Conversion of Public Company into Private Company

A public company enjoys several advantages such as easier access to capital and wider public participation. However, public companies are also subject to extensive legal and regulatory compliances under the Companies Act, 2013. Due to increasing compliance burdens and operational restrictions, many companies prefer converting into private companies. The conversion process is governed by the Companies Act, 2013 and the Companies (Incorporation) Rules, 2014, and involves approval from shareholders, creditors, and the Regional Director.

Meaning of Conversion of Public Company into Private Company

Conversion of a public company into a private company means changing the legal status of a company from a public limited company to a private limited company by altering its Memorandum of Association (MOA) and Articles of Association (AOA).

After conversion, the company becomes subject to provisions applicable to private companies under the Companies Act, 2013. The company also gains several exemptions and relaxations available to private companies.

A private company under the Companies Act, 2013 generally has the following characteristics:

• Restriction on transfer of shares
• Limitation on the number of members to 200
• Prohibition on invitation to the public for subscription of securities

The conversion does not create a new legal entity. The company continues to exist with the same assets, liabilities, obligations, and legal proceedings.

Legal Provisions Governing Conversion

The conversion of a public company into a private company is governed mainly by the following provisions:

Section 13 of the Companies Act, 2013

Section 13 deals with alteration of the Memorandum of Association. Since conversion may require changes in the name clause and other clauses of the MOA, alteration under this section becomes necessary.

Section 14 of the Companies Act, 2013

Section 14 provides for alteration of Articles of Association. A public company can convert into a private company by passing a special resolution and altering its articles.

The conversion becomes effective only after approval of the Central Government.

Section 18 of the Companies Act, 2013

Section 18 allows a company registered under the Act to convert itself into another class of company by altering its MOA and AOA.

Rule 41 of the Companies (Incorporation) Rules, 2014

Rule 41 lays down the detailed procedure for conversion of a public company into a private company, including filing requirements, advertisements, notices, and approval process.

Role of Regional Director

Earlier, approval for conversion was granted by the National Company Law Tribunal (NCLT). Later, the powers of the Central Government for approval of conversion were delegated to the Regional Director through notification.

Therefore, applications for conversion are now filed before the Regional Director instead of NCLT. This change has simplified and expedited the conversion process to some extent.

Reasons for Conversion of Public Company into Private Company

Several companies choose conversion due to practical and commercial reasons. Some important reasons are discussed below.

• Lesser Compliance Burden: Public companies are subject to stricter compliance requirements regarding meetings, disclosures, governance, and filings. Private companies enjoy various exemptions and reduced procedural requirements.
• Greater Operational Flexibility: Private companies can make business decisions more quickly due to fewer regulatory restrictions and simpler management structure.
• Better Management Control: In a private company, promoters and existing shareholders can maintain better control over management and ownership.
• No Need for Public Funding: Many public companies do not require capital from the public market. In such cases, maintaining public company status may become unnecessary.
• Reduced Cost of Compliance: Compliance costs relating to audits, disclosures, meetings, and filings are comparatively lower in private companies.

Conditions and Eligibility for Conversion

Before initiating conversion, certain conditions should be satisfied.

• Number of Members: The number of members should not exceed 200 after conversion into a private company.
• Consent of Creditors: Creditors and debenture holders should not have objections to the proposed conversion.
• No Default in Repayment: The company should not have defaulted in repayment of deposits, debentures, or interest thereon.
• Pending Charges: Charges created on assets should either be satisfied or No Objection Certificate (NOC) should be obtained from charge holders.
• Statutory Filings: The company should be regular in filing statutory returns and forms with the Registrar of Companies.
• No Major Management Dispute: There should not be serious disputes among management or shareholders affecting the functioning of the company.
• No Pending Serious Non-Compliance: The company should avoid major pending prosecutions, inspections, inquiries, or investigations under the Companies Act, 2013.

Procedure for Conversion of Public Company into Private Company

The conversion procedure involves multiple stages and regulatory approvals.

Step 1: Convening Board Meeting

The first step is to convene a Board Meeting by issuing notice in accordance with Section 173 of the Companies Act, 2013 and Secretarial Standard-1.

The Board considers and approves the proposal for conversion.

The following matters are generally approved in the Board Meeting:

• Proposal for conversion into private company
• Alteration of MOA and AOA
• Approval of draft notice for Extraordinary General Meeting (EGM)
• Fixing date, time, and venue of EGM
• Authorisation to issue notice of EGM
• Authorisation to file necessary forms and applications

Step 2: Issue of Notice of General Meeting

Notice of the Extraordinary General Meeting should be sent at least 21 clear days before the meeting.

The notice should be sent to:

• Members
• Directors
• Auditors

The notice should contain:

• Agenda of the meeting
• Explanatory statement under Section 102
• Details regarding proposed conversion

Step 3: Holding Extraordinary General Meeting

The company conducts the EGM on the scheduled date.

Necessary quorum should be present. The company then passes a Special Resolution under Section 114(2) approving:

• Conversion from public company into private company
• Alteration of Articles of Association
• Alteration of Memorandum of Association wherever required

Where the company has more than 200 members, approval may be required through postal ballot.

