Conversion of Private Company to Public Company
As grow, the limitations of being a private limited company become evident. To expand and increase access to funding, many brands choose to convert their private company to a public company. This transformation allows a company to offer shares to the public and raise funds from a large number of investors. However, the process of converting a private company to a public company requires compliance with various legal and regulatory requirements. In this article, we will take a closer look at the procedure for the conversion of a private company to a public company in India
A. Definition of Private and Public Company
A limited company is a type of corporate structure wherein ownership is limited to a small group of individuals and not available to the general public. As per the Companies Act 2013, a private limited company has a minimum of two and a maximum of 200 shareholders. Its shares cannot be freely traded and are restricted in nature. In contrast, a public limited company is a corporate structure that can offer shares to the general public. This type of company requires a minimum of three directors and seven shareholders, and it has no limit on the number of shareholders. Its shares can be traded on a stock exchange, and it can raise funds from a large number of investors.
The main difference between these two structures is the level of access to funding, transferability of shares, and the number of shareholders. A private limited company is ideal for small businesses, whereas a public limited company is more suited for businesses looking to expand and raise capital from the general public.
For a private limited company to convert into a public limited company, certain legal and regulatory requirements must be met. These include obtaining approval from shareholders and the Registrar of Companies, making changes to the Memorandum and Articles of Association, obtaining Director Identification Numbers, and preparing PAN and TAN cards. Additionally, the company must comply with provisions applicable to public companies, such as appointing additional directors and increasing the number of members.
Overall, converting a private limited company to a public limited company is a significant step towards expanding and increasing access to capital. It is recommended to seek professional guidance from experts to ensure a smooth and efficient conversion process.
B. Why private companies switch to public
Private limited companies are a common type of company in India, but many of them eventually make the switch to become public limited companies. Why do they do this? The key reasons include the potential for growth and flexibility.
By becoming a public limited company, a business gains access to an Initial Public Offering (IPO), which allows them to offer shares to the general public. This can attract new investment and provide access to more funding sources, which can help fuel growth. Plus, there is no cap on the maximum number of members a public limited company can have, making it easier for a business to raise capital.
Public limited companies also have the advantage of being able to issue debentures, fixed deposits, and convertible debentures to the public. Additionally, they can accept deposits from the public, making it easier for them to earn interest from investments.
There are other benefits of converting from a private to a public limited company as well. For example, shareholders can transfer their shares more easily than they can with a private company. Also, public limited companies have to comply with certain regulatory requirements and disclosure obligations, which can help increase their credibility and build trust with customers and investors.
Overall, while there are some challenges involved in converting from a private to public limited company, the potential benefits can make it a smart move for many businesses looking to expand and grow.
II. Procedure for Conversion of a Private Company into Public Company
A. Board resolution and Special Resolution
The process of converting a private company into a public company requires thorough planning and execution. One of the chief considerations during this process is the passing of board and special resolutions. The board resolution comes first, where members must issue a notice of the board meeting to all directors at least seven days prior to the date, as dictated by the articles of association. During this meeting, the directors will discuss and approve the proposal for conversion, subject to the approval of shareholders. They will also approve the draft new set of Memorandum and Articles of Association meeting the requirements of the public company. The name clause of Memorandum of Articles will be altered to exclude the word “private,” and articles of association will be modified to eliminate the limitations of a private company and include the provisions mandated for a public company. Furthermore, company members must approve the amendment of the Memorandum and Articles of Association to eliminate restrictions and limitations from a private company. The special resolution will be passed at the general meeting, which requires a notice to be issued at least 21 clear days before the meeting. After passing the special resolution, the company must file the necessary forms with the Registrar of Companies, such as Forms MGT-14 and INC-27, to convert the company and issue a fresh Certificate of Incorporation with the changed name. By following the proper procedures and completing the necessary forms and documentation, companies can successfully convert from private to public, expanding their opportunities and raising capital through public issue of shares.
B. eForm MGT-14 and eForm INC.27
After passing a special resolution in the general meeting for conversion of a private company into a public company, the next steps involve filing e-Form MGT-14 and e-Form INC.27 with the Registrar of Companies. These forms are critical since information such as the alteration in the memorandum and articles of association of the company, conversion of a private company into a public company, fixing the date, and time, and venue of the general meeting for shareholder’s approval, are included in them. The procedure for filing these two forms must be followed correctly; otherwise, there may be delays or even rejection of the application by the Registrar.
The e-Form MGT-14 must be filed with the Registrar of Companies within 30 days of passing the special resolution during the general meeting. The e-Form INC.27 must be filed within 15 days of passing the special resolution, along with the necessary attachments and prescribed fees. A company needs to make the necessary alterations to every copy of the memorandum or articles, and the name has to be painted or affixed outside every office or place where the business is carried on. It also needs to be engraved on the seal, if any. Finally, the new name must be intimated to all the banks, authorities, and other basic utility service providers, as applicable.
It’s important to bear in mind that the conversion of a private company into a public company could provide ample opportunities for growth and expansion and prepare the organization for the next level of governance and superintendence. The procedure may seem daunting, but accurate and timely filing of e-Form MGT-14 and e-Form INC.27 with the Registrar of Companies is the key to a successful conversion.
C. Compliance of provisions applicable on public companies
Once a private company converts into a public company, it must comply with provisions applicable to the latter. These provisions include appointing a minimum of three and a maximum of fifteen directors. Two of these directors must possess Director Identification Numbers (DINs). They must also prepare the Memorandum of Association (MOA) and Articles of Association (AOA), consisting of all mandatory clauses. Failure to include any of these clauses can result in penalties.
Next, a public company must apply for a Permanent Account Number (PAN) and Tax Account Number (TAN) separately. The Reserve Bank of India has also mandated a foreign exchange management act notification, stating that public companies must open a separate foreign currency account. Besides this, a public company must comply with provisions of issuing securities, such as employee stock options or sweat equity shares. It must also maintain a database of shareholders and conduct annual general meetings and board meetings.
After ensuring compliance with all provisions, the company can then apply for a Certificate of Incorporation (CIN) by filing Form INC-7. CIN is a document that certifies that the company has been incorporated under the Companies Act. It includes details such as company name, registered address, authorized capital, and the names of the directors.
Therefore, converting a private company into a public one comes with a bag full of compliance responsibilities. However, adhering to these provisions ensures transparency, credibility, and helps build investor trust.
In conclusion, the conversion of a private limited company to a public limited company entails a range of implications and challenges. Public limited companies face enhanced disclosure and reporting obligations, requiring them to provide transparent and timely information to the market. They must embrace robust corporate governance practices and compliance mechanisms to ensure accountability, protect shareholder interests, and maintain trust among stakeholders.
The market volatility and investor relations associated with being a public limited company require careful management of share price fluctuations and effective communication with shareholders and investors. By understanding these implications and challenges, companies can proactively address them, seek professional guidance where necessary, and leverage the opportunities that come with being a public limited company.
While the conversion process may involve complexities and additional responsibilities, it can offer significant benefits such as access to capital, increased market visibility, and enhanced liquidity for shareholders. By undertaking a comprehensive analysis, seeking expert advice, and diligently adhering to legal and regulatory requirements, companies can successfully navigate the conversion process and position themselves for growth and success in the public markets.