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Conversion of Public Company into Private Company: A Complete Guide

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Conversion of Public Company into Private Company: A Complete Guide

Contributed By: Amrutha Ananda
Email ids: amrutha@simplybiz.in

Introduction

While Public Companies have a great advantage in terms of raising funds from the public, they often face challenges in handling their large compliance requirements. As a result, several public companies are increasingly converting their structure into private limited companies. In this context, Companies Act, 2013 and Companies (Incorporation) Rules, 2014 govern the conversion of companies from public to private.

Earlier, it was required to take approval from the NCLT for the conversion of a Public Company into Private Company now the powers have been delegated to the Regional Director.

Legal Provisions related to the conversion of Public Company into Private Company

  1. Section 13 of the Companies Act, 2013: The conversion from a Public Company to a Private Company can only be done if the MOA of the Company allows for conversion, so it is necessary to alter the MOA of the Company.
  2. Section 14 of the Companies Act, 2013: Provides for alteration of AOA for Conversion of Public company to Private company.
  3. Section 18 of the Companies Act, 2013: Provides for conversion of any registered Company by altering the MOA and AOA of the Company.
  4. The Companies Incorporation (Fourth Amendment) Rules, 2014 explains the conversion of a Public Company to a Private Company.

To put it another way, charge is a financial security created by any person or company i.e., “borrower” over their current or future assets and properties against the loan taken from financial institutions or banks or any other lender i.e., “creditor”. The company/borrower creating the charge is called the “creator of the charge” and the creditor in whose favor the charge is created is called the “charge holder”.

Eligibility/ Pre-requisitions

  1. The members of the Company should not exceed 200.
  2. All the creditors of the Company must agree and approve the conversion.
  3. All the charges should be satisfied, or NOC from the charge holder shall be taken for the pending charges.
  4. There should not be any prosecution initiated under the Companies Act, 2013 against the Company.
  5. There should not be any default in any of the necessary filings with the Registrar.
  6. There should not be any managerial dispute in the Company.
  7. There should not be any default made in the repayment of matured deposits/debentures and interest on deposits/debentures.

Procedure

Step 1 Board Meeting

The Company shall hold a Board meeting by sending a notice at least 7 days before the date of the meeting and as prescribed under section 173 of the Companies Act, 2013.

The following shall be considered for approval in the meeting:

  1. To consider the proposal for conversion from public to private
  2. Approval for amendments in the AOA and MOA subject to members approval.
  3. To fix the date, time, and place for convene the general meeting.

Step 2 General Meeting

The Company shall hold a general meeting at the decided date by giving a notice of atleast 21 days prior to the date of the general meeting and passing a special resolution for the following under sections 12 and 14 of the Companies Act, 2013.

  1. Approval for the conversion of the Company from a Public company to a private company.
  2. Approved for alteration of MOA and AOA of the Company.

Step 3 Filing of Form MGT-14

Form MGT-14 shall be filed with ROC within 30 days from the passing of the special resolution with the necessary documents attached.

Step 4 Form INC 25A

The company atleast 21 days before from the date of filing an application to Regional Director [RD] for the conversion, shall make a public advertisement in the Form INC 25A.

The public advertisement shall be made in a local newspaper in the principal vernacular language in the district and in English language in an English newspaper, widely circulated in the State in which the Registered Office of the Company is situated.

A notice of the same shall be served to the debenture holders and the creditors of the Company.

A notice of same shall also be served to all the regulatory authorities like ROC, RD, GST, IT.

Step 5 Draft an Application

An application shall be drafted with following particulars.

  1. Reasons for the conversion of a Public Company to a Private Company.
  2. Effect of the conversion on shareholders, creditors, debenture holders and other related parties.
  3. The date of the Board and General meeting where the proposal for conversion was approved.

Step 6 Filing of E-Form RD-1

 An application in the E-Form RD-1 should be filed with the Regional Director within 60 days of passing of resolution with the attachments specified below:

The application shall contain the following documents:

  1. Application/petition
  2. Draft copy of altered MOA and AOA
  3. A copy of the minutes of the General Meeting at which the special resolution authorizing such alteration was passed together with details of votes cast in favor and or against with names of dissenters.
  4. Copy of Board resolution dated not earlier than THIRTY DAYS authorizing to file application for such conversion.
  5. A copy of the advertisement in Form INC 25A
  6. A declaration by the Key Managerial Personnel that the company limits the number of its members to 200.
  7. A copy of the proof of serving the notice to the creditors, debenture holders, registrar and other regulatory bodies.
  8. A declaration by Key Managerial Personnel that the company has not accepted any deposits in violation of the Act and rules made thereunder.
  9. A declaration by a Key Managerial Personnel that there has been no non-compliance of sections 73 to 76A, 177, 178, 185, 186 and 188 of the Act and rules made thereunder.
  10. A declaration shall also be given that the company has never been listed and if so listed all necessary procedures were complied with in full for the complete delisting of the shares in accordance with the applicable rules and regulations laid down by SEBI.
  11. A list of creditors and debenture holders of a date not earlier than 30days from the date of filing of the application.
  12. An affidavit verifying the list of creditors shall also be attached to the application.
  13. Declaration as to no inspection/inquiry/investigation is pending against the Company under the Companies Act

Step 7 Objection against the advertisement

If any objection is received by the Company against the advertisement or notice served, a copy of such objection shall be served to the Regional Director.

The Regional Director, after giving a proper opportunity of being heard, shall make the decision.

Step 8 Resubmission

Where the Regional Director on examining the application if finds necessary to call for any further information or finds any information to be incomplete or defective, shall within 30 days from the receipt of the application direct to serve the complete information or ask to rectify the defect in the application.

Such rectification or re-submission shall be made within 15 days from the receipt of the notice in the E-form RD-GNL-5.

It is to be noted that a Maximum of only two (2) resubmissions are allowed.

Step 9 Approval of application

The RD shall approve the Conversion process after the required above inquiry and an order for such Conversion will be issued to the Applicant.

Step 10 Filing with the Registrar

The order issued by the Regional Director shall be filed by the Company with the Registrar in Form INC-27 and INC-28 within 15 days from the receipt of the approval.

Post compliance of conversion

  1. All the requisite changes shall be made in the signboards, Letter heads, Books Rubber Stamps, Bill Books, Common Seal, visiting cards and other documents and items.
  2. The word “formerly” shall be used for atleast 2 years on every document of the Company with its present name.
  3. Changes shall be intimated to Banks, the Income Tax Department, PF Department, ESI Department and all other departments.
  4. The changes shall be made to the PAN, TAN, and GST portal.
  5. Intimation shall also be given to other regulatory authorities.

Advantages

  1. It is Easier to exercise greater control in a private Company.
  2. Various provisions under the Companies Act, 2013 are not applicable to a Private Company.
  3. Private Company has less compliances as compared to Public Company like, minimum number of members required is only two whereas seven in public company, No requirement of Statutory Meeting or Statutory Report, No undesirable shareholders, Absolute Control and Management of the company, No restriction on remuneration and much more.

Conclusion

The process of  conversion is long-lasting, very lengthy and needs to adhere to the various formalities prescribed under the Companies Act, 2013. SimplyCorp has well experienced professionals to help and guide you through the processes of conversion, assuring you successful completion of the conversion.

If you are looking for compliance support or would like to have more details on conversion of Public Company into Private Company, please reach out to our product head at vaishali@simplybiz.in or simplycorp@simplybiz.in We will be happy to help you.

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