Conversion of Private Ltd. Co. to Public Ltd. Co. in India

Introduction

This article is majorly focused on the procedure of conversion of a private limited company to a public limited company. The article initially delves into the description of a private limited company and then it iterates the details of a private limited company. The article aims to describe all the nuances of conversion of a private limited company to a public limited company. It also talks about the basic differences between the categories of companies. The article begins with the meaning and a general view of the company and its categories.

In compliance with Section 2(20) of the Act (hereinafter referred as ‘the Act’), a company is the one which is registered under the Companies Act, 2013 or any other previous company laws.[1] The definition of the company envisaged under the ActAct cannot be considered exhaustive so the perusal of the meaning of the term shall be construed by the observations and definitions provided by scholars over the years. Considering the views of various scholars, the definition and meaning of a company can be summed up to “an association of persons engaged in a business and have a common seal and a separate legal entity.” A company has a separate legal entity from its members and has a perpetual existence which simply means that the existence of a company does not cease to exist even after the death of its directors. A company can sue and can be sued by other parties which may or may not be involved in the business of the company and generallya company is limited by shares, by guarantee or it can have unlimited liability. The members cannot attain the property or cannot claim the property or other assets of the company. The companies in India are divided into various categories, for example, government companies, One-person company etc. Still, the two major categories of companies are private limited companies and public limited companies. Private limited companies differ from a public limited company in many ways. Further, it is necessary to discuss the meaning of private limited companies and public limited companies to understand the procedure of conversion into a public limited company and the changes occurring in the structure thereby in the converted company.

Features of a Private limited company

Under Section 2(68) of Act which describes Private Limited companies as “company having a minimum paid-up share capital, as may be prescribed, and which by its articles —

(i) restricts the right to transfer its shares;

(ii) except in the case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for this clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased,

shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company;”[2]

The bare perusal of the above-mentioned definition elucidates some key points and features of a private limited company. It depicts that a private limited company shall have a paid-up share capital. Further, the definition prohibits the right to transfer shares of a company thereby restricting the public to subscribe to the shares of the company. The definition also decides the limit of a number of members to 200 members except in the case of One Person Company (hereinafter referred as ‘OPC’). For limitation on a number of memberships, it is pointed out here that the persons holding shares jointly shall be considered as one member. Generally, Private Limited Companies are held and incorporated to carry on small scale businesses. The liability of members under private limited companies is generally limited to the number of shares held by them in the company. A private limited company is distinct from other categories of companies existing in the corporate world. The Companies law in India iterates that a private limited company can have a minimum of two members and a maximum 200 number of members in the company.The members of a private limited company are only liable to the extent of the amount of the shares held by them. The personal assets of the members of private limited companies are not under stake in case the company incurs losses. A private limited company can be constituted with the existence of two directors and there is no limit to the maximum number of directors in private limited companies. All the private limited companies in India must use the term ‘Private Limited’ after the name of the company as it clearly shows the status of the company as private.

Features of a Public Limited Company

In pursuance of Section 2 (71) of the Act, a public limited company means a company which –

(a) is not a private company;

(b) has a minimum paid-up share capital as may be prescribed.

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for this Act even where such subsidiary company continues to be a private company in its articles.

The bare perusal of the definition of a public limited company iterates that a company which is not a private limited company and has a minimum paid-up share capital shall be considered a public limited company. Other than this there are certain features of a public limited company which helps in identification and determination of a public limited company. One of the main features is that there is no restriction on the transferability of shares of a public limited company. Then the public limited company requires a minimum of seven members and there shall be no restriction on the maximum number of shares. A public limited company has limited liability on shareholders of the company as they are mostly liable only for the number of shares held by them. A public limited company also has to maintain an index of members which is not required in the case of a private limited company. A public limited company requires three directors to come into existence. A prospectus must be issued by the company for the invitation of shareholders to buy the shares of the company. A public limited company also requires a minimum subscription to its shares for carrying on its business in the market. There are no such restrictions on a private limited company.[3]

