Converting a Public Limited Company into a Private Limited Company
Riteek Baheti
Associate Member, Institute of Company Secretaries of India (ICSI) LL.B.
Proprietor, Riteek Baheti & Associates
(Kolkata-based Practicing Firm)
Registered Valuer, Insolvency and Bankruptcy Board of India (IBBI)
(Security or Financial Assets Valuation Specialist)
In