Once in a while we hear that a company has changed its class from a public limited company to a private limited company, wondering about the reasons behind such conversion, its modalities and the provisions that come into play in this transition from one class to another.
Reasons
More often than not, the core reason for contemplating conversion by a company of its class from public limited to private limited is to attain and achieve operational decision making flexibility. A public limited company, although it has wide market presence and a wider reach for investments and fundraising, is also obligated to comply with rules and regulations that are much stricter in nature compared to the rules and regulations that typically apply to a private limited company. A stricter compliance/disclosure requirement under the provisions of the Companies Act, 2013 (the “Act”) and, in the case of listed entities, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, is usually viewed as taking away the operational and decision making flexibility of a company for the greater intermesh of statutory and procedural compliances. Whether this actually curtails or aids prudent decision making is a topic best left for another day.
On the other hand, a private limited company, while it may have limited access to public monies and wider market reach, inherently has greater operational flexibility, less strict compliance and also enjoys dispensations/benefits and privileges (such as Sections 2(76)(viii), 67, 67(2), 180, 185, etc. of the Act) available to a private limited company under the Act.
Statutory Provisions
Now, to understand the modalities involved in such conversion, it is relevant to look into the various provisions of the Act applicable to conversion by a company of its class from unlisted public limited to a private limited.
In accordance with Section 18(1) and other relevant provisions of the Act, a company of any class registered under the Act may convert itself as a company of another class by alteration of its memorandum of association and articles of association in accordance with the provisions specified in the Act and in compliance with the rules prescribed thereunder.
While Section 18(1) of the Act provides the right to a company for changing/converting its class from one to another, Section 13 and Section 14 of the Act provide for alteration of the memorandum of association and articles of association of a company respectively (which is a precursor to undertaking such conversion) by passing a board resolution and, subsequently, adopting/concurring with the same by passing a special resolution.
Further, to bring into effect the conversion of company from one class to another, approval from the Central Government is mandatorily required including the events where a company changes its name, register address from one state to another. However, proviso to Section 13(2) of the Act provides exception to obtaining approval of Central Government in case where conversion of company from one class to results only in change of name of a company by addition or deletion of word ‘Private’ from therefrom. Owing to the fact that a company contemplating conversion of its class from public limited to private limited by addition of word ‘Private’ in the name of a company, hence, approval from the Central Government will not be necessary and such conversion could take effect without obtaining an approval from the Central Government.
Further, for giving effect to the conversion of class from one to another, an unlisted public company apart from the modalities provided hereinbelow, has to limit the number of its members to 200. While for listed public company this modality stretches to further extent such a delisting of shares, limiting the number of members to 200 etc., which is a topic best left for another day.
Modalities Involved in Conversion of Class of a Company
Convening Meeting of Board of Directors of a Company
For giving effect to the conversion of class of a company, a company should hold a meeting of board of directors to consider the reason for changing the name of a company and should pass the necessary resolutions including approval of the proposal for alteration of memorandum of association and articles of association of a company to the extent required for the purpose of such conversion.
Convening Meeting of Shareholders of a Company
Pursuant to passing the board resolution, a company should hold a meeting of its shareholders and pass the necessary special resolution under Section 13(1) of the Act for the purpose of giving effect the conversion of its class and carry out change in name clause of the memorandum of association and required alteration in the articles of association of a company.
After passing the special resolution, a company should file a certified copy of the special resolution with the Registrar in e-Form MGT-14 under Section 117 of the Act along with the necessary attachments as mentioned therein within 30 (thirty) days of passing the special resolution.
Advertisement and Notice
After passing the required resolutions, a company, at least 21 (twenty-one) days prior to filing the application with the Regional Director, should advertise in Form No. INC 25A, in the newspapers widely circulated in vernacular language and in English language, serve individual notice (by registered post with acknowledgement due) to each debenture holder and creditor of a company and serve notice (by registered post with acknowledgement due) to the Regional Director and the Registrar for the purpose of bringing into the notice of everyone associated with a company.
Application for Conversion of a Company from Public Limited to Private Limited
After advertising the contemplated conversion within the given timeline next milestone for a company is to apply, within 60 (sixty) days of passing the special resolution, with the Regional Director in e-Form No. RD-I along with the relevant fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 and, inter alia, a draft copy of memorandum of association and articles of association with proposed alteration including the alteration pursuant to Section 2(68) of the Act (as may be applicable), copy of minutes of general meeting at which special resolution was passed, a copy of board resolution etc. for the purpose of obtaining approval from the Regional Director on the contemplated conversion of its class from public limited to private limited.
Further, a company, along with the application filed with the Regional Director, should also attach or provide in the application such declaration, information (including but not limited to the list of debenture holders, creditors etc.) as stipulated in Rule 41 of the Companies (Incorporation) Rule, 2014.
Approval of Application filed under e-Form No. RD-I
In the event no objection has been received in response to the advertisement made or notice served by a company and upon the application being complete in all respects (subject to any intimation of defect and/or incompleteness of application that has been received by a company from Regional Director and initiation of re-submission or rectification process), the Regional Director will pass an order approving the application within 30 (thirty) days from the date of receipt of application.
Where an objection is received pursuant to an advertisement made or notice served and/or upon examination of any specific observation provided by the Regional Director pursuant to the provisions of the Act, the Regional Director will hold a hearing within a period of 30 (thirty) days. Subsequent to which, a company should file an affidavit to record the consensus reached at the hearing and the Regional Director will pass an order either approving or rejecting the application. In the event no consensus is reached, the Regional Director may approve such conversion upon being satisfied that the conversion would not be against the interests of a company or the same is not being done with an objective to avoid compliance under the provisions of the Act.
Application to Registrar
As a final milestone in the process/modalities of conversion of a company from public limited to private limited, a company, within 15 (fifteen) days from the date of receipt of the order/approval from the Regional Director, should file an application in Form No. INC 27 with the Registrar along with applicable fee (as stipulated under the Companies (Registration Offices and Fees) Rule, 2014), the altered e-memorandum of association and articles of association of a company. Pursuant to which a new certificate of incorporation will be issued to a company reflecting the change in name from public limited to private limited.