Difference between a Private Company and a Public Company

The differences between a private limited company and a public company are as follows –

The members of a Public Company have a minimum requirement of seven members and there is no limitation on the maximum number of members whereas in the case of Private Limited Companies the minimum number of members shall be 2 and the maximum number shall be 200.
A Public Company requires at least three directors for the purpose of incorporation where they should stay in India for at least 182 days in the previous calendar year and the maximum number of directors shall be restricted to 15 whereas in the case of Private Limited Companies the minimum number of directors shall be limited to two and maximum number shall be 15.
The quorum for conducting an Annual General Meeting (hereinafter referred as ‘AGM’) requires more members in Public Limited Companies. In a Private Limited Company, an AGM can be conducted with two members also.
Shares of a Public Company are listed and are easily transferable. A Public Limited Company can issue shares publicly whereas a private limited company cannot do so. The transferability is restricted in Private Companies.
Generally, the financial affairs of the Public Companies are disclosed to the general public whereas the financials of a Private Limited Company are kept confidential.
A Public Company is under strict compliances and all the financials of the company are to be disclosed to the public whereas there are many exemptions available to a Private Limited Company.
The control over the affairs of the company and the management of a Public Limited Company rests with the majority shareholders and with board of directors which are generally outsiders whereas in a Private Limited Company the management and control over the affairs of the company lies with the Board and shareholders who are closely related or known to the company.

The procedure of Conversion of a Private Limited Company to a Public Limited Company

The provisions regarding the conversion of Private Limited Company to a Public Limited Company are envisaged under Section 24 and Section 18 of Act read with Rule 33 of the Companies (Incorporation) Rules, 2014. For conversion of a private company into a public company Form No INC-27 has to be filled according to Rule 33. Further, a copy of the order of competent authority shall be filed with registrar of companies in the aforementioned form along with the prescribed fee. Section 18 of the Act provides for the amendments in Articles of Association (hereinafter referred as ‘AOA’) and Memorandum of Association (hereinafter referred as ‘MOA’) for conversion. Further, the procedure of conversions is as follows:

First of all, the company should call for a board meeting under Section 173(3) of the Act. The main agendas that are to be discussed in the meeting shall be amended in the AOA; date, time and venue for conducting an Extra-Ordinary general meeting (hereinafter referred as ‘EOGM’); approving of notice for EOGM and agenda; and to authorize directors and Company Secretary (hereinafter referred as ‘CS’) for the issuance of notice of EOGM.
Then the notice of EOGM shall be issued to all the members, Directors and auditors of the company in pursuance to Section 101 of the Act.
Then the EOGM shall be conducted on the due date and venue as mentioned in notice and shareholder’s approval shall be taken to decide for conversion into a Public Limited Company. This shall also be mentioned that it will require a massive change in the AOA of the company.
Then after attaining the approval of the shareholders the company shall fill certain E-forms which are required for conversion. These forms are to be filled with registrar of companies according to Section 14 of the Act.
E-form MGT 14 is needed to be filed for the conversion of Public Limited Company into a Private Limited Company.
After the submission of all the forms and compliance to all the rules, the registrar of companies shall scrutinize the application properly and should make sure that all the compliances have been properly done by the company. This shall be done by complying with the provisions mentioned under Section 18 of the Act.
After the conversion of the company into a Public Limited Company, the company shall inform about the same to all the necessary authorities like Excise and Sales Tax Department. The company also requires to arrange a new PAN number. The company also needs to thoroughly examine the new AOA and MOA of the company. The company will also be required to increase the number of directors to meet the required criteria of a public limited company.

Also Read Meeting of the Board of Directors

Conclusion

The article concludes all the aspects of conversion of a private limited company to a public limited company. The article aims to describe all the areas and procedures related to conversion. It also delves into brief discussions on private limited companies and public limited companies. It also distinguishes the two and furthers the procedure of conversion.