COMPANY LAW
Conversion from Public to Private Company under Companies Act, 2013
Introduction:
As per the Companies Act, 2013 mainly there are two types of companies:
-Private Company
-Public Company
Private Company is defined in section 2(68) of the Companies Act, 2013 “is a business company owned either by non-governmental organizations or by a relatively small number of shareholders or company members restricted to 200 which does not offer or trade its company stock (shares) to the general public on the stock market exchanges, but rather the company’s stock is offered, owned and traded or exchanged privately or over-the-counter.”
Public Company is defined in section 2(71) of the Companies Act, 2013 “is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public company can be listed on a stock exchange (listed company), which facilitates the trade of shares, or not (unlisted public company).”
Conversion of Public Limited Company into Private Limited Company is mentioned in the Companies Act, 2013 and Incorporation of Companies Rules, 2014. Ministry of Corporate Affairs by its notification dated 18th December 2018 has amended the Companies (Incorporation) Rules, 2014 by making Companies (Incorporation) Fourth Amendment Rules, 2018. Rule 41 has been inserted in the said rules which provides for the regulations for making application for conversion of public limited company into private limited company. Earlier, the National Company Law Tribunal (NCLT) has a power pertaining to the conversion of Public Company into Private Company. The process of this is very time consuming. Thereby to free the tribunals with the cases of conversion, power of approval of conversion has been transferred to Central Government. Thereafter the Central Government has delegated his powers to Regional Director vide notification S.O. 6225 (E) dated 18th December 2018 for approval of conversion of public limited company into private limited company.
REASONS FOR CONVERSION:
MCA has increases compliance requirement through various notifications which sometimes became hurdle to do business in smooth manner for the public Companies on other hand there are various exemptions available to the private companies under the Companies Act 2013.
Being a Public Limited Company, it required and mandated to follow various statutory guidelines as provided under the provisions of Companies Act, 2013 and rules made thereunder. Apart from this, there are various types of compliance to be done under the provisions of Companies Act, 2013 (Act) and SEBI Act. Private Limited Company has fewer compliances compared to Public Limited Company. Considering the exemptions available to the private companies many public companies are converting into the private company to reduce the compliance requirement. The main and foremost reason for conversion from public limited company to a private limited company is to avail the relaxation or exemptions provided to private companies by MCA vide notification dated 05th June 2015 and 13th June 2017.
Relevant Provisions for Conversion from Public to Private Company under Companies Act, 2013
| Section | Provision |
| Section 13 of the Companies Act, 2013 | “Save as provided in section 61, a company may, by a special resolution and after complying with the procedure specified in this section, alter the provisions of its memorandum. Any change in the name of a company shall be subject to the provisions of sub-sections (2) and (3) of section 4 and shall not have effect except with the approval of the Central Government in writing.” |
| > Provided that no such approval shall be necessary where the only change in the name of the company is the deletion therefrom, or addition thereto, of the word “Private”, consequent on the conversion of any one class of companies to another class in accordance with the provisions of this Act.” | |
| Section 14 of the Companies Act, 2013 | “Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of— |
| a) a private company into a public company; or | |
| b) a public company into a private company: | |
| > Provided further that any alteration having the effect of conversion of a public company into a private company shall not be valid unless it is approved by an order of the Central Government on an application made in such form and manner as may be prescribed.” | |
| Section 18 of the Companies Act, 2013 | “A company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of this Chapter.” |
| > Where the conversion is required to be done under this section, the Registrar shall on an application made by the company, after satisfying himself that the provisions of this Chapter applicable for registration of companies have been complied with, close the former registration of the company and after registering the documents referred to in sub-section (1), issue a certificate of incorporation in the same manner as its first registration.” | |
| Section 18 of the Companies Act, 2013 | “A company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of this Chapter.” |
