conversion procedure.
Some Important provisions of the Companies Act, 2013 (Act) is as under:
Section 13 of the Act speaks about the alteration of memorandum Company can alter memorandum in terms of S. 61 of the Act. This section explained about any changes in the alteration of memorandum for that purpose prior permission of the central government is required. This section further provides that no such approval is required on account of conversion if addition/ deletion with respect to the word “Private” means if the entire name is changed in that circumstances prior permission is required as envisage in said section.
Section 14 of the Act speaks about the alteration of memorandum and conversion in Public Company into Private Company, it is also mentioned that prior permission is required. Also, we need to read this Section with Companies Incorporation (Fourth Amendment) Rules 2018 wherein the details procedure for conversion of Public Company into Private Company has been discussed.
Section 18 of the Act speaks about the conversion of Companies which are already registered under the provisions of the Act. Section 18 states that a Company of any class may convert itself a Company of other class under the provisions of the Act by alteration of memorandum and articles of the Company in terms of the relevant chapter relating to the Section 18 of the Act. Certain compliance is required to be done and the registrar should satisfy with the said compliances. This Section further states that registration of the Company under this Section shall not affect any debts, liabilities obligations or contracts means said liabilities cannot carve out the mere conversion of Public Company into Private Company.
In view of aforesaid S. 14 of the Act, a Public Company may convert into a Private Company with prior approval from the Central Government. The conversion of Public Company into Private Company has been explained in the Companies Incorporation (Fourth Amendment) Rules, 2018. The Central government has vide power to amend said rules. These rules are amended from time to time. In view of this, we need to update recent notifications that are updated on time to time at the website of MCA.
- Steps for the conversion of Public Company into Private Company: Section 13, 14 and 18 of the Act need to be read with Rule 41 of the Companies Incorporation (Fourth Amendment) Rules, 2018. Rule 41 describes the procedure/ steps for the conversion of Public Company into Private Company. Following steps need to be taken for conversion of Public Company into Private Company:
- The Board meeting shall be convened for the conversion decisions. All formalities as per secretarial standards shall adhere to the said meetings since it’s a crucial part in terms of the conversion procedure. The Board approves the conversion procedure. The minutes of the meeting should be drafted carefully.
- The Company shall authorize any representative to act on behalf of the Company for further conversion procedure. One Certified True Copy of resolution may be required on behalf of the Company in favor of any professional to represent the Company before the Regional Director.
- The General Meeting of the Company shall be called.
- The General Meeting shall take a decision for the conversion of the Company.
- The necessary E form should be filed pertaining to the decision of conversion of the Company. S. 117 of the Companies Act, the mandate to file certain documents at the time of said filling. The said documents should be carefully submitted.
- The necessary application for conversion shall be drafted and submitted before the Regional Director.
- The said application has to file within 60 days from the passing of the said resolution. The documents /declarations as mentioned in the said Rule 41 needs to be submitted before Regional Director along with the application.
- Also, particulars as mention in Rule 41 (2) shall be submitted before the RD.
- A list of creditors and debenture holders needs to be annexed with said application. Due amounts, claims and liabilities, contingent and uncertain debt details required to be annexed.
- Further, the duly authenticated copy of the list of creditors and debenture holders shall be kept at the registered office the same can be verified and inspected during the ordinary hours of business.
- The Company has to file form NO INC 25 A in vernacular and English language.
- After submission of said details RD may seek additional information, details the same need to be submitted in the period of 15 days in E Form No. RD GNL -5. The applicant cannot file more than two resubmissions. RD may reject the application within a period of 30 days after the submission of the application.
- If no order of approval, or rejection or resubmission has been passed by the RD then said the application is deemed to allow and automatically order would be passed.
- If any objection has been received same shall be recorded in writing RD shall conduct hearing within a period of 30 days upon the receipt of the said objection. If any consensus reaches the Company can file application about the consensus. The RD shall pass an order within a period of 30 days.
- In the case where no consensus is received then, RD can reject the palliation within a period of 60 days.
- Conversion shall not pass if any prosecution is pending against the Company.
- No prosecution is pending or envisaged then RD shall allow conversion.
- The Conversion order has to file in Form No. INC 28. Within 15 days upon receipt of the order.
- The aforesaid procedure has been prescribed in the said rules.
Conversion of Public Company into Private Company is lengthy and needs to adhere to various mandatory formalities as mentioned in the Act and Rules. However, after conversion into a Private Company, the Private Company shall have benefits with respect to minimum compliances. Public Company has to adhere and strictly abide by the various compliances. After the Conversion of Public companies into Private companies, there are fewer compliances. However, some precautions need to be taken during the conversion procedure. Some Companies decision regarding conversion into the private company is controversial so that though the statute permitted for the conversion of Public Company into Private Company all precautions need to be taken. Also, the information submitted before the Regional Director has to be correct. If there is a consensus between all stakeholders for conversion then the process for the conversion would go easy and smooth. However, sometimes shareholders also raised questions over the conversion procedure. National Company Law Appellate Tribunal in one matter clarified that only board approval is sufficed for the conversion and it is not necessary to obtain all shareholder’s permission.
We have discussed all relevant and practical procedures in the said article pertaining to the conversion of a public company into a private company. However, it is advisable to seek the guidance of professionals during the aforesaid conversion procedure.
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