Conversion of Private Company into Public Company

Conversion of Private Company into Public Company

Are you also thinking of taking your private company into a public company or you are confused that whether you should convert your private limited company into a public limited company? Well, this is a big decision. So, it should be followed by long-term strategic objectives, growth opportunities, value creation, etc.  One needs to do thorough homework to clearly understand the impact of conversion of the status of the company.

We will help you to take a better decision by highlighting the difference between a Private Company and a Public Company and the pros and cons of a Public Limited Comes. Also, we will inform you about the procedure of conversion and statutory requirements so that you can take a well-planned decision.

1. Public Company Vs Private Company

BasisPrivate CompanyPublic Company
DefinitionStatutorily, a company having a minimum paid-up share capital and restricts the right to transfer shares, and limits the number of its members to 200 by its articles of association is a private company under section 2(62) of the Companies Act, 2013.A company which is not a private company is a public company.
Number of shareholders/ MembersMinimum number of members are 2 and maximum are 200.Minimum number of members are 7 and maximum are unlimited.
Number of directorsMinimum number of directors are 2 and maximum are 15.Minimum number of directors are 3 and maximum are 15.
Invitation to PublicA private company cannot invite the public to take its shares.A public company has the option to offer shares to the Public at large through the listing. However, the listing is not mandatory for Public Limited Companies.
Transfer of sharesThe shares of a private company are not freely transferableA public company can freely transfer its shares.
Managerial remuneration limitNo limitManagerial remuneration cannot exceed 11% of total net profits.
Disclosure of the financial reportThere is no requirement of presentation of financial statements and annual reports to the public. However, a Private Company is required to file its financial statements with RoC on an annual basisA public company is bound to present its financial statements and annual report to shareholders and publish the same on its website.

2. Advantages of a public company

While a public company has a large investor base with more market visibility and credibility, it has its own advantages. Some of them are:

a. Access to more fundraising options

On-going public, various opportunities for growth and business expansion open up with a wide range of sources of capital viz. raising money by issuing shares, fixed deposits, and debentures to the public. The funds can be used in acquisitions, research, and development, retiring existing debts, and expanding business in new markets.

b. Transfer of shares allowed

With ease, shareholders of public companies can transfer shares to another person whenever they want to benefit from the liquidity and this lures people to invest in the company.

c. Limited liability of shareholders

A company is different from its shareholders and thus, the liability of shareholders remains separate from the company and thus, the liability of shareholders is limited to the extent of their shareholding only.

d. Increase in employee motivation

A public company can adopt stock-based compensation strategy i.e. inclusion of ESOP in salary structure for attracting key persons of the company.

e. Greater visibility

More diverse investor base in a public company creates greater public awareness of your products and services. Also, disclosing audited financial statements, furnishing it to the Registrar, and holding shareholders’ meetings enhance the credibility and visibility of the company.

3.   Procedure of conversion of private company into a public company

Company is required to follow the following procedure to convert into a public limited company:

a. Conveying a Board Meeting

  • The very first step in the conversion of a Public Limited Company is to convey a Board Meeting.
  • Notice for Board Meeting should be given least 7 days from date of the board meeting to discuss the following agenda:
    • Fix the date on which Extra-Ordinary General Meeting is to be held
    • Pass resolution of conversion of Private Company to Public Company
    • Approve amendments in the Memorandum of Association and Article of Association. Changes are generally made in the Name Clause of the Memorandum of Association, the number of Director’s related clauses in the Article of Association.

b. Convey Extraordinary General Meeting

  • The Board shall convey the extraordinary General Meeting to approve the conversion of the company.
  • Prepare a draft memorandum and articles of association with all relevant clauses applicable to a public company and present the same before the shareholders’ for approval.
  • The Company shall give notice of clear 21 days for EGM to all shareholders, auditors, directors, and others who are entitled to receive the notice.
  • Shareholders shall pass a special resolution for the conversion of a private company into a public company and for the alteration of MOA and AOA.

c. File Form INC-27 with Registrar of Company:

  • The Company shall file Form INC-27 with the Registrar of the Company within 15 days from the date of holding an extraordinary general meeting.
  • The following documents are required to be attached to Form INC-27:
    • Minutes of the member’s meeting where approval was given for conversion and altered articles of association
    • Certified copy of the resolution
    • Altered MOA and AOA
    • order of competent authority in case of conversion from a public company to a private company
    • certified copy of the order for condonation of delay in case it is filed after the due date of filing; 

d. File Form MGT-14 with RoC:

  • Form MGT-14 is used to file resolutions and agreements with the Registrar of the Company.
  • The Company shall file Form MGT-14 with the Registrar informing about alterations in memorandum and articles of association within a period of 30 days of passing the special resolution

e. Approval of Conversion by RoC

  • Upon receipt of documents, the Registrar verifies all the documents submitted by the company for conversion status from private to public.
  • Once the documents are found to be correct and proper, the Registrar will issue a new certificate of incorporation to a public company.

4. Post-conversion compliances for new public company

Once a private company gets converted into a public company, it has to complete a few formalities immediately. Post-conversion compliances to be completed by the public company are:

  1. Changing the suffix from ‘Private Limited’ to ‘Limited’. For example, a private company with the name ‘Gauge Private Limited’ will change its name to ‘Gauge Limited upon being transformed into a public company.
  2. Print new letterheads, business letters, invoices, faxes, and all relevant documents and stationery having the name of the company with the new name.
  3. Intimate the change of status to all concerned authorities such as Income Tax, Goods and Service Tax, Import & Export, customs, etc.
  4. Intimate the change of status to related parties, vendors, etc.
  5. Print new copy of the memorandum of association and articles of association.
  6. A fresh certificate of incorporation should be kept in your office.
  7. Paint the new name of the company in the office building.
  8. Inform banks with which the account is maintained and relevant changes should have been applied to be made with the submission of relevant documents.
  9. Utility service providers, insurers, and all relevant departments should be informed and the name should be updated.
  10. Most importantly, decide about the listing of a public company on the stock exchange where it wants to be listed and complete all the formalities in consultation with the company secretary.
  11. If your public company intends to offer its shares to the public by means of an initial public offer (IPO), then the company needs to plan, prepare and execute its IPO within the prescribed time limit.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Related Post
Loans or Deposits from Members or Shareholders | Companies Act, 2013- Part-2
CA. Kavit Vijay

Loans or Deposits from Members or Shareholders | Companies Act, 2013- Part-2

Apart from Loans from Banks and NBFCs, companies do have options to borrow funds from shareholders or members. However, since funds are involved of the shareholders, therefore, company law contains detailed provisions related to loans and deposits from Member or shareholders. Companies are required to follow detailed procedure to obtain deposits and also are required to repay the same within committed time.

Read More »
Loans or Deposits from Members or shareholders| Companies Act, 2013- Part-1
CA. Kavit Vijay

Loans or Deposits from Members or Shareholders | Companies Act, 2013- Part-1

Companies are always in need of funds and it keeps on looking for various sources of funds such as share capital, Loans from banks or Financial institutions, loans from other persons etc. Issuance of shares involves a lot of compliances and it compromises shareholding as well. Similarly, loans from banks and NBFC is subject to detailed compliances, availability of mortgage or security and timely payment of interest and principal amount. Therefore, companies prefer acceptance of loans from other persons.

Read More »

V J M & Associates LLP

Contact Us