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Conversion from Public to Private Company
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Conversion of Public Company to Private Company
According to the Companies Act of 2013 and the Incorporation of Companies Rules of 2014, a public company may become a private company. In comparison to public companies, private companies are less likely to comply with the Companies Act of 2013. A greater number of public companies are becoming private as a result of the requirement for less compliance. Previously, the National Company Law Tribunal (NCLT) had the authority to convert a public company into a private company; however, the Regional Director now has that authority. Under the Companies Act of 2013 and in accordance with the guidelines established by the Companies Rules of 2014, a public company can convert to a private company. The Companies Act of 2013's regulatory obligations pertaining to public companies are lessened by this conversion.
Such shifts from public to private status are becoming increasingly common, which is fueled by the growing compliance burden. A public company's conversion to a private one was previously authorized by the National Business Law Tribunal prior to the 2013 Act.
Reasons for converting Public company into Private Ltd Company
A company may decide to become a private company for a number of reasons, such as:
i) To avoid the expenses and complications of being a publicly traded company.
ii) To lessen regulatory burdens and compliance for private limited company requirements.
iii) To strengthen decision-making flexibility and autonomy.
iv) To shield the company from hostile takeovers or unwelcome investor scrutiny.
v) To enable the company to concentrate on long-term growth and strategy instead of short-term profits.
Legal Provision regarding conversion
1.Section 13 of the Companies Act : A public company may become a private company by making sure that its memorandum contains an enabling language that permits such a conversion, according to Section 13 of the Companies Act of 2013. Modifying the memorandum of association is required if the MoA lacks such a clause.
2.Section 14 of the Companies Act: A public company may become a private company by changing its articles of association and getting Central Government approval, according to Section 14 of the Companies Act of 2013.
3.Section 18 of the Companies Act : In order for a business to become a private company, a special resolution must be passed at a general meeting.
4.Section 61 of the Companies Act : the business must submit an application for conversion, together with the necessary paperwork and payments, to the Registrar of Companies (ROC).
Benefits of conversion from Public Limited Company to Private Limited Company
1.Greater Flexibility: Because private companies are not subject to the same degree of disclosure and regulatory compliance obligations as public companies, they are able to make decisions with greater freedom.
2.Cost Savings: Private companies can save money on expenses like audits, legal fees, and investor relations that come with turning a public company into a private one.
3.Increased Confidentiality: Private companies are able to keep their trade secrets, financial data, and business plans private, which can provide them a competitive edge.
4.Long-term Focus: Rather than being influenced by the immediate profit demands of public shareholders, private companies are able to concentrate on long-term growth and strategy.
5.Owner or Family Control: Making the company private may give owners or family members back authority and decision-making authority.
6.Decreased Regulatory Burden: The administrative load on private companies is lessened because they are not required to comply with as many regulations or file as many documents.
7.Improved Capability to Make Strategic Choices: Private companies are able to make strategic choices more rapidly without having to think about how they might affect public shareholders.
8.Protection from Hostile Takeovers: Because their shares are not listed on a public exchange, private companies are less prone to hostile takeovers.
9.Better staff Morale: Instead of being motivated by immediate financial goals, private companies can concentrate on staff retention and morale.
10.Tax Benefits: Private Limited Companies may qualify for specific tax benefits, including pass-through taxes, which lowers their tax obligation.
Documents Required
i) A list of events and dates that includes the dates of the extraordinary general meeting and board meeting where the resolution for conversion was approved.
ii) Modified AOA and MOA.
iii) The minutes of the extraordinary general meeting in certified copy.
iv) A board resolution or power of attorney granting permission to apply.
v) A list of creditors whose payments are due within 30 days, together with the names, addresses, and total amount owing, along with the cause for the debt. Additionally, an affidavit confirming the creditors' list must be included.
vi) A newspaper advertisement copy.
KMP or any of the Directors may make a separate declaration about the following:
i) The Company has not yet taken any deposits;
ii) There are no more than 200 members overall.
iii) We have complied with all relevant Act provisions, such as sections 73 to 76A, 177, 178, 185, 186, and 188, as well as the associated regulations.
iv) That the company was never listed on any stock exchange, and if it had been, that all legal requirements for delisting procedures had been met.
v) That the Company is not the subject of any inquiry, investigation, or inspection.
Process of conversion of Public Limited Company to Private Limited Company
1. A board resolution approving the hiring of an attorney and the conversion and modification of the memorandum and articles of association with restrictions applicable to a private company under section 2(68).
2. A special resolution to approve the conversion, revise the articles of association and memorandum of association, and change the name to include the word "Private."
3. E-Form MGT-14, which must be submitted to the Registrar within 30 days of the resolution being passed, together with:
(a) A special resolution with an explanation.
(b) Acceptance of a shortened notice period (if appropriate).
(c) Modified the articles of association and memorandum.
4. The company must do certain things such as:
(a). The application must be advertised by the company using Form INC 25A at least 21 days prior to the application being filed .
(b) send the acknowledgement due to each creditor and debenture holder individually by registered mail
(c) send the acknowledgement due to the RD, Registrar, and Regulatory Body via registered mail, if the company is subject to any additional laws.
(d) Filing of application with RD : The company must submit form GNL-1 to ROC at any point prior to submitting an application to the regional director in RD-1, together with a full copy of the application and all supporting documentation.
5. Within 60 days of the Special Resolution being passed, submit an application using e-Form No. RD-1 with the Regional Director ("RD") and the fee specified in the Companies (Registration Offices and Fees) Rules, 2014, along with the accompanying attachments:
(a) A copy of the articles of association and memorandum
(b) A copy of the Extraordinary General Meeting Minutes
(c) A copy of the Board Resolution of Power of Attorney granting permission to submit an application to RD no early than 30 days.