| > Where the conversion is required to be done under this section, the Registrar shall on an application made by the company, after satisfying himself that the provisions of this Chapter applicable for registration of companies have been complied with, close the former registration of the company and after registering the documents referred to in sub-section (1), issue a certificate of incorporation in the same manner as its first registration.” |
PROCEDURE FOR CONVERSION OF PUBLIC LIMITED COMPANY INTO PRIVATE LIMITED COMPANY:
| Step 1 | Company to send notice to directors for convening Board meeting for approving items listed in step 2. | To send notice not less than 7 days before the date of meeting according to section 173(3) of Companies Act, 2013 | ||
| Step 2 | Company to duly convene and held Board meeting as per section 173 and SS-1 for the approval of below certain items: | 1. To consider the proposal of conversion of public company into private company; | ||
| 2. To approve amendment of memorandum of association and articles of association of the company subject to approval of members by way of special resolution in General Meeting and Regional Director; | ||||
| 3. To authorize director or any other eligible person on behalf of the company to do all acts as deem necessary for the purpose of giving effect to the proposal of conversion of public company into private company; | ||||
| 4. To fix the date, time and venue of the General Meeting and authorise a director or company secretary to send the notice of the General Meeting to the members; | ||||
| 5. To consider and authorise any officer of the company to prepare the list of creditors and debenture holders, drawn up to the latest practicable date preceding the date of filing of application by maximum 30 days comprising of following details: | ||||
| Name and address of every creditor and debenture holder of company; | ||||
| Nature and respective amounts due to them in respect of debts, claims or liabilities | ||||
| In respect of any contingent or unascertained debt, the value, so far, as can be justly estimated of such debt. | ||||
| Step 3 | Company to send notice to members as per section 101 and SS-2 for convening General Meeting for approving items by way of special resolution for items listed in step 4. | To send notice not less than 25 days before the date of meeting according to the registered address of members, auditors and directors of the company. | ||
| Step 4 | Company to duly convene and conduct General meeting for approving conversion of public company into private company and thereby approving alteration in memorandum and articles of association of the Company under the provisions of Companies Act, 2013. | 1. To consider the proposal of conversion of public company into private company; | ||
| 2. To approve amendment of memorandum of association and articles of association of the company subject to approval of Regional Director; | ||||
| 3. To authorize director or any other eligible person on behalf of the company to do all acts as deem necessary for the purpose of giving effect to the proposal of conversion of public company into private company; | ||||
| Step 5 | Company to file e-form MGT-14 pursuant to section 117 of the Companies Act, 2013 within Thirty (30) days of passing the special resolution along with following documents as attachment: | Certified true Copy (CTC) of Special Resolution passed in General Meeting; | ||
| Certified true Copy of Notice along with Explanatory Statement to the Notice of Meeting; | ||||
| Certified true Copy of altered Memorandum of Associations (MOA) | ||||
| Certified true Copy of altered Articles of Associations (AOA) | ||||
| Step 6 | Drafting of Application for conversion of public limited company into private limited company by setting out the following particulars as required under rule 41(2) of Companies (Incorporation) Rules, 2014, as amended: | a) the date of the Board meeting at which the proposal for alteration of Memorandum and Articles was approved | ||
| b) the date of the general meeting at which the proposed alteration was approved; | ||||
| c) reason for conversion into a private company, effect of such conversion on shareholders, creditors, debenture holders, deposit holders and other related parties; | ||||
| d) details of any conversion made within last five years and outcome thereof along with copy of order; | ||||
| e) details as to whether the company is registered under section 8. | ||||
| Step 7 | As per rule 41(3) of the Companies (Incorporation) Rules, 2014, as amended, there shall be attached to the application, a List of Creditors and Debenture Holders, drawn up to the latest practicable date preceding the date of filing of petition by not more than 30 days, setting forth the following details, | a) the names and address of every creditor and debenture holder of the company; | ||
| b) the nature and respective amounts due to them in respect of debts, claims or liabilities; | ||||
