Conversion of Public Limited Company into Private Limited Company

Conversion of Public Limited Company into Private Limited Company
31 August 2020

Conversion of Public Limited Company into Private Limited Company

There are largely two types of Companies, One is a Private Limited Company and the other is Public Limited Company. Public Company is defined in S. 2 (68) of the Companies Act, 2013, and Private Company is defined Under S. 2 (69) of the Companies Act, 2013.  For our understanding, we can derive that Private Companies are those Companies whose articles of association restrict the transferability of shares and prevent the public at large for subscribing to them. This is the basic and important difference between a Private Company and a Public Company.  Private Companies can now have a minimum paid-up capital of any amount. Public Company means a Company that is not a Private Limited Company and has a minimum paid-up capital of five lakh rupees or such higher paid-up capital as may be prescribed.  

The Ministry of Corporate Affairs by its notification dated 18th December 2018 has amended the Companies (Incorporation) Rules, 2014 by making Companies (Incorporation) Fourth Amendment Rules, 2018. Rule 41 has been inserted in the said rules which provide for the regulations for making applications for conversion of a public limited company into a private limited company. Earlier the application for conversion was made with NCLT Benches having jurisdiction over companies and the same is a very time-consuming process. Thereby to free the tribunals with the cases of conversion, the power of approval of conversion has been transferred to the Central Government. Thereafter the Central Government has delegated his powers to Regional Director vide notification S.O. 6225 (E) dated 18th December 2018 for approval of the conversion of a public limited company into a private limited company.

As per Rule 41, the application for conversion is to be made to the Regional Director having jurisdiction over companies. Earlier the application for conversion was made with the National Company Law Tribunal and the process was gradual. Therefore to reduce the burden of NCLT and in order to expedite the process of conversion of a Public Company into a Private Company, MCA took this move. Now, the application is to be made to the Regional Director within sixty days from the date of passing of the special resolution in e-form RD-1.

Reasons for Conversion

The main and foremost reason for conversion from a public limited company to a private limited company is to avail the relaxation or exemptions provided to private companies by MCA vide notification dated 05th June 2015 and 13th June 2017.

Legal Provisions

The legal provisions related to conversion are given in section 14 of the Companies Act, 2013 read with rule 41 of Companies (Incorporation) Rules, 2014, as amended. As per section 14 of the Companies Act, 2013 a public company may convert itself into a private company by taking approval of members by way of passing a special resolution in the General Meeting and by taking the approval of the Central Government on an application made in such form and manner as may be prescribed.

