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Conversion of a Public Company into a Private Company

April 09, 2018
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In this Article, Saloni Shah pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses to convert a Public Company into a Private Company.

A listed company has been defined in section 2(52) of the Companies Act, 2013 as “listed company means a company which has any of its securities listed on any recognized stock exchange.”

Listed companies primarily include any public limited company and other financial institutions and their main objectives are:

  1. Provide liquidity to securities;
  2. Mobilize savings for economic development; and
  3. Protect the interest of investors by ensuring full disclosures.[1]

Listed companies must abide by the regulations in place such as Securities Contracts (Regulation) Act, 1956 and take necessary approvals from the Listing Department for the listing of their securities. They must also have the prescribed eligibility criteria required for listed companies such as the paid-up capital and other requirements as set out in the regulations/bye-laws and the stock exchange requirements.

Private Company under Companies Act, 2013

The Act also provides for the definition of a private company under section 2(68) as follows:

Private company means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles:

  1. Restricts the right to transfer its shares;
  2. Except in case of One Person Company, limits the number of its members to two hundred.

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that:

  1. Persons who are in the employment of the company; and
  2. Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
  3. Prohibits any invitation to the public to subscribe for any securities of the company.

Therefore, in view of the above definitions, the primary difference between the two types of companies is that a private company cannot invite any public to subscribe to its shares and a listed company has its shares listed in a public stock exchange.

Conversion to a Private Company under the Companies Act, 2013

The procedure for conversion from one company to the other is expounded within the Act with certain statutory requirements such as alteration of the Memorandum of Association (MOA) and Articles of Association (AOA) of the company.

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The Act sets out regulatory provisions under various sections, i.e., Section 13, 14 and 18, which are required for the purpose of conversion and set out below is a gist of the procedure provided under the Act:

Notice for Board Meeting

A 7-day notice period must be given to the directors of the company to convene a board meeting. A shorter notice may also be given provided at least one independent director is present for the meeting. The board meeting is convened for the purpose of passing a resolution approving the conversion to a private company.

Extraordinary General Meeting (EGM) to pass the special resolution

A 21-day notice period must be given to call for an EGM. The board decides a time and place for the EGM which is for the purpose of passing a special resolution. Further, the members are informed by way of an explanatory statement of the nature of transaction for which a special resolution is required in order to ensure and generate better understanding amongst the members.

The quorum required for the passing of the resolution and conducting an EGM is specified under the Act, i.e., required to be passed by postal ballot, if the company has more than 200 members as stipulated under section 110 of the Act read with Rule 22 (16)(b) of the Companies (Management and Administration) Rules, 2014.[2]

Forms

The ROC will verify the documents which have been submitted and subsequently, a new certificate of incorporation is issued to the company for their new status as a private company.

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National Company Law Tribunal Rules, 2016 (NCLT Rules)

Requirements for Conversion

Other Formalities

The other formalities are required to complete before the hearing in the NCLT are:

  1. Form NCLT-3A for advertisement of the petition in one vernacular newspaper and one English newspaper.
  2. Form NCLT-3B for notice to every creditor about the conversion process. (registered post with acknowledgment due)
  3. Notice along with a copy of the petition to other applicable authorities such as the ROC. (registered post with acknowledgment due)

The notice is sent to creditors or other parties for the purpose to enable them to raise objections in the event their interests are affected by the proposed conversion. The objection must be conveyed to the ROC either before the hearing in the NCLT or on the date of the hearing. This measure helps protect the interests of the affected parties who are part of the company.

When NCLT can approve the Conversion?

Conclusion

There are various advantages for a public company to convert to a private company. As per statistics of the Ministry of Corporate Affairs, there was a substantial increase in the number of public companies to convert to a private company pursuant to the passing of the Act. The new Act provides more exemptions to private companies in respect of aspects such as managerial remuneration, provisions of related party transactions and fewer members required to constitute a quorum for meetings, amongst other exemptions.

Several companies also choose to undergo this conversion due to the better facilitation of operations in the company and also due to lesser compliance requirements for the company. The flexibility which is given to private companies is essential to a smooth functioning of the company.

Therefore, the conversion from a listed company to a private company, though necessitates the completion of a lot of compliance requirements under the new Act and NCLT Rules, the conversion for a company is more beneficial in nature.

 

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References

[1]http://www.bseindia.com/Static/about/listsec.aspx

[2]https://taxguru.in/company-law/checklist-conversion-public-company-private-company-companies-act-2013.html

[3]http://www.mca.gov.in/Ministry/pdf/Notification_02062016_I.pdf

 

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