Friday, March 29, 2024
Friday, March 29, 2024

Conversion of a Public Company into a Private Company

by Aishwarya Agrawal
Private comapny

The process of conversion of public company to private company is established within the legal framework of the Companies Act, 2013, in conjunction with the directives outlined in the Incorporation of Companies Rules, 2014. This conversion brings with it a reduction in regulatory commitments as compared to the obligations imposed on public enterprises under the Companies Act, 2013. 

The increased compliance load acts as a driving force for the growing frequency of such transitions from public to private status. Before the 2013 Act, the authority which used to authorise the transformation of a public company into a private one was the National Company Law Tribunal. In this blog, we shall see the procedure for conversion of public company to private company

Advantages of Conversion of Public Company to Private Company

The process of conversion of Public Company to Private Company offers several advantages, contributing to effiicient operations and enhanced control with private limited company registration. The key advantages of this conversion are as follows:

1. Restricted Share Transfer:

In a Private Company, shareholders are constrained in transferring their shares publicly. Shareholders are required to obtain approval from other shareholders prior to transferring shares. This restriction on share transfer helps prevent the entry of undesirable or unaligned shareholders.

2. Enhanced Control:

Conversion of a public company into a Private Company brings about greater control in the hands of the capital owners. Unlike in Public Companies where ownership is dispersed among numerous shareholders, the control of a Private Company rests with its owners.

3. Simplified Regulatory Compliance:

Private Companies are subject to fewer regulatory provisions compared to Public Companies. This results in a simplified compliance process, reducing administrative burdens and costs associated with meeting extensive regulatory requirements.

4. Loan Provisions:

A Private Company has the advantage of granting loans to its directors without the need for prior approval or consent from the Central Government. This flexibility in providing loans to directors can aid in efficiently managing the company’s financial operations.

Legal Provisions Related to the Conversion of Public Company to Private Company

The provisions within the Companies Act, 2013 which are pertinent to the conversion of Public Company to Private Company are as follows:

1. Section 13: Alteration of Memorandum of Articles (MoA)  

This section emphasises the importance of altering the Memorandum of Articles (MoA) of the company. The conversion is permissible only if the existing MoA allows for such a transformation. Consequently, modifying the MoA becomes a necessary step in the process of converting a company into a Private Company.

2. Section 14: Alteration of Articles of Association (AoA)  

Section 14 governs the alteration of the Articles of Association (AoA) in the context of converting a Public Company into a Private Company. This step is essential to ensure alignment between the company’s AoA and its new status as a Private Company.

3. Section 18: Conversion of Registered Companies  

Section 18 provides a framework for converting registered companies from one class to another. This conversion involves altering both the MoA and AoA of the company. It underscores the legal process that must be followed to effect a change in the class of a company.

Mandatory Requirements for Conversion of Public Company to Private Company

In the process of converting a Public Company into a Private Company, certain mandatory requirements must be adhered to as follows:

1. Amendment of Name Clause in Memorandum

To reflect its new status as a Private Company, the name clause in the Memorandum of the company must be amended to include the term ‘Private.’

2. Amendment of Articles of the Company

The Articles of the Company should be amended appropriately to incorporate provisions that pertain specifically to a Private Company. It is advisable to establish a new set of Articles tailored to the characteristics of a Private Company.

3. Financial Compliance

The company must not be in default concerning the submission of essential documents such as Financial Statements, Annual Returns, or any other filings due to the Registrar.

4. Debentures and Deposits

Another vital requirement is that the company must not be in default regarding the repayment of debentures, matured deposits, or the payment of interest on debentures or deposits. 

Procedure for Conversion of Public Company to Private Company

The following outlines the procedural details for this conversion of Public Company to Private Company process:

Step 1: Notice for Board Meeting

The company initiates the process by sending a notice to its directors and this has to be dispatched at least 7 days prior to the meeting date.

Step 2: Board Meeting

  • The company conducts the Board Meeting in accordance with the rules stipulated under Section 173 of the Companies Act, 2013.
  • The Board Meeting addresses several crucial aspects, including:
  • Consideration of the proposal for converting the Public Company into a Private Company.
  • Approval of amendments in the Memorandum of Association and Articles of Association, pending member’s approval through a special resolution.

Step 3: Notice for General Meeting

The company sends a notice to convene a General Meeting at least 21 days before the meeting date. The purpose of this meeting is to obtain approval for the items discussed in Step 2. The approval is achieved through the passage of a special resolution.

Step 4: General Meeting

  • The General Meeting is held, during which approval is sought for the Conversion of Public Company into a Private Company.
  • Consent for the alteration in MoA and AoA is secured through the passage of a special resolution.
  • Compliance with quorum requirements is verified.
  • Auditor presence is confirmed as per Section 146 of the Companies Act, 2013.

Step 5: Filing Form MGT-14

  • Within 30 days of passing the special resolution, the company files Form MGT-14.
  • The form should be accompanied by several documents, including:
  • Certified copy of the altered MoA.
  • Certified copy of the altered AoA.
  • Notice of the General Meeting along with an explanatory statement.
  • Certified copy of the passed special resolution.

Step 6: Application to the Regional Director (RD)

Within 60 days of passing the special resolution, the company submits an application to the RD using e-Form RD-1.

The application must include:

  • Copies of MoA and AoA with proposed alterations.
  • Minutes of the General Meeting.
  • Board Resolution authorising the Conversion.
  • List of creditors and debenture holders.

Step 7: Submission of Creditor and Debenture Holder List

  • It is necessary to attach a list of creditors and debenture holders to the application.
  • Simultaneously, an application must be advertised in Form INC-25A in local and English newspapers.

Step 8: RD Application and Approval Process

  • As per Rule 41(1), the e-Form RD-1 application for conversion must be submitted to the RD within 60 days from the special resolution date.
  • The RD has the authority to reject the application if resubmissions are not made within 30 days of being requested. Up to two resubmissions are allowed.
  • The RD may request additional information after the initial submission.
  • If no objections arise from the advertisement and the application is complete, RD can issue orders without a hearing. 

Step 9: Conversion Approval and Filing

  • Upon RD approval, an order is issued for the conversion.
  • This order is filed in Form INC-28 with the Registrar of Companies (RoC) within 30 days from the order’s date.

The entire process involves meticulous adherence to legal guidelines and timely submissions to achieve a successful conversion of Public Company to Private Company.

Final Thoughts

The conversion of Public Company to Private Company offers many advantages including controlled share transfer, enhanced ownership control, simplified compliance, confidentiality, efficient decision-making, and tailored business strategies. The flexibility to grant loans to directors without extensive approvals and the exemption from mandatory statutory meetings further simplify its operations.  This transition promotes a more focused, responsive, and private business environment that aligns with the specific goals of entrepreneurs.

For more information on conversion of Public Company to Private Company, connect with our experts at StartupFino.

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