A company can be classified as a Private Limited Company or a Public Limited Company. Public Companies are defined under Section 2 (68) of the Companies Act, 2013 and Private Companies under Section 2 (69) of the Companies Act, 2013. We can conclude from our understanding that Private Companies are those in which their articles of association restrict the transferability of shares and prevent public participation. The difference between a public and private company is that private companies can now have any minimum paid-up capital they desire. Public Companies are companies that are not private limited companies and that have at least five lakh rupees in paid-up capital or a higher paid-up capital as prescribed by the Government.
Companies Act, 2013 and Incorporation of Companies Rules, 2014 mention the conversion of private company into public company. However, before we proceed, we must understand why converting a private limited company into a public limited company is necessary. Under the Companies Act, 2013 and the rules made thereunder, Public Limited Companies are required to follow a number of statutory guidelines. As well as this, various compliance requirements must be met under the provisions of the Companies Act, 2013 (Act) and SEBI Act. In general, Private Limited Companies tend to convert Private Limited Companies into Public Limited Companies because they have fewer compliances than Public Limited Companies.
This Act contains the following important provisions:
Section 13 of the Act discusses the alteration of memoranda. Under Section 61 of the Act, a company can alter the memorandum without obtaining the permission of the central government. The section also specifies that no such approval is required for conversions if the word “Private” is added or deleted, but in that case, prior approval is required as outlined above.
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Moreover, Section 14 of the Act stipulates that prior permission is required to alter memorandums or convert a private corporation into a public corporation. This section should also be read in conjunction with the Companies Incorporation (Fourth Amendment) Rules 2018 which provide details on the process of converting a public corporation into a private company.
Converting a private company into a public company involves the following steps:
Incorporation (Fourth Amendment) Rules, 2018, Rule 41 of the Act must be read in conjunction with Section 13, 14 and 18 of the Act. A public company can be converted into a public company by following the steps described in Rule 41.
- For conversion decisions, a Board meeting will be convened. The Board approves the conversion procedure. The minutes of the meeting should be drafted carefully according to secretarial standards. The meeting should adhere to all formalities as per secretarial standards. The Board approves the conversion procedure.
- Any representative of the Company can act on behalf of the Company for further conversion procedures. One Certified True Copy of a resolution may be required for the Company to provide to any professional to represent the Company when speaking with the Regional Director.
- It is necessary to call the Company’s General Meeting.
- In order for the company to convert, a decision must be made at the General Meeting.
- 116 of the Companies Act mandates that certain documents be filed at the time of the conversion decision. These documents should be submitted carefully. S. 117 of the Companies Act mandates that certain documents be filed at the time of the conversion decision.
- It is the responsibility of the Regional Director to draft and submit the necessary application for conversion.
- Within 60 days of the passing of the resolution, the application needs to be filed and the documents/declarations required by Rule 41 submitted to the Regional Director.
- It is also mandatory that particulars, as outlined in Rule 41 (2), be submitted before the RD.
- It is necessary to annex a list of creditors and debenture holders with said application, as well as detailed information regarding due amounts, claims and liabilities, contingent debt, and uncertain debt.
- Additionally, a copy of the duly authenticated list of creditors and debenture holders shall be available for inspection during normal business hours at the registered office.
- There are two forms that need to be filed by the company, INC 25 A in vernacular and INC 25 A in English.
- A period of 15 days must be allowed for RD to seek specific information, the details of which should be submitted in E Form Number after submission of said details. In the event that RD rejects the application within 30 days of receiving it, the application may be resubmitted.
- As long as the RD has not passed an order of approval, rejection, or resubmission, the application will be considered to be allowed and an order will be automatically issued.
- In case of any objections received, the same must be documented in writing and RD will hold a hearing within 30 days following receipt. It is possible for the Company to file an application about a consensus if any consensus is reached.There is a 30 day deadline for the RD to pass an order.
- Within 60 days RD has the power to reject palliations where no consensus is reached.
- In the event of an pending prosecution against the company, the conversion will not pass.
- In the absence of any pending prosecution or anticipated prosecution, RD must permit conversion.
- Form INC 28 must be completed within 15 days following receipt of the conversion order.
- The aforementioned procedure must be followed according to the rules.
There are a number of mandatory formalities that need to be adhered to when converting a public company into a private one. However, after conversion into a public company, the private company will have benefits with respect to minimum compliances. There are fewer compliance requirements for private companies after they have been converted into public companies.
During the conversion procedure, however, certain precautions need to be taken. While the statute permits for the conversion of public companies into private companies, precautions need to be taken since some companies’ decisions regarding conversion are controversial. The information submitted to the Regional Director must also be accurate. If all stakeholders have a consensus on the conversion, then it will be an easy and smooth process. There have been instances, however, when shareholders have raised concerns about the conversion process. The National Company Law Appellate Tribunal, in one case, clarified that obtaining the approval of all shareholders is not necessary for the conversion.