Conversion of a Private Company into a Public Company

A private company may become a public company in any of the following three modes: 1. Conversion by Default. 2. Conversion by Operation of Law or Private Company to be Deemed Public Company. 3. Conversion by Choice.

1. Conversion by Default:

Where a private company makes a default in complying with the statutory requirements as laid down in Sec. 3(1)(iii) of the Companies Act (i.e., if its membership exceeds fifty, it permits free transfer of shares, or invites public to subscribe to its shares or debentures), it becomes a public company automatically.

The Company Law Board, however, may relieve the company from being treated as a public company, on such terms and conditions as it thinks just and equitable, if it is of opinion that the default was due to inadvertence or accident or some other sufficient cause, on an application of the company or any interested person.

It is to be noted that a private company which becomes a public company automatically by virtue of the above provisions need not comply with any legal formality. Again, in spite of the conversion, such a company may retain the characteristics of a private company, i.e., it can have restrictions as to transfer of shares, membership and public subscription. It can continue to have only two members and two directors.

2. Conversion by Operation of Law or Private Company to be Deemed Public Company:

Section 43 A introduced by the Companies (Amendment) Act, 1960 added a new class of companies of “Deemed to be Public Company”.

Private companies are exempted from the operation of several sections of a Companies Act and enjoy certain privileges principally on the ground that they are family concerns in which the public is not directly interested.

It is, however, well known that there are many private companies with large capital doing extensive business and controlling a number of public companies. This is made possible because funds of other companies, public and private, are invested in such companies. As public money is invested in such companies, there is no reason for treating such companies as private companies.

The problem of private companies has always been somewhat difficult. On the one hand there are genuine private companies which are nothing but glorified partnership and on the other hand there are private companies whose operations, financial and industrial, are far wider than those of many public companies.

The Companies (Amendment) Act, 1960 added a new section 43-A with a view to deal with those private companies which employ public money to a large extent but escape the limitations and restrictions as to disclosure as apply to public companies.

The Companies (Amendment) Act of 1974 and 1988 have considerably enlarged the Section 43-A by inserting three new sub-sections-(1A), (1B) and (1C).

Section 43-A, as amended by the Companies (Amendment) Act, 1988 provided that a private company becomes a public company automatically under the following circumstances:

1. Section 43-A sub-section (1) provides that a private company would be deemed to be a public company where twenty-five percent or more of its paid-up share capital (whether preference or equity) is held by one or more public companies or private companies which had become public companies by virtue of Sec. 43- A.

In computing the above percentage, shares held by banking company shall not be taken into account in the following cases:

(а) Where the shares are held as a trustee of some trust, not being a case where shares are held as a trustee for the benefit of anybody corporate; or

(b) Where the shares are held as, or on behalf of, an executor or administrator of a deceased person to whom such shares belonged and the shares have not been bequeathed by ‘will’ to anybody corporate by the deceased.

2. Section 43-A sub-section (1A) provides that a private company having an average annual turnover of five crore rupees or more during the period of three consecutive financial years shall become a public company, on and from the expiry of a period of three months from the last day of the third financial year of the ‘relevant period’ during which the private company had the said average annual ‘turnover’.

The turnover of a company is defined as, “The aggregate value of the realisation made from sale, supply or distribution of goods or on account of services rendered, or both by the company during a financial year.”

3. Section 43-A sub-section (1B) provides that if a private company holds 25 per cent or more of the paid-up share capital (whether preference or equity) of a public company, then that private company shall become a public company, on and from the date on which the aforesaid percentage is first held by it.

4. Section 43-A sub-section (1C) provides that after the commencement of the Companies (Amendment) Act, 1988, if a private company accepts, after an invitation is made by an advertisement, or renews deposits from the public, other that its members, directors or their relatives, such private company shall on and from the date on which such acceptance or renewal, as the case may be, is first made after such commencement, become a public company.

As per clarification (vide Circular No. 3/89, dated 17.4.1989) issued by Department of Company Affairs, it is worth noting that a private company which had accepted, after an invitation made by advertisement, deposits from the public prior to the 15th June 1988, shall be deemed to have become a public company when any deposit so accepted is renewed, on and from the date of such renewal.

The term deposit, as used in Section 43-A has the same meaning as in Section 58-A.

A private company which has become a public company by virtue of Section 43-A shall continue to be a public company, until it has, with the approval of Central Government and in accordance with the provisions of the Companies Act, again become a private company [Sec. 43A(4)].

Information to Registrar:

Within three months from the date on which a private company becomes a public company, the fact should be notified to the Registrar of Companies, who shall thereupon delete the word ‘Private’ from its name and shall make over necessary alterations in its certificate of incorporation and memorandum of association.

If a company makes default in complying with this provision, the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 500 for every day during which the default continues.

3. Conversion by Choice:

A private company may deliberately choose to become a public company. If a private company deletes from its Articles of Association, the requirements of Section 3(1)(iii) by passing a special resolution, the company will cease to be a private company from the date of the alteration of Articles of Association.

When a private company chooses to become a public company it will have to comply with all the provisions of the Companies Act applicable to a public company. Within 30 days of its becoming a public company, it shall file with the Registrar a prospectus or a statement in lieu of prospectus and a printed or typewritten copy of the special resolution in accordance with Section 192.

Further the following requirements have also to be made if a private company chooses to become a public company:

1. If the number of members is less than seven, it must be raised to at least seven.

2. If the number of directors is less than three, it must be raised to at least three.

3. The word ‘private’ shall be deleted before the word ‘limited’ in its name.

The prospectus or statement in lieu of prospectus to be filed by a private company on its conversion into a public company must be according to the form and requirements of parts I to III of Schedule II and IV respectively. In case of default the company and every officer party thereto shall be liable to a fine to the extent of Rs. 500 per day.

On the conversion of a private company into a public company no new company springs into existence. Such conversion does not affect the legal personality of the company.