Sunday, May 11, 2014

Conversion of Private Company into Public Company or Vice Versa

Conversion of Private Company into Public Company

There are three ways through which the conversion of a private company into a public company takes places.
1.       Conversion by default
2.       Conversion by operation of law
3.       Conversion by choice
1.       Conversion by default:-
(i)      According to section 43, if a default is made in complying the statutory requirement as laid down in Section 3(i)(iii) of the act, a private company gets converted into a public company automatically (that is if it permits free transferability of shares, if its membership exceeds 50 or when it extends invitation to the public to subscribe to shares or debentures or to make deposits.)
(ii)    As a result of this the private company will not be able to enjoy the privileges and exemptions conferred on it and the provisions of the companies Act shall apply to it as if it were a public company.
(iii)   Further, if the company wants to remain a private company, than it should apply to the Company Law Board for relief.

(iv)  However, the CLB on being satisfied, that the failure to comply with the condition was accidental or due to inadvertence or to some other reason, it may grant relief from such consequences, as aforesaid.
(v)    The relief may be granted on grounds, which the CLB feels just and equitable.
2.       Conversion by the operation of Law: There are four circumstances mentioned in section 43A which would force a private company to become a public company. They are –
(i)      Where 25% or more its paid-up share capital is held by one or more bodies corporate or public company.
(ii)    Where the average annual turnover is not less than 25 crores for three consecutive financial years.
(iii)   Where a private company holds out not less than 25% of the paid-up share capital of a public company.
(iv)  Where the private company accepts by invitation or renews deposits from the public, other than from its members or directors and their relatives, than the private company will become a public company, the day it accepts the deposits.
3.       Conversion by choice: A private company may be its own choice becomes a public company. The steps necessary for this purpose are as follows:
(i)      Special Resolution:  A private company desiring to become public company must pass a special resolution, deleting from its articles the requirement of section 3(i)(iii). A copy of resolution so passed must be filed with the Registrar of companies within 30 days.
(ii)    Increase in number of directors (section 252): If the numbers of directors are less than three, it should be raised to three.
(iii)   Increase in membership (section 12): If the numbers of member is less than 7, it should be raised to 7.
(iv)  Raising of paid up capital to the minimum, prescribed for public companies that is Rs. 5 Lakhs
(v)    According to section 44(1)(b), a prospectus or statement in lieu of prospectus in the prescribed form (schedule IV) must be filed with the registrar with 30 days from the passing of the special Resolution.
(vi)  Every prospectus files under sub-section (1) should state the matter specified in part I or schedule II, and sets out the reports specified in part II of that schedule [section 44(2)(a)]
(vii) The statement in lieu of prospectus filed, should be in the form and contain particular set out in Schedule IV [section 44(2)(b)]
(viii)            If the company and every officer of the company makes a default, than they shall be punishable with a fine, which may extend to Rs. 5000 for every day during which the default continues.

(ix)  If any untrue statement is filed in the prospectus or statement in lieu of prospectus, than the person authorized shall be punishable with fine or Rs. 50,000 with imprisonment upto 2 years or both.

Conversion of Public Company into Private Company
The Company Act does not allow a Public Company to turn itself into a private company, but it neither prohibits such conversion. The conversion can take place in following ways:-
1.       A Public company can be converted into a private company by altering the articles, incorporating the three restrictions, mentioned in section 3(i)(iii).
2.       Approval of the central government is necessary for converting a Public company into a private company.
3.       Special resolution is to be passed within 30 days, after obtaining the approval of the Central Government for conversion.

4.       The word private Ltd. is used. The conversion of a public company into a private company does not affect the identity of the company.