(d) A Key Managerial Personnel's ("KMP") declaration in accordance with section 2(68)
(e) A KMP's declaration that there hasn't been any violation of sections 73 to 76A, 177, 178, 185, 186, and 188 of the Act;
(f) A KMP's declaration that no resolution has yet to be filed in accordance with section 179(3); and that the company was never listed on any Regional Stock Exchanges, or if it was, all procedures required by the Securities Exchange Board of India were followed.
6. A properly verified copy of the list of debenture holders and creditors should be retained at the Registered Office for any necessary inspections.
7. Within 30 days of receiving the application, RD will issue an approval order without holding a hearing if there are no objections to the notice or advertisement and the application is complete.
8. If an application is incomplete or flawed, RD must notify the company within 30 days of receiving it. The company then has 15 days to correct the application and submit it again using eForm RD-GNL-5.
9. If issues are not resubmitted or RD is not satisfied, RD will reject the application within 30 days of the application being filled out or, if applicable, within 30 days of the latest resubmission date.
10. If RD receives a particular objection or an objection to conversion, RD will arrange a hearing within 30 days and instruct the company to provide an affidavit documenting the hearing's consensus. Registrar's acceptance of Form MGT-14 for conversion and receipt of the NCLT order following the hearing.
11. If no agreement is reached within 60 days of the application being filed, the RD will resubmit the application within the allotted time. Conversion will not be permitted if the company is the subject of an ongoing investigation, inspection, or prosecution.
12. Within 15 days of receiving approval, a company must submit a certified copy of the RD's order in Form INC-27.
13.Filing of the Regional Director's Order: Within fifteen days of receiving permission, the company must register the Regional Director's order with the Registrar using Form No.INC-28 and pay the amount specified in the Companies (Registration Offices and Fees) Rules, 2014. A new certificate of incorporation will be issued by ROC after it has been satisfied.
- FAQ
1. What documents are required to convert a public company into a private company?
Usually, the following documentation is needed:
i) The shareholders passed a special resolution.
ii) Modified the AoA and MoA to reflect the company's status change.
iii) A copy of the resolution passed by the board that approved the conversion.
iv) Evidence of filing fee payment.
v) If necessary, the directors' or current members' consent.
vi) Affidavit attesting to adherence to the conversion requirements.
2. What are the conditions for conversion of a public company into a private company?
Among the prerequisites are the following:
i) The company shall consist of no more than 200 members, excluding current and former employees.
ii) The business is not allowed to be listed on any stock exchanges.
iii) There must be no outstanding debts owed by the business.
iv) In order to comply with the format of a private company, the name of the business should not contain any references to "Public Limited" or "Ltd."
3. How long does it take to convert a public company into a private company?
If all compliance requirements are fulfilled and the MCA processes the application without any objections, the conversion procedure normally takes five to six weeks from the date the necessary paperwork are filed. However, the complexity of the business's operations and the processing time of MCA may cause this schedule to change.
4. Can a listed company be converted into a private company?
Unless it is delisted first, a listed company cannot convert directly to a private a company. The company can proceed with the conversion after the de-listing process is finished in accordance with the Securities and Exchange Board of India's (SEBI) rules.
5. What are the advantages of converting a public company into a private company?
Some of the main benefits are:
i) More freedom to make decisions because private businesses are subject to fewer rules and regulations.
ii) Disclosure requirements are lower than for public firms, which are required to provide shareholders and the public with comprehensive financial and operational data.
iii) Reduced expenses for audits, compliance, and regulatory reporting .
6. What happens to the shareholding structure of the company after conversion?
There is no direct impact of the conversion on the company's shareholding structure. But according to the Companies Act of 2013, the number of shareholders following the conversion cannot be more than 200 (not including current and former employees). To meet this requirement, the business might have to shrink its shareholder base or purchase back shares.
7. Is it mandatory to change the company's name after conversion?
Yes, a public company's name must change to reflect its new position as a private company. "Private Limited" or "Pvt Ltd" must be the last part of the name rather than "Public Limited" or "Ltd."
8. Can a public company convert into a private company without the consent of all its members?
No, a majority of shareholders must accept a special resolution before the conversion may proceed. Subject to the rules of the Companies Act of 2013, any member who objects to the conversion may sell their shares or leave the company.
9. What are the legal implications of converting from a public to a private company?
Following the conversion, the business will be subject to the regulations set forth in the corporations Act of 2013 that apply to private corporations. It might be necessary for the business to reorganize its internal controls, governance, and shareholder base in order to conform to the private company framework. Obligations pertaining to public companies, like submitting financial reports to stock exchanges, will no longer be necessary.
10. Can a private company convert back into a public company?
It is possible for private company to become a public company again, but the process must be reversed. The business would have to update the AoA and MoA, approve a special resolution, and submit the required paperwork to the MCA.
11. Can a company convert from a public to a private company if it has outstanding debts?
No, if a company has any outstanding debts, it cannot become a private company. To ensure compliance with the regulations for private companies under the Companies Act of 2013, the company must pay off all of its debts before moving forward with the conversion.
12.What happens if the company fails to comply with the requirements after conversion?
The MCA may impose fines or even cancel the conversion if the company disregards the rules after the conversion. Legal action against the company and its directors may follow noncompliance with the Companies Act of 2013.
13. Can a company convert into a private company if it has more than 200 members?
No, in order to be considered a private company, a business must have fewer than 200 members (not including staff). A public business that has more than 200 members must therefore lower that number by repurchasing shares or making sure that the number of members is within the allowed limit before converting.