| c) in respect of any contingent or unascertained debt, the value, so far as can be justly estimated of such debt; | ||||
| > Affidavit verifying List of Creditors: | ||||
| As per the proviso to rule 41(3), the company shall file an affidavit, signed by the Company Secretary of the company, if any, and not less than two directors of the company, one of whom shall be managing director, where there is one, to the effect that they have made a full enquiry into affairs of the company and, having done so, have formed an opinion that the list of creditors and debenture holders is correct, and that the estimated value as given in the list of the debts or claims payable on contingency or not ascertained are proper estimates of the values of such debts and claims that there are no other debts, or claims against, the company to their knowledge. | ||||
| Step 8 | The company shall advertise in the Form INC. 25A at least twenty-one days before the date of filing of the application | a) vernacular 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; | ||
| b) serve, by registered post with acknowledgement due, individual notice on each debenture holder and creditor of the company; and | ||||
| c) serve, by registered post with acknowledgement due, a notice to the Regional Director and Registrar and to the regulatory body, if the company is regulated under any law for the time being in force | ||||
| Step 9 | Company to duly convene and held Board meeting as per section 173 and SS-1 for the approval of below certain items: | To authorize any director or any other person to make an application in form RD-1 to Regional Director for seeking approval for the aforesaid conversion and to file necessary forms and documents; | ||
| (not earlier than thirty days) | To authorize any practicing professional to enter appearance before Regional Director for the aforesaid conversion; | |||
| Step 10 | Filling of Application with Registrar of Companies in e-form GNL-1: | It is advisable to the applicant to submit a copy of application for conversion to concerned ROC. | ||
| Step 11 | Filling of Application for conversion with Regional Director in e-form RD-1: | application to regional director (notary); | ||
| As per rule 41(1) of the Companies (Incorporation) Rules, 2014, as amended An application under the second proviso to sub-section (1) of section 14 for the conversion of a public company into a private company, shall, within sixty days from the date of passing of special resolution, be filed with Regional Director in e-Form No. RD-l along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 and shall be accompanied by the following documents, namely: | affidavit verifying the application by director (stamp of rs. 50); | |||
| memorandum of appearance (Stamp of rs. 10); | ||||
| a draft copy of Memorandum of Association and Articles of Association, with proposed alterations including the alterations pursuant to clause (68) of section 2; | ||||
| certified true copy of the notice calling general meeting of the members of the company; | ||||
| certified true copy of Special Resolution for conversion from public to private passed in general meeting of members of the company | ||||
| certified true copy of the minutes of the general meeting attendance sheet together with details of votes cast in favour and or against with names of dissenters; | ||||
| a copy of Board resolution or Power of Attorney dated not earlier than thirty days, as the case may be, authorising to file application for such conversion; | ||||
| copy of news paper advertisement. | ||||
| declaration by a key managerial personnel that pursuant to the provisions of clause (68) of section 2, the company limits the number of its members to two hundred and also stating that no deposit has been accepted by the company in violation of the Act and rules made thereunder; | ||||
| 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; | ||||
| declaration by a key managerial personnel that no resolution is pending to be filed in terms of sub-section (3) of section 179; | ||||
| declaration by a key managerial personnel stating that the company was never listed in any of the Regional Stock Exchanges and if was so listed, all necessary procedures were complied with in full for complete delisting of the shares in accordance with the applicable rules and regulations laid down by Securities Exchange Board of India: list of creditors and debenture holders; | ||||
| list of creditors and debenture holders; | ||||
| affidavit verifying list of creditors and debenture holders(stamp of rs. 50); | ||||
| details of particulars as required by sub rule (2) of rule 41of the Companies (Incorporation) Rules, 2014 | ||||
| certified true copy of board resolution for conversion from public to private passed in board meeting of the company | ||||
| copy of form MGT-14 filed for special resolution passed for conversion and challan of MGT-14 filed | ||||
