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Conversion of Public Company into Private Company
In the dynamic landscape of business and corporate governance, companies often find themselves planning structural changes to adapt to evolving market conditions and strategic goals. One such significant transformation is the conversion of a public company into a private company. The Companies Act, 2013 in India provides a comprehensive framework for this conversion, enabling companies to change their status and operations in response to changing business environments. In this article we will discuss about Conversion of Public Company into Private Company and its relevant provision as per Companies Act, 2013.
Before we move on to discuss about Conversion of Public Company into Private Company, let us first discuss about Public Company and Private Company respectively, so that we could have better understanding of the topic.
Conversion from Public company to Private Company as per Companies Act, 2013
The Companies Act, 2013, a significant legislative reform in India’s corporate governance framework, introduced several provisions to regulate the operations and functioning of companies. One notable aspect of the Act is the provision for the conversion of a public company into a private company. This provision aims to provide companies with the flexibility to adapt their structure to changing business needs while ensuring regulatory compliance.
A Public Company and a Private Company are distinct entities under the Companies Act, 2013 each governed by specific regulations. A Public Company is one that can offer its shares to the public and has no restrictions on the transfer of shares.
On the other hand, a Private Company operates with restrictions on the transfer of shares, a cap on the number of members (shareholders), and does not invite the general public to subscribe to its shares. Conversion from Public Company to Private Company involves a change in these fundamental characteristics.
Reasons of Conversion of Public Company into Private Company
The following are the reasons of conversion of Public to Private Company:
1. Enhanced Control and Management: One of the primary motivations for a company to convert from a public to a private entity is the desire for increased control and management flexibility. As a private company, the management has the autonomy to make strategic decisions without the pressure of quarterly earnings reports and public scrutiny. This enables them to focus on long-term goals and execute business strategies with greater agility.
2. Reduction in Regulatory Compliance: Public companies are subject to a myriad of regulatory obligations and compliance requirements, including regular financial disclosures, reporting, and shareholder communications. The conversion to a private company can significantly reduce the administrative burden and costs associated with compliance, as private companies have fewer reporting obligations and enjoy more privacy in their operations.
3. Enhanced Privacy and Confidentiality: Public companies are required to disclose a substantial amount of information to the public, including financial statements, business strategies, and executive compensation. By converting to a private company, the management can maintain a higher level of confidentiality, protecting sensitive business information from competitors and the general public.
4. Flexibility in Shareholding: Private companies often have a more concentrated ownership structure, with a smaller number of shareholders. This can lead to quicker decision-making and a stronger alignment of interests among stakeholders. The conversion to a private company allows existing shareholders to retain greater control over the company’s direction and future.
5. Long-Term Planning: Private companies typically have a longer-term outlook compared to public companies, which often face pressure to deliver short-term results to satisfy shareholders. This change in focus can allow private companies to make strategic investments, undertake innovative projects, and weather market fluctuations without the constant pressure to meet quarterly earnings expectations.
6. Cost Savings: The process of being a publicly traded company involves substantial expenses, including costs related to regulatory compliance, investor relations, and listing fees on stock exchanges. By converting to a private company, an organization can potentially achieve significant cost savings, which can be redirected towards growth initiatives, research and development, or improving shareholder value.
Benefits of conversion from Public Company to Private Company
The following are the benefits of conversion of Public Company into Private Company:
1. Enhanced Operational Flexibility: Public companies are subject to stringent regulatory requirements, including detailed financial reporting, disclosure norms, and compliance standards. By converting to a private company, organizations can streamline their reporting processes and reduce the administrative burden associated with adhering to public company obligations. This enhanced operational flexibility allows the management to focus more on core business activities and strategic decision-making.
2. Reduced Regulatory and Compliance Burden
Lower Compliance Costs: Public companies are subject to stringent regulatory frameworks, including regular filings with the Registrar of Companies (ROC), Securities and Exchange Board of India (SEBI) regulations, annual general meetings (AGMs), quarterly reports, and other disclosures. By converting to a private company, the company avoids the compliance costs and complexities that come with maintaining public status.
3. Flexibility in Shareholding
Control Over Share Transfer: In a private company, shares are not freely transferable like in a public company. This provides greater control to the existing shareholders over who can own a part of the company. It also reduces the likelihood of unwanted investors or external influence.
Ease of Shareholding Changes: The transfer of shares in a private company is subject to certain restrictions, and the company can have more flexibility in managing its ownership structure. This can be useful for maintaining close-knit ownership or making adjustments as needed.
4. Tax Advantages
Lower Tax Burden: In some cases, the cost of compliance with public company regulations, including financial audits and reporting, can lead to higher operational expenses. By converting to a private company, the organization might reduce these costs, which could result in a more efficient use of resources and potentially lower tax liabilities in some circumstances.
Tax Benefits for Family-Owned Businesses: In family-owned public companies, converting to a private company can allow for better tax planning, particularly in the case of inheritance, succession planning, and gift taxation.
5. Stability and Continuity
Greater Stability for Long-Term Projects: Private companies are more insulated from market fluctuations, which makes them more stable when pursuing long-term projects or investments that require consistency and time. Public companies, on the other hand, may face pressure from shareholders for short-term results.
