Conversion of a private company into a public company.

Conversion of a private company into a public company.

A Public company under the company act 2013 can offer its share to general public for subscription. In order to become a public company, the company need to offer its share to general public through IPO.

As per section 2(71), Companies act (amendment) Act 2015, a public company means a company which:

(a) is not a private company

(b) has a minimum paid up share capital, as may be prescribed;

(c) is a private company which is a subsidiary of a company which is not a private company.

A Private company cannot offer its share to general public, it is restricted. The share of private company is held by members or investors. According to section 2(68), as amended by the companies (amandment) Act, 2015, a “private company” means a company which has a minimum paid up share capital, as may be prescribed, and by its articles of association:

(a) restricts the rights of the members to transfer its shares;

(b) limits the number of its members to 200, excluding members who are or were in the employment of the company;

(c) prohibits any invitation to the public to subscribe for any securities of the company.

Conversion of a private company into a public company.

The conversion can be carried out in two ways:-

(1) conversion by default

(2) conversion by choice

1. Conversion by default – When a private company default in compliance with the statutory provision given under section 3(1)(iii) of the Act, i.e

(a) if its members exceeds 50,

(b) it permits free transfer of shares

(c) invites public to subscribe its shares or debentures or

(d) invites or accepts deposits from public

It becomes a public company automatically.

The company will cease to be private company and become public and will be no more entitled to privileges and exemptions conferred on private companies under company act.

In such case the Company Law Board may relive the company of the consequences of non-compliance of the provision of the Act, if it is of the opinion that the non-compliance was accidental or inadvertent.

The Company Law Board shall grant relief on such terms and conditions as it may think just and expedient (section 43).

It must be noted that in spite of conversion due to non-compliance of the said provision the article of association of the company may continue to retain the characteristics of the private company.

2. Conversion by Choice – Section 44 of the act lays down the method by which a private company can be converted to public. The procedures is as follows:

(i) It shall pass a special resolution to alter its articles so as to eliminate the provision relater to private company.

(ii) within 30 days, of passing of special resolution to alter the articles of the company eliminating private company provision

(a)a prospectus or a statement in lieu of a prospectus

(b)together with a copy of special resolution and (c)a copy of altered articles should be filed with the Registrar

(iii) The company shall increase the number of members to at least 7. And it must increase the number of its directors to 3.

(iv) The company have to increase its paidup capital to at least 5 lakhs.

(v) It shall delete the word “Private” from its name.

(vi) The company shall cease to be a private company from the date of the alteration.

The conversion of a private company into public and the consequent change of name would not affect the identity of the company.