Conversion of Public Company into Private Company

Public limited company is one of the popular and well known form of business structure. A public limited company can be further categorised into unlisted public company and listed public company. The basic difference between these two categories is that shares of unlisted public are not listed on any stock exchange whereas listed company’s share are listed on stock exchange, further being listed compliance of listed companies increase manifold comparative to unlisted public company.

Since compliances for a public limited company be it listed or not are numerous furthermore the administration, management and other records of company are also available in public domain, often a public limited company recourse to convert itself into private limited company to retain the control in hand of few people and to easily manage the company with lesser compliances.

Companies Act, 2013 has prescribed for conversion of public company into private company which are enumerated as below:

To understand the process of conversion it is imperative to get to know the basic feature of a private company and public company which is explained in the definition of private and public company.

Definition of Public Company

As per definition of public company given under 2(71) of Companies Act, 2013,

“Public company” means a company which is not a private company

Therefore, to get clarity on the definition of public company it is necessary to understand what is a private limited company.

Definition of Private Company

Private limited companies are those entities which are prohibited by its articles to offer its share to public and have restrictions on transfer of its shares. These entities are privately managed and do not affect shareholders at large, since it is a closed entity and doesn’t include public interest.

As per section 2(68) of Companies Act, 2013:

“Private company” means a company which by its articles,

(i) restricts the right to transfer its shares;

(ii) 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—

(A) persons who are in the employment of the company; and

(B) 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

(iii) prohibits any invitation to the public to subscribe for any securities of the company;

Any company which is incorporated as a private company has to mandatorily incorporate the above said restriction in its article of association, to reflect the prime feature of a private company.

Upon observation of both definitions, it is clear that the prime restrictions which are imposed on a private limited company are not applicable in case of public limited company.

We can summarise that public company can:

1. Freely transfer its shares: In case of listed public company shares can be freely transferred from one party to another.
2. Have members without any maximum limit;
3. Offer public to subscribe its shares: only a listed public company can invite public to subscribe for any securities of the company.

Public companies have option to bring initial public offer (IPO) to gets its securities listed on any stock exchange. Companies whose shares got listed are categorised as unlisted public company.

Process for Conversion

A public company is allowed to convert itself into a private limited company by inserting the restrictions as given in the definition of private company.

Since number of shareholders are larger in case of a public limited company, various approvals are sought for conversion.

As per section 14 of Companies Act, 2013 Company can alter its Article of Association having the effect of conversion of public limited company into private limited company.

Such alteration requires prior approval of shareholders of the Company and RD.

The procedural requirement to be complied by the Company is given below:

1. Any director or person authorised by the Board will dispatch a notice to call for Board Meeting to consider the proposal of conversion of private company into public company.
2. Notice shall be given as per section 173 of Companies Act, 2013 read with secretarial standard 1 on Board Meetings.
3. Conduct Board Meeting to consider the feasibility of conversion.
4. After assent of the board members, call for a general meeting for approval of members to alter the Article of Association and Memorandum of Association.
5. Dispatch notices for calling an Extra Ordinary General Meeting (EGM)/ Annual General Meeting (AGM) to all the members in accordance with provisions section 101 of Companies Act,2013 read with secretarial standard 2 on General Meetings
6. Accord approval of Members through Special Resolution at Extra Ordinary General Meeting (EGM)/Annual General Meeting (AGM) for conversion of private company into public company.
7. File E form MGT-14 to submit special resolution with the Registrar of Companies.
8. File E form RD-1 within 60 days of passing special resolution to file documents like minutes of general meeting, board resolution etc.
9. At least 21 days prior to filing RD-1 Company should seek objection from any person who is likely to get effected by such conversion:
   If no objection is received by the Company within 14 days and if the application is complete in all respect, then the concerned the Regional Director can pass the order within 30 days of filing application.
   If any objection is received the Regional Director shall hold a hearing and direct the company to file an affidavit to record the consensus reached at the hearing, upon executing which, the Regional Director shall pass an order either approving or rejecting the application.
10. File E form INC 28 within fifteen days from the date of receipt of approval.
11. File E form NC 27 with the Registrar of Companies within fifteen days from the date of receipt of the order
12. The Registrar shall after considering the details filed in the form, approves the Form and issue certificate of incorporation reflecting new name by inserting the word “Private” from the name of the Company.

Points to Remember

• Conversion shall not be allowed if any inquiry, inspection or investigation has been initiated against the company or any prosecution is pending against the company under the Act.
• Company should not be listed on any stock exchange and if listed all formalities of delisting of company has been done with.
• Declaration to be given that the company limits the number of its members to two hundred and also stating that no deposit has been accepted by the company in violation of the Act
• Prohibition on conversion if company has not complied with sections 73 to 76A, 777, 178,185,186 and 188 of the Act and rules made thereunder;

Compliance needs to be done post conversion

As per section 2(62) of Companies Act, 2013, Private Company cannot have member exceeding 200 thus company should restrict its member upto 200.

Below given are some additional requirements needs to be complied post conversion:

1. Printing of New Memorandum of Association and Article of Association to reflect the word “Private” in the name of the Company.
2. Change in Sign Board, Letter head, stationary and other items where old name used to be displayed.
3. Application to update name in PAN.
4. Intimation and application to other authorities where Company is registered i.e. GST, EPF, ESI etc.
5. Intimation to various suppliers and parties with whom Company has business.
6. Intimation to banks where Company is maintaining bank accounts.

It is pertinent to note that the above stated regulatory framework are as per Companies Act, 2013 only, if any Company is registered with other any regulatory bodies like SEBI, RBI, MSME, IRDA, Companies have to follow additional compliance as prescribed by different regulators under which Company is registered.