6. No Need to Meet Stock Market Expectations: Private companies are not concerned with the fluctuations of stock prices or quarterly earnings reports. This gives them more stability to focus on their long-term vision.
Necessary requirements for Conversion of Public Company into Private Company as per Companies Act, 2013
The following are the necessary requirementsfor conversion from Public Company to Private Company :
1. There shouldn’t be more than 200 employees in the company.
2. The conversion requires the consent and approval of all of the Company’s creditors.
3. If any outstanding charges are not paid in full, the charge holder must give their NOC.
4. There shouldn’t be any legal action taken against the Company under the Companies Act, 2013.
5. Any required filings with the Registrar shouldn’t have any defaults.
6. There shouldn’t be any conflict among the company’s managers.
7. There shouldn’t be any missed deadlines for paying back deposits, bonds, and interest on deposits, bonds, and deposits.
8. ‘Private’ has to be included to the name clause of the memorandum.
9. The Company’s Articles must be appropriately modified to include any limiting clauses that apply to Private 10. Companies. Adopting new articles that are appropriate for a private company is advised.
10. The company has not missed a deadline for completing any necessary documents with the Registrar, including annual returns, financial statements, or other forms. [Companies (Incorporation) Rules, 2014, Rule 29(1)]
11. The company hasn’t fallen behind on paying interest or maturing deposits or debentures, either. [Companies (Incorporation) Rules, 2014, Rule 29(1)]
Procedure for Conversion of Public Company into Private Company
The following are the procedure for Conversion of Public Company into Private Company:
Step 1: At least seven days prior to the date of the board meeting, the company shall notify the directors that a board meeting will be held.
Step 2: The Company must conduct the Board Meeting in accordance with the procedures outlined in Section 173 of the Companies Act, 2013. It is necessary to approve the following items:
To take into account the proposal for the conversion of a public company into a private company.
To approve adjustments to the Company’s MoA and AoA that are subject to member approval via a special resolution.
Step 3 – The Company should send a notice at least 21 days before the General Meeting to assemble for the purpose of approving the items indicated in Step 2 by passing a special resolution.
Step 4 – The Company must call a general meeting to approve the conversion of a public company into a private company. A special resolution need also be passed to approve the change in the MoA and AoA. The quorum should be checked at the General Meeting. According to Section 146 of the Companies Act, 2013, the participation of an auditor in the General Meeting is required; if not present, check to see if a Leave of Absence has been granted.
Step 5 – The form MGT-14 must be filed within 30 days after the special resolution’s approval. The following papers should be added to the Form MGT-14:
A authentic certified copy of the Altered MoA
Altered AoA authentic certified copy
Notice of General Meeting with an explanation
A authentic certified copy of the Special Resolution approved in the General Meeting
Step 6 – An application must be submitted to the Regional Director within 60 days of the special resolution being passed. The application must be submitted using e-Form RD-1. The application should be accompanied by the following documents:
Copy of the MoA and AoA with recommended changes.
Copy of the minutes of the General Meeting.
Step 7 – In line with Rule 41(3) of the Companies (Incorporation) Rules, 2014, a List of Creditors and Debenture Holders should be attached to the application, which shall be made up to the earliest practical date prior to the date of filing of the petition, but not more than 30 days.
Step 8: In accordance with Rule 41(1) of the Companies (Incorporation) Rules, 2014, as amended, a Regional Director must receive an application in the electronic form RD-1 within 60 days of the passage date of the special resolution if the public company is to be converted into a private company.
Step 9: After the RD accepts the conversion procedure, the applicant will receive an order for the conversion. Within 30 days after the date on which the order was passed, the aforementioned order must be submitted to the Registrar of Companies (RoC) in Form INC-28.
Necessary Forms required for Conversion of Public Company into Private Company as per Companies Act, 2013
The following are some necessary forms required for Conversion of Public Company into Private Company as per Companies Act, 2013 that one should keep handy before the Conversion of Public to Private Company:
1. Form MGT-14: This form is required to be filed with the Registrar of Companies (RoC) within thirty days of passing the special resolution for conversion in a general meeting. The special resolution must be approved by a minimum of three-fourths of the shareholders present and voting. Form MGT-14 contains details of the special resolution, along with other pertinent information about the company.
2. Form INC-27: After obtaining the approval of the shareholders through the special resolution, Form INC-27 is to be filed with the RoC. This form comprises an application for the conversion of a public company into a private company, along with the altered Memorandum of Association and Articles of Association. It is crucial to ensure that the amended articles of association comply with the provisions of the Companies Act, 2013.
3. Form MGT-14 (Revised): A revised Form MGT-14 is also required to be submitted to the RoC, within fifteen days from the date of the conversion. This form should include a copy of the altered memorandum and articles of association, indicating the conversion from public to private status.
4. Form INC-28: Form INC-28 is filed with the RoC to obtain a fresh certificate of incorporation reflecting the change in status from a public company to a private company. The form also requires submission of documents such as a list of shareholders, details of shareholding, and a copy of the altered articles of association.
5. Form SH-7: In addition to the above forms, Form SH-7 is to be filed with the RoC to update the changes in the share capital of the company post-conversion. This form includes details of the reduction in share capital and any other modifications related to shares.
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A Public company can also get converted into a private company by filing Form INC-27 subject to passing the special resolution and approval of the competent authority.
