Converting a public company into a private limited company reduces regulatory burdens, enhances decision-making, and offers greater control and privacy. The process involves board and shareholder approvals, filing essential forms with the Registrar of Companies, and securing approval from the Regional Director. This article explains the legal provisions, detailed steps, and the benefits of the conversion, and how CorpZo can streamline the entire process for your business.
In the corporate world, companies often restructure to align with their long-term goals and operational efficiency. One such significant move is the conversion of a public company into a private limited company. This change is not just about altering the company’s name, but a strategic decision that can reduce regulatory burdens, improve decision-making speed, and protect sensitive business information. In this article, we’ll cover the procedure for conversion of a public company into a private company, the legal steps involved, and why companies choose to go private.
Public or Private Company: Understanding the Difference
Before diving into the conversion process, it’s important to understand the difference between public corporations and private corporations.
Public Company
A public company is a company whose shares are offered to the general public. These shares are publicly traded on stock exchanges. Some features of a public company include:
- Unlimited shareholders: There is no upper limit on the number of shareholders.
- Public trading of shares: Shares can be bought and sold freely.
- High regulatory compliance: Public companies are bound by strict regulatory requirements, such as disclosing financials to the public.
Private Limited Company
In contrast, a private limited company restricts ownership to a smaller group and offers greater control over the business. Key features include:
- Limited shareholders: A minimum of two and a maximum of 200 shareholders.
- Restricted share transfer: Shareholders cannot transfer shares to the public without other members’ approval.
- Fewer regulatory requirements: Private companies face fewer compliance obligations compared to public companies.
Understanding the difference between public and private corporations is crucial for businesses evaluating whether to remain public or convert to a private limited structure.
Why Convert from Public to Private?
Companies convert from public to private for several strategic reasons:
- Less Regulatory Burden: Public companies face numerous compliance requirements, which can be costly and time-consuming. Private companies have more flexible rules.
- Improved Decision-Making: Private companies with fewer shareholders can make decisions faster.
- Enhanced Privacy: Public companies are required to disclose a significant amount of information to the public, while private companies can operate with more confidentiality.
- Greater Control: In a private company, existing shareholders have more control over who can own shares.
Legal Provisions for Conversion of Public to Private Company
The Companies Act, 2013 lays down several legal provisions that regulate the conversion process:
- Section 13: This section deals with the alteration of the Memorandum of Association (MoA). When converting from public to private, the company must amend its MoA to reflect the change.
- Section 14: The Articles of Association (AoA) must also be modified during the conversion process. This section governs the necessary changes to align the AoA with the private limited company’s operations.
- Section 18: This section covers the legal framework for converting registered companies, including the need to make changes to both the MoA and AoA.
Checklist for Conversion Process
To ensure a smooth conversion, companies must meet the following checklist:
- Change in Name Clause in MoA: The company’s name must be updated to include “Private Limited” to reflect the new status.
- Amendment of AoA: The Articles of Association must be revised to incorporate provisions specific to a private company.
- Financial Compliance: Ensure that the company is not in default on any filings required by the Registrar, including financial statements and annual returns.
- Debentures and Deposits: The company must not be in default on debentures, deposits, or any related interest payments.
- Creditor & Debenture Holder List: A detailed list of creditors and debenture holders must be prepared.
- Publication of Advertisement: An advertisement about the conversion must be published in local and English newspapers to notify the public and creditors.
Step-by-Step Procedure for Conversion of Public Company into Private Company
Here’s a detailed procedure for the conversion of a public company into a private company:
Step 1: Board Meeting
The process begins with a Board Meeting. The directors of the company must hold a meeting to:
- Approve the proposal to convert the company from public to private.
- Suggest amendments to the Memorandum of Association (MoA) and Articles of Association (AoA), which need to be aligned with the private limited structure.
The proposed changes are subject to shareholder approval in the next steps.
Step 2: General Meeting
The company must call a General Meeting of shareholders by issuing a notice at least 21 days before the meeting date. In this meeting:
- A special resolution must be passed, with at least 75% of the shareholders approving the conversion.
- Approval of the modifications to the MoA and AoA.
Step 3: Filing Form MGT-14
Once the resolution is passed, the company has 30 days to file Form MGT-14 with the Registrar of Companies (RoC). This filing includes:
- The special resolution.
- A copy of the amended MoA and AoA.
- The notice and minutes of the General Meeting.
Step 4: Application to the Regional Director (RD)
Next, the company must submit an application to the Regional Director (RD) using e-Form RD-1. This must be done within 60 days of passing the special resolution. The application includes:
- Copies of the updated MoA and AoA.
- The minutes of the Board Meeting and General Meeting.
- A list of creditors and debenture holders.
The company must also publish an advertisement in both local and English newspapers, notifying creditors about the conversion and inviting objections.
Step 5: Creditor & Debenture Holder List Submission
Along with the RD application, a detailed list of creditors and debenture holders must be submitted. If no objections arise from the creditors or the public, the RD proceeds with the application.
Step 6: RD Approval
If the RD finds the application satisfactory and there are no objections, the RD issues an order approving the conversion. If the application is incomplete, the RD may allow the company to resubmit the documents within 30 days, with up to two resubmissions allowed.
Step 7: Filing with the Registrar (Form INC-28)
Once the RD approves the conversion, the company must file the RD order with the RoC using Form INC-28 within 30 days of the approval. This filing officially completes the conversion process.
Benefits of Conversion
After converting into a private limited company, businesses can enjoy several benefits:
- Simplified Compliance: Private companies face fewer regulatory hurdles and less frequent filing requirements.
- Controlled Share Transfers: Share transfers are restricted, allowing shareholders to maintain control over ownership.
- Increased Privacy: Private companies don’t need to disclose as much information as public companies.
- Greater Financial Flexibility: Private companies can provide loans to directors without needing approval from the Central Government, offering more flexibility in managing finances.
How CorpZo Can Help in the Conversion Process
Converting a public company into a private limited company is a complex process that involves several legal and regulatory steps. This is where CorpZo can step in to simplify the process for you.
CorpZo specializes in offering end-to-end services for companies looking to convert their business structure. Here’s how CorpZo can assist:
- Expert Guidance: With years of experience, CorpZo provides expert advice on navigating the legal provisions, preparing the required documents, and ensuring timely submissions.
- Document Preparation: CorpZo handles the preparation and filing of essential documents like the MoA, AoA, and various forms required by the Registrar of Companies and Regional Director.
- Regulatory Compliance: CorpZo ensures that your company remains compliant with all legal and financial obligations during the conversion process, avoiding potential delays or legal hurdles.
- Time and Cost Efficiency: By outsourcing the process to CorpZo, companies can save time and reduce the costs associated with compliance and administrative work, allowing you to focus on your core business activities.
Whether it’s filing forms, drafting resolutions, or dealing with regulatory authorities, CorpZo’s team of experts is equipped to handle every aspect of the conversion process with efficiency and professionalism.
Conclusion
The conversion of a public company into a private limited company offers companies a range of benefits, from reducing regulatory burdens to gaining tighter control over decision-making and share ownership. The procedure for conversion of a public company into a private company follows a structured process involving Board and General Meetings, legal filings, and approval from the Regional Director. Understanding the difference between public corporations and private corporations can help businesses determine whether this move is right for them. For businesses aiming to simplify compliance and improve operational control, converting from a public company to a private limited company can be a game-changer.
