The Covid 19 pandemic created a havoc in the entire world. It was the kind of catastrophe the world was not prepared for. Not only did it prove to be fatal and took the lives of many, it severely affected the world economy. Stock markets all around the world crash. The crash was so deep that it created a panic like environment amongst equity investors. Nonetheless, the panic was short lived and by the end of 2020, the Indian markets witnessed what is known as a bull run or rally. The bull run continued till October of 2021. During this momentary bull run, several companies made Initial Public Offerings (hereinafter referred to as “IPO”). It is pertinent to note that although it is not mandatory for all companies to be listed on the stock exchange, there is an established process for a Private Company to convert into a Public Company and in this Article, we will be enumerating upon the same.
What Is A Private Company?
It is a well-known fact that the public cannot subscribe to the shares of a private company via an IPO as there is a restriction on the transfer of shares of a private company. The maximum number of members that could be members of a Private Company is limited to 200, this is not the case with a Public Company as a Public Company is free to have unlimited members. The minimum number of members that are required to form a private company is two. A private company is required to add the suffix “Pvt. Ltd.” to the name of the Company. Directorship can be retained in 20 private companies as opposed to the number being restricted to 10 in public companies. A private company can be limited by guarantee, limited by shares or be an unlimited company.
What Is A Public Company?
As per section 2 (71) of Companies Act, 2013, a public company has a minimum prescribed share capital and is one that is not a private company. According to the aforesaid definition provided in the Company Law, a public company’s shares are freely transferable and can deem to be movable property. A Public Company can invite the public to subscribe to its securities by issuing a prospectus. Such a company is free to accept deposits from the Public as opposed to a private company’s inability to accept deposits from the Public. A Public Company has no limit on its maximum number of members unlike a Private Company.
Benefits Of Converting Private Company Into Public Company
Although a private company enjoys certain perks like a lesser number of directors and members, better control over the company, etc. A restrictive feature of a private company is that its shares are not freely transferable. This is not the case with public companies. Shareholders of a Public company are free to transfer shares. Apart from that, they are also permitted to raise money via an IPO. Therefore, simplifying the process of raising funds as raising money via an IPO is one of the most popular ways of raising funds from the public. A Public Company has the option to list itself on the stock exchange by following the prescribed procedure. Being listed on the stock exchange creates a buzz in the stock market and also aids in the company’s branding and reputation.
How A Private Company Is Converted Into A Public Company?
The law concerning the conversion of private company into public company has been contained in section 18 and section 14 of the Companies Act that is to be read with Rule 33 of Companies (Incorporation) Rules, 2014 (hereinafter referred to as “Incorporation Rules” ).
For a company to convert into a Public Company, a minimum of three directors are required and the minimum number of members shall be seven. In order to convert into a public company, a private company needs to alter its Articles of Association (hereinafter referred to as “AOA”) in accordance with section 14 of the Companies Act, 2013 (hereinafter referred to as “Company Law”). This is to be done by passing a special resolution. Once a company gets rid of the restrictive clauses or limitations in its AOA like the clause enumerating upon the limitation on the number of members, clauses regarding transferability of shares, and restriction on the public to subscribe to its shares, a company ceases to be a private company from that day onwards. Alterations, as well as a copy of the order of the Central Government approving such alteration, are required to be filed within 15 days with the Registrar.
Following are the step-by-step process for conversion of private company into public company:
1) Notice For A Meeting of the Board of Directors
The first step for conversion of private company into public company would include issuing a notice for a meeting of the board of directors (hereinafter referred to as “BOD”) at least seven days prior to convening such a meeting. In the aforementioned meeting, the BOD is to decide the place, date and time for the general meeting, to approve the notice of general meeting along with the agenda and explanatory statement to be annexed to the said notice, in order to increase the number of directors they need to pass a notice for the same, to allow the Company Secretary or Director to issue the general meeting’s notice, to pass a resolution for getting the in principle approval of Directors for conversion of the said company into a public company by altering the AOA.
2) Notice of the General Meeting
The second step would be to issue a notice of the General Meeting to all the concerned parties, that would include the Members, Directors and Auditors of the company.
3) Special Resolution in the General meeting
The next step for conversion of private company into public company would be to pass the necessary Special Resolution in the General meeting in order to get shareholder’s approval for the Conversion of the company into a public company along with alteration in AOA.
4) Fillings of Necessary eForms with the Registrar of Companies
Furthermore, the concerned Company would need to file MGT – 14 and INC – 27 with the Registrar of Companies. The aforesaid forms are e-forms. A copy of special resolution is needed to be filed with the Registrar of Companies by filing of MGT-14 (E – form) within thirty days of passing of the special resolution in the general meeting. While filing the aforesaid e–form, we need to attach a few additional documents which include a notice of the general meeting along with a copy of explanatory statement, a certified true copy of the special resolution, an Altered Memorandum of Association, an Altered AOA and an optional attachment which includes a certified true copy of the board resolution. Further, Rule 33 of the Incorporation Rules mandates the application for conversion to private company be filled in INC 27 (e-form) by paying the prescribed fee. Furthermore, certain documents are to be attached along with the aforesaid form and that would include the minutes of the member’s meeting where the approval for conversion and altered AOA was received, the Altered AOA, an optional attachment may be attached which would include the certified true copy of the board resolution and any other relevant documents.
5) Cancelation of Previous Registration and Issuance of New Incorporation Certificate
After all the formalities as discussed above have been completed on the company’s end, the Registrar shall then scrutinize the documents and satisfy themself as per the necessary provisions of the Statute. Further, the Registrar shall cancel the previous registration and issue a new incorporation certificate.
As mentioned in the Article, a private company’s AOA has quite a few restrictive or limiting clauses that are absent in the AOA of a Public Company. In case a private company, which is also a start-up, does not have a Company Secretary, it can have its annual return signed by the director instead. Although a Private Company does not need to adhere to the same stringent laws that a Public Company needs to abide by, a private company does not enjoy the option to raise money through the means of an IPO either. In India, only Public Companies can be listed on the recognized stock exchanges. Although getting listed on a recognized Indian Stock Exchange is not a cake walk, if a private company wishes to raise funds via an IPO, the first step is to convert into a Public Company. By doing so, the company would then get rid of its restrictive clause that forbids it from transferring shares or raising money from the public.
- Company Law by Taxmann.
- Setting Up of Business Entities and Closure by Institute of Company Secretaries of India.