Conversion of public company to private company is carried out under the law under Companies Act, 2013 and based on the directives under the Companies Rules, 2014. This conversion reduces regulatory commitments relative to public enterprises imposed under the Companies Act, 2013.
The rising compliance load is a driving force for such transitions from public to private status more frequently. The authority that used to authorise the conversion associated with a public Company to a private one before the 2013 Act was the National Business Law Tribunal. Let us understand the procedure for converting a public company into a private company in this blog.
Benefits of Conversion of Public Company into Private Company
Conversion of Public company to private company has several benefits for effective operations and enhanced control through private limited company registration. The primary benefits of this conversion are:
1. Restricted Share Transfer:
In a Private Company, shareholders tend to be restricted to transferring shares publicly. Shareholders must look for approval from other shareholders before transferring shares. This prohibition on share transfer prevents unwanted or unaligned shareholders from entering.
2. Improved Control:
Conversion of public Company into private company provides increased control to the capital owners. Unlike in Public Companies which have many shareholders distributing ownership equally, the owners retain control of the private company.
3. Simplified Regulatory Compliance:
Private Companies have fewer regulatory provisions than public companies. This makes compliance easier and also reduces administrative costs and burdens related to satisfying large regulatory requirements.
4. Loan Provisions:
A Private Company has the advantage of giving loans to its directors without Central Government approval or consent. This flexibility in loaning to directors might assist with the management of the company’s finances.
Legal Provisions Regarding Conversion from Public To Private Company
Provisions of the Companies Act, 2013 related to conversion of Public Company to Private Company are the following:
- Section 13: Change of Memorandum of Articles (MoA) – This section highlights the modification of Memorandum of Articles of the business. The conversion is allowable only when the existing MoA allows such a transformation. Consequently, modifying the MoA turns into a mandatory component of transforming a Company into a Private company.
- Section 14: Modification of Articles of Association (AoA) – Section 14 deals with the alteration of the Articles of Association whenever a Public Company turns into a Private Company. This action is needed to align the Company’s AoA because of its new status as a Private company.
- Section 18: Conversion of registered businesses – Section 18 provides a framework for converting Registered Companies. This conversion changes both MoA and AoA of the company. It demonstrates the legal procedure associated with creating a change in the class of a company.
Conversion of Public Company to Private Company Checklist
The conversion of a Public Company to a Private Company calls for the following necessary conditions:
- Change in name clause in Memorandum – The Name Clause in the Memorandum of the Company requires the word Private Limited in it.
- Amendment of Articles of the Company – The Articles of the Company ought to be amended so they contain provisions particular to a Private Company. It might be necessary to prepare new Articles particular to a Private Company.
- Financial Compliance – The company may not be in default with respect to filings required by the Registrar including Financial Statements in addition to Annual Returns.
- Debentures & Deposits -Another important requirement would be that the company isn’t in default on debentures or matured deposits and on interest on deposits or debentures.
Procedure for Conversion of Public to Private Company
The following are the procedural details of the conversion of Public Company to Private Company process:
Step 1: Notice of Board Meeting
- The company initially sends a notice to its directors that should be delivered at the very least seven days before the meeting date.
Step 2: Board Meeting
The company holds the Board Meeting as per the rules provided by Section 173 of the Companies Act, 2013.
The Board Meeting addresses the following items:
- Proposed conversion of the Public Company to a Private Company considered.
- Modifications to the Memorandum of Association and Articles of Association pending member approval by special resolution.
Step 3: Notice of General Meeting
- The company sends notice to call a General meeting a minimum of twenty one days before the meeting date. This meeting will be to obtain approval for the things talked about in Step two. The approval is by a special resolution.
Step 4: General Meeting
- The General Meeting takes place where approval for Conversion of Public Company into Private Company is sought.
- Consent to change in MoA and AoA is obtained by a special resolution.
- Quorum compliance is verified.
- Auditor presence is confirmed under Section 146 of the Companies Act of 2013.
Step 5: Filing Form MGT-14
The company files Form MGT-14 within 30 days of the special resolution passing.
The form should be accompanied by specific documents, for example :
- A certified copy of the altered MoA.
- Certified copy of altered AoA.
- Notice of the General Meeting with explanatory statement.
- A certified copy of the passed special resolution.
Step 5: Applications to the Regional Director (RD)
The company applies to the RD using e-Form RD-1 within 60 days of passing the special resolution.
The application should contain:
- Copy of AoA and MoA with proposed alterations.
- Minutes of the General Meeting.
- Board Resolution authorising the Conversion.
- Creditors along with debenture holders list.
Step 6: Submission of Creditor & Debenture Holder List
- A listing of creditors and debenture holders should accompany the application.
- An application has to simultaneously be advertised in Form INC-25A in local and English newspapers.
Step 7: RD Application & Approval Process
- Under Rule 41 (1), the e-Form RD-1 application for conversion needs to be submitted with the RD within sixty days from the special resolution date.
- The RD could reject the application for noncompliance with resubmissions within thirty days of the request. Up to 2 resubmissions will be permitted.
- The RD could request additional details following the initial submission.
- If the advertisement raises no objections and the application is complete, RD may order without hearing.
Step 8: Conversion Filing and Approval
- An order for conversion is issued after RD approval.
- This order is filed in Form INC 28 to the Registrar of Companies (RoC) within thirty days of the order date.
- The whole process follows strict legal guidelines and timely submissions to convert Public Company into Private Company.
Final Thoughts
Conversion of Public Company to Private Company provides controlled share transfer, enhanced ownership control, confidentiality, simplified compliance, effective decision making and customised business strategies. Its flexibility to make loans to directors with very little or no approval and exemption from obligatory statutory meetings simplify its operation. This transition creates a more focused, private and responsive business environment which reflects the entrepreneurial goals.
FAQs
1. How to convert a public company into private?
The important steps are:
- Send notice of board meeting.
- Hold board meeting to approve proposal and also get approvals for modifications to MOA/AOA.
- Send notice of the general meeting.
- Hold a general meeting and pass a special resolution.
- File Form MGT-14 within 30 days.
- Apply to Regional Director using form RD 1 within 60 days.
- Submit list of creditors / debenture owners.
- RD reviews applications and approves.
- Filing RD order with ROC in Form INC 28 within 30 days.
2. What are legal requirements for public to private company conversion?
- Alter Memorandum of Association (Section 13)
- Alter Articles of Association (Section 14)
- Follow conversion under Section 18.
- Not in default on financial filings, debenture/deposit repayments.
3. What are documents needed for public to private company conversion?
- Altered MOA & AOA.
- Board and general meetings notices and minutes.
- Special resolution.
- Creditors & debenture holders List.
- Newspaper ad.
4. What is the timeframe for public company to private conversion?
- Form MGT-14 within thirty days of special resolution.
- Apply to RD with RD-1 by 60 days of special resolution.
- RD order should be filed with ROC within 30 days.
What are the implications of public to private conversion for stakeholders?
- Restricted share transfers need shareholder approval.
- Improved control for owners/promoters.
- Simplified compliance along with regulatory requirements.
- Ability to make loans to directors with no govt approval.
