Clearing your confusions regarding 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.

Understanding Public Company

A Public Limited Company, as defined by the Companies Act, 2013, is a corporate entity that offers its shares to the general public and is governed by specific legal provisions designed to ensure transparency, accountability, and proper governance. 

This type of business structure allows for a broader ownership base, enabling individuals from all walks of life to invest in and become shareholders of the company. The Companies Act, 2013 in India introduced significant reforms and regulations pertaining to public limited companies, aiming to enhance corporate governance and investor protection. 

Understanding Private Limited Company

A Private Limited Company, as defined under the Companies Act, 2013, is a type of business entity that is incorporated with limited liability and shares that are not freely transferable. It is a legal entity separate from its owners, and it enjoys perpetual succession, meaning the company continues to exist even if its shareholders or directors change. 

This structure allows a Private Limited Company to function as an independent unit, capable of owning assets, entering into contracts, and engaging in business activities in its own name.

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.

Also read our Article on: Conversion of Private Company to Public Company as per Companies Act, 2013

Reasons of Conversion of Public Company into Private Company

The following are the reasons of conversion of Public to Private Company:

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• Removal of Market Volatility: Publicly traded companies are subject to market fluctuations, which can lead to volatility in their stock prices. Converting to a private company eliminates the exposure to stock market swings, providing stability to the company’s valuation and reducing the potential for shareholder discontent due to stock price fluctuations.

Benefits of conversion from Public Company to Private Company

The following are the benefits of conversion of Public Company into Private Company:

• 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.

• Reduced Regulatory Scrutiny: Public companies are under constant regulatory scrutiny from various entities, including stock exchanges, securities regulators, and shareholders. This scrutiny can lead to increased reporting obligations and potential legal challenges. As a private company, the level of regulatory oversight decreases, reducing the time and resources spent on regulatory compliance and related legal matters.

• Control and Privacy: A major advantage of private companies is the ability to maintain greater control over company operations and decision-making. Conversion to a private company allows the founders, management, or a select group of investors to hold the majority of shares, thereby ensuring a tighter grip on strategic initiatives without the influence of external shareholders.

• Reduction in Costs: Going public involves substantial costs, including initial public offering (IPO) expenses, ongoing compliance costs, and fees associated with maintaining a listing on stock exchanges. Converting to a private company eliminates or significantly reduces these expenses, leading to cost savings that can be redirected towards growth initiatives, research and development, or other strategic priorities.

• Flexibility in Capital Structure: Public companies often face pressure to meet short-term performance targets to appease shareholders and maintain stock value. As a private company, there is greater flexibility to focus on long-term growth strategies without the constraints of quarterly reporting and the potential impact on stock prices. This can result in a more balanced approach to business decisions.

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:

• There shouldn’t be more than 200 employees in the company.
• The conversion requires the consent and approval of all of the Company’s creditors.
• If any outstanding charges are not paid in full, the charge holder must give their NOC.
• There shouldn’t be any legal action taken against the Company under the Companies Act, 2013.
• Any required filings with the Registrar shouldn’t have any defaults.
• There shouldn’t be any conflict among the company’s managers.
• There shouldn’t be any missed deadlines for paying back deposits, bonds, and interest on deposits, bonds, and deposits.
• ‘Private’ has to be included to the name clause of the memorandum.
• The Company’s Articles must be appropriately modified to include any limiting clauses that apply to Private Companies. Adopting new articles that are appropriate for a private company is advised.
• 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)]
• The company hasn’t fallen behind on paying interest or maturing deposits or debentures, either. [Companies (Incorporation) Rules, 2014, Rule 29(1)]

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:

• 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.
• 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.
• 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.
• 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.
• 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.

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.
• To decide the time, date, and location of the General Meeting, and to authorize a Director or Company Secretary to provide notice of the General Meeting to each member.
• To consider and agree to limiting the total number of members in the firm to a maximum of 200.
• 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.
• The Board Resolution that grants Conversion authorization.
• A list of creditors and holders of debentures should be supplied.
• 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. 

Meanwhile, an application should be advertised in Form INC-25A, a vernacular newspaper in the district’s vernacular language, and English daily widely disseminated in the State.  

• 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. 

If the resubmissions are not made, the application may be denied by RD within 30 days after the date RD requested the application be resubmitted. A maximum of two revisions are permitted. Following the submission of information to the Regional Director (RD), RD may request more information. Within 15 days, these resubmissions must be sent in. 

The application may be put up for orders without hearing if there are no objections raised in response to the advertising and the application is complete. Within 30 days of the applicant’s filing date, the RD must approve the application.  

The application submitted is presumed to be permitted by the RD, and an approval order will be immediately sent to the applicant, if no order of acceptance, rejection, or resubmission is made by the RD within 30 days.

In the event that an objection is made, the RD may convene a hearing. The RD must provide written justifications for the hearing, and the hearing must take place within 30 days. The RD may reject the application if no agreement is reached for conversion within the allotted 60 days after the date the application was filed.

• 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.

Post-Compliance Requirements for Conversion of Public Company into Private Company

Once the conversion is approved by the Registrar of Companies (ROC), the following post-compliance requirements must be met:

• Signboards, letterheads, books, rubber stamps, bill books, the common seal, visiting cards, and other documents and products must all undergo the necessary adjustments.
• On every document of the Company bearing the name it has at the moment, the word “formerly” must be used for at least two years.
• Banks, the Income Tax Department, the PF Department, the ESI Department, and all other departments must be informed of changes.
• The PAN, TAN, and GST portals will all undergo the necessary adjustments.
• Other regulatory agencies must also be notified.

To Sum Up

The conversion of a public company into a private company under the Companies Act, 2013, is a structured and regulated process designed to facilitate corporate adaptability in a changing business environment. This legal provision enables companies to align their operations and governance with their strategic objectives. By understanding the process, implications, and potential advantages, companies can make informed decisions about whether to pursue such a conversion, ultimately shaping the trajectory of their business in a competitive market landscape.

Also, you can contact with our Experts at Legal Window for Conversion from Public Company to Private Company. Our Experts would be Happy to Help.