Relevant Provisions
  1. Section 13: Alteration of Memorandum of Association
  2. Section 14: Alteration of Articles of Association
  3. Rule 41: Application under section 14 for the conversion of a public company into a private company.
Stepwise Procedure for the Conversion of Public Company into Private Company
  1. Convene a Board Meeting and pass the resolution for following agenda items with the requisite majority:
    1. Conversion of Company from “Public Limited “ to “Private Limited”;
    2. To Alter the Articles of Association of the Company by way of inclusion of restrictions and limitations which are required to be included in the articles of a private company;
    3. To Alter the Memorandum of Association of the Company for its name Change;
    4. To call an Extraordinary General Meeting and approve Notice and Explanatory Statement;
    5. To authorize professional for filing an application and appearing before the authorities;
  2. Dispatch the Notice of EGM to all Shareholders of the Company in accordance with the provisions of Section 101 of the Act read with Secretarial Standard – 2.
  3. Convene an EGM and pass the following resolutions as Special Resolution:
    1. Conversion of Company from “Public Limited “ to “Private Limited”;
    2. To Alter the Articles of Association of the Company by way of inclusion of restrictions and limitations which are required to be included in the articles of a private company;
    3. To Alter the Memorandum of Association of the Company for its name Change;
  4. File an E-Form MGT-14 within thirty days of passing the Special Resolution stated in the above clause.
  5. Give an advertisement in Form No. INC 25A, at least 21 days before filing an application, in a vernacular newspaper in the principal vernacular language in the district and in the English language in an English newspaper, widely circulated in the State in which the registered office of the company is situated;
  6. Prepare and finalize the application for conversion comprising under mentioned mandatory particulars:
    1. the details of the Board meeting at which the proposal for the alteration of Memorandum and Articles was approved;
    2. the details of the general meeting at which the proposed alteration was approved;
    3. reason for conversion into a private company;
    4. effect of such conversion on shareholders, creditors, debenture holders, deposit holders, and other related parties;
    5. details of any conversion made within the last five years and outcome thereof along with a copy of the order;
    6. details as to whether the company is registered under section 8;
    7. Details of Creditors, debenture holders up to the latest practicable date preceding the date of filing of application not later than 30 days.
  7. The List of Creditors and debenture holders shall be setting forth the following details, namely:-
    1. the names and address of every creditor and debenture holder of the company;
    2. the nature and respective amounts due to them in respect of debts, claims or liabilities;
    3. in respect of any contingent or unascertained debt, the value, so far as can be justly estimated of such debt;
  8. Take necessary steps for filing of E-Form RD-1. The following documents will be accompanied by E-Form RD-1:
    1. a copy of Memorandum of Association and Articles of Association, with proposed alterations;
    2. a copy of the minutes of the general meeting at which the special resolution authorizing such alteration was passed along with the details of votes cast in favor and or against with names of dissenters along with attendance sheet;
  9. If the No Objection received from any person in response to the advertisement or notice referred in clause 5 above and the application is complete in all respects, the same may be put up for orders without hearing and the concerned Regional Director shall pass an order approving the application within 30 days from the date of receipt of the application.
  10. If the Regional Director on examining the application finds it necessary to call for further information or finds such application to be defective or incomplete in any respect, he shall within 30 days from the date of receipt of the application, give intimation of such information called for or defects or incompleteness, on the last intimated e-mail address of the person or the Company, which has filed such application, directing the person or the company to furnish such information, to rectify defects or incompleteness and to re-submit such application within a period of fifteen days in e-Form No. RD-GNL-5;
    1. In cases where such further information called for has not been provided or the defects or incompleteness has not been rectified to the satisfaction of the Regional Director within the period allowed, the Regional Director shall reject the application with reasons within 30 days from the date of filing application or within 30 days from the date of the last re-submission made as the case may be.
  11. If no order for approval or re-submission or rejection has been explicitly made by the Regional Director within the stipulated period of 30 days, it shall be deemed that the application stands approved and an approval order shall be automatically issued to the applicant.
  12. If an objection has been received by Regional Director or any other person under the provisions of Act, the same shall be recorded in writing and the Regional Director shall hold a hearing or hearings within a period thirty days as required and direct the company to file an affidavit to record the consensus reached at the hearing, upon executing which, the Regional Director shall pass an order either approving or rejecting the application along with reasons within 30 days from the date of hearing, failing which it shall be deemed that application has been approved and approval order shall be automatically issued to the applicant.
  13. In the case where no consensus is received for conversion within 60 days of filing the application while hearing or otherwise, the Regional Director shall reject the application within the stipulated period of 60 days;
  14. The order conveyed by the Regional Director shall be filed by the company with the Registrar in Form No.lNC-28 within 15 days from the date of receipt of approval along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.]
Affidavit Verifying List of Creditors

As per the proviso to rule 41(3), the applicant company shall file an affidavit along with the application, signed by the company secretary of the company, if any, and not less than two directors of the company, one of whom shall be a managing director, where there is one, to the effect that they have made a full inquiry into the affairs of the company and, having done so, have formed an opinion that the list of creditors and debenture holders is correct, and that the estimated value as given in the list of the debts or claims payable on a contingency or not ascertained are proper estimates of the values of such debts and claims and that there are no other debts of, or claims against, the company to their knowledge.

Compliances to be made after Conversion of Public Company into Private Company
  1. Print the revised copies of MOA & AOA with a fresh name and Fresh Certificate of Incorporation;
  2. Make all requisite changes in the signboards, Letterheads, Books Rubber Stamps, Bill Books, Common Seal, visiting cards and other documents and items;
  3. Make the necessary changes in PAN, TAN, GST Portal, Bank Accounts, etc;
  4. Intimate about change to Banks, Income Tax Department, PF Department, ESI Department, and all other departments.
  5. Use the former name of the Company with a present name up to two years on every document of the Company.