Step 4: Filing Form MGT-14

After passing the Special Resolution, Form MGT-14 must be filed with the Registrar of Companies within 30 days.

Attachments to MGT-14

Important attachments generally include:

• Certified true copy of Special Resolution
• Notice of EGM
• Explanatory statement
• Minutes of EGM
• Attendance sheet
• Altered MOA
• Altered AOA
• Board Resolution

Filing of MGT-14 is important because its Service Request Number (SRN) is later used in subsequent filings.

Step 5: Publication of Advertisement

At least 21 days before filing application to the Regional Director, the company must publish advertisement in Form INC-25A.

The advertisement should be published:

• In a vernacular newspaper in the principal vernacular language of the district
• In an English newspaper widely circulated in the state where the registered office is situated

The purpose of advertisement is to inform stakeholders and invite objections, if any.

Step 6: Service of Notice to Stakeholders

The company must serve notice individually to:

• Creditors
• Debenture holders
• Registrar of Companies
• Regional Director
• Regulatory authorities, wherever applicable

The notice is generally sent through registered post with acknowledgement due.

Regulatory authorities may include:

• Income Tax Department
• GST authorities
• SEBI, if applicable
• Other sectoral regulators

Step 7: Preparation of Application to Regional Director

An application is prepared explaining the reasons and effect of conversion.

The application usually contains:

• Background of the company
• Reasons for conversion
• Details of Board and General Meetings
• Effect on shareholders and creditors
• Confirmation regarding compliance with legal requirements

Step 8: Filing Form GNL-1

Before filing RD-1, the company may file Form GNL-1 with the Registrar of Companies along with copy of the application and annexures.

The ROC examines the application and may submit comments or report to the Regional Director.

Step 9: Filing Form RD-1

The company files Form RD-1 with the Regional Director within 60 days from passing the Special Resolution.

This is one of the most important stages in the conversion process.

Attachments to RD-1

The application is accompanied by several documents and declarations, including:

• Petition or application
• Altered MOA and AOA
• Copy of Special Resolution
• Minutes of General Meeting
• Board Resolution authorising filing
• Newspaper advertisement in Form INC-25A
• List of creditors and debenture holders
• Affidavit verifying list of creditors
• Proof of service of notices
• Declaration regarding compliance with Sections 73 to 76A
• Declaration regarding compliance with Sections 177, 178, 185, 186, and 188
• Declaration regarding non-acceptance of deposits in violation of law
• Auditor’s certificate
• List of shareholders and directors
• Declaration regarding absence of pending inquiry, inspection, or investigation
• Proof of dispatch of notices to authorities and creditors

Where the company was previously listed, declaration regarding proper delisting in compliance with SEBI regulations is also required.

Step 10: Objections by Stakeholders

Any person whose interest may be affected can raise objections against the proposed conversion.

Objections may be filed by:

• Creditors
• Debenture holders
• Regulatory authorities
• Other affected persons

Where objections are received, the Regional Director provides opportunity of hearing to the concerned parties before passing order.

Step 11: Resubmission and Rectification

If the Regional Director finds defects or incomplete information in the application, directions may be issued for rectification.

The company is required to resubmit corrected documents within prescribed time.

Usually, only limited opportunities for resubmission are allowed.

Step 12: Approval by Regional Director

If the Regional Director is satisfied that:

• The application is complete
• Proper procedure has been followed
• No prejudice is caused to stakeholders

an order approving conversion is passed.

Where no objections are received and documents are complete, approval may be granted without hearing.

Step 13: Filing INC-27 and INC-28

After obtaining approval order, the company files:

• Form INC-27
• Form INC-28

with the Registrar of Companies within 15 days from receipt of order.

Attachments generally include:

• Copy of Regional Director’s order
• Altered MOA and AOA
• Minutes of EGM
• Special Resolution
• List of creditors

After verification, the Registrar issues a fresh Certificate of Incorporation reflecting conversion into a private company.

The conversion becomes effective from the date mentioned in the fresh Certificate of Incorporation.

Effect of Conversion of Public Company into Private Company

Conversion from public company into private company does not affect:

• Existing liabilities
• Contracts
• Legal proceedings
• Debts and obligations
• Rights of creditors

The company continues as the same legal entity with changed status.

Post-Conversion Compliances

After conversion, several practical and statutory changes are required.

Changes in Name and Stationery

The company must update:

• Name boards
• Letterheads
• Invoice books
• Rubber stamps
• Visiting cards
• Common seal, if any

Updating Government Records

Necessary changes should be made in:

• PAN
• TAN
• GST registration
• Bank records
• PF and ESI records

Intimation to Authorities

Relevant authorities, customers, vendors, and stakeholders should be informed about the conversion.

Printing of Revised MOA and AOA

Updated copies of MOA and AOA reflecting private company status should be maintained.

Conclusion

Conversion of a public company into a private company is a significant corporate restructuring process under the Companies Act, 2013. Companies generally prefer such conversion to reduce compliance burdens, achieve operational flexibility, and exercise greater managerial control. The process involves approval of shareholders, filing of statutory forms, publication of notices, and approval from the Regional Director. Since the procedure contains several legal and procedural requirements, careful compliance with statutory provisions and filing timelines becomes essential for successful conversion.