| > Provided that in case of such companies where no key managerial personnel is required to be appointed, the aforesaid declarations shall be filed any of the director. | ||||
| > While making application in e-form RD-1 one should keep in its mind the following three events: | ||||
| Date of passing special resolution | ||||
| Date of list of creditors and debenture holders | ||||
| Date of news paper advertisement | ||||
| Application for conversion should be filed latest by only after expiry of 21 days from the date of advertisement and filed maximum upto 30 days from the date of list of creditors and 60 days from the date of passing special resolution. So while filing e-form RD-1 one should keep in its mind all of the dates so there won’t be any non-compliance. | ||||
| As per rule 41(6) of the Companies (Incorporation) Rules, 2014 as amended: | APPROVAL WITHOUT HEARING: | |||
| a) Where no objection has been received from any person in response to the advertisement or notice referred to in sub-rule (5) and the application is complete in all respects, the same may be put up for orders without hearing and the concerned Regional Director shall pass an order approving the application within thirty days from the date of receipt of the application. | ||||
| RE-SUBMISSION ON OBJECTIONS: | ||||
| b) Where the Regional Director on examining the application finds it necessary to call for further information or finds such application to be defective or incomplete in any respect, he shall within thirty days from the date of receipt of the application, give intimation of such information called for or defects or incompleteness, on the last intimated e-mail address of the person or the company, which has filed such application, directing the person or the company to furnish such information, to rectify defects or incompleteness and to re-submit such application within a period of fifteen days in e-Form No. RD-GNL-5. | ||||
| > Provided that maximum of two re-submissions shall be allowed. | ||||
| c) In cases where such further information called for has not been provided or the defects or incompleteness has not been rectified to the satisfaction of the Regional Director within the period allowed under sub- rule (6), the Regional Director shall reject the application with reasons within thirty days from the date of filing application or within thirty days from the date of last re-submission made. as the case may be. | ||||
| d) Where no order for approval or re-submission or rejection has been explicitly made by the Regional Director within the stipulated period of thirty days, it shall be deemed that the application stands approved and an approval order shall be automatically issued to the applicant. | ||||
| As per rule 41(9) of the Companies (Incorporation) Rules, 2014 as amended: | a) Where an objection has been received or Regional Director on examining the application has specific objection under the provisions of Act, the same shall be recorded in writing and the Regional Director shall hold a hearing or hearings within a period thirty days as required and direct the company to file an affidavit to record the consensus reached at the hearing, upon executing which, the Regional Director shall pass an order either approving or rejecting the application along with reasons within thirty days from the date of hearing, failing which it shall be deemed that application has been approved and approval order shall be automatically issued to the applicant. | |||
| b) In case where no consensus is received for conversion within sixty days of filing the application while hearing or otherwise, the Regional Director shall reject the application within stipulated period of sixty days. | ||||
| Ø Provided that the conversion shall not be allowed if any inquiry, inspection or investigation has been initiated against the company or any prosecution is pending against the company under the Act. | ||||
| (As per rule 41(10) of the Companies (Incorporation) Rules, 2014 On completion of such inquiry inspection or investigation as a consequence of which no prosecution is envisaged or no prosecution is pending, conversion shall be allowed.) | ||||
| Step 12 | For effecting the conversion of a private company into a public company or vice versa, the application shall be filed in Form No.INC.27 | Certified true Copy (CTC) of Special Resolution passed in General Meeting; | ||
| Certified true copy of the minutes of the general meeting; | ||||
| CTC of altered Memorandum of Associations (MOA); | ||||
| CTC of altered Articles of Associations (AOA); | ||||
| Order of Regional Director | ||||
| Step 13 | As per rule 41(11) of the Companies (Incorporation) Rules, 2014 as amended: Filling of Application with Registrar of Companies in e-form INC-28: | The order conveyed by the Regional Director shall be filed by the company with the Registrar in Form No.lNC-28 within fifteen days from the date of receipt of approval along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 |