The conversion of public companies into private companies and vice versa in India involves a structured process governed by the Companies Act, 2013. This conversion process allows companies to change their status based on strategic decisions, financial needs, and business objectives.
Introduction to Company Conversion
In India, companies are broadly classified into two categories: public companies and private companies. A public company can raise capital from the public by issuing shares, while a private company restricts its share transferability and prohibits public subscriptions. Both company types have their own advantages and limitations, and the decision to convert from one type to another often hinges on the evolving needs and goals of the business.
The conversion of a public company into a private company usually occurs when the company wants to gain more control, reduce compliance requirements, and limit the number of shareholders. Conversely, a private company may convert into a public company when it seeks to raise large capital by offering shares to the public or expand its market presence.
Legal Framework for Conversion:
The conversion of companies in India is governed by the following key provisions under the Companies Act, 2013:
- Section 13: Deals with the alteration of the Memorandum of Association (MOA).
- Section 14: Governs the alteration of the Articles of Association (AOA).
- Section 18: Relates to the conversion of companies from one type to another.
Conversion of a Public Company into a Private Company:
The conversion of a public company into a private company is primarily done to gain the benefits of flexibility and less stringent regulatory compliance. The procedure involves several steps, including shareholder approval, filing of applications with the Registrar of Companies (RoC), and obtaining approval from the National Company Law Tribunal (NCLT).
Procedure for Conversion
-
Board Meeting:
The process begins with a board meeting where a resolution is passed to convert the company from a public to a private entity. The board also fixes the date for the Extraordinary General Meeting (EGM) to seek shareholders’ approval.
-
Alteration of AOA and MOA:
AOA and MOA need to be altered to reflect the change in the company’s status. The company must add or modify clauses that define it as a private company and specify relevant restrictions on share transferability and limits on the number of shareholders.
-
Shareholders’ Approval (Special Resolution):
The company must hold an EGM where shareholders vote on the conversion. A special resolution is required, meaning at least 75% of the votes cast must be in favor of the conversion.
-
Application to NCLT:
After obtaining shareholders’ approval, the company must file an application with the NCLT along with relevant documents, including the special resolution, altered AOA and MOA, and detailed justifications for the conversion.
-
Hearing and Approval from NCLT:
NCLT will conduct a hearing, allowing stakeholders to raise objections if any. Upon satisfaction, the NCLT will grant approval for the conversion.
-
Filing with RoC:
Once the NCLT’s order is received, the company must file the order along with the altered AOA and MOA with the RoC for the issuance of a new certificate of incorporation.
-
Issuance of Certificate of Incorporation:
Upon completion of the process, the RoC issues a fresh certificate of incorporation, confirming the status change from a public to a private company.
Key Considerations and Compliance Requirements:
- The company must adhere to all existing contractual obligations and liabilities.
- Compliance with SEBI regulations is crucial if the company’s shares are listed.
- The company must ensure that all legal and financial documents reflect the change in status.
Conversion of a Private Company into a Public Company:
The conversion of a private company into a public company is usually motivated by the need for large-scale funding and expanding the shareholder base. This process allows the company to issue shares to the public and gain listing on recognized stock exchanges.
Procedure for Conversion:
-
Board Meeting:
Similar to the reverse conversion, the process starts with a board meeting to discuss and approve the proposal to convert the company into a public entity. The board will set the date for the EGM.
-
Alteration of AOA and MOA:
The AOA and MOA must be altered to remove restrictions typically associated with private companies, such as limits on share transfer and the number of shareholders.
-
Shareholders’ Approval (Special Resolution):
An EGM is convened where shareholders vote on the conversion. A special resolution must be passed, with at least 75% of votes in favor.
-
Filing with RoC:
The company must file Form MGT-14 with the RoC, along with the special resolution and altered AOA and MOA.
-
Issuance of Certificate of Incorporation:
After completing all formalities, the RoC issues a new certificate of incorporation, confirming the company’s status as a public company.
-
Compliance with SEBI Regulations:
For companies planning to list their shares, compliance with SEBI’s regulations, including IPO guidelines, is mandatory.
Key Considerations and Compliance Requirements:
- The company must adhere to enhanced disclosure requirements and governance norms applicable to public companies.
- The company must increase its number of directors and ensure compliance with provisions like independent directors and audit committees.
- Existing shareholders must be informed about the implications of converting into a public company, including dilution of control and changes in dividend distribution policies.
Impact and Implications of Conversion:
The conversion of a company from public to private or vice versa has significant implications:
-
Compliance Requirements:
Public companies face more rigorous compliance norms compared to private companies. Conversion into a private company reduces the compliance burden, while conversion into a public company increases it.
-
Control and Decision-Making:
Private companies offer more control and flexibility in decision-making to promoters and shareholders. Public companies, due to their larger shareholder base, require more transparency and collective decision-making.
-
Capital Raising:
Public companies have access to a broader range of capital-raising options, including public issues, while private companies are restricted to raising funds from a smaller pool of investors.
-
Market Perception and Growth:
The conversion into a public company may enhance the market perception of the company and provide growth opportunities through listing on stock exchanges. Conversely, a private company can focus on long-term strategies without the pressure of quarterly performance and public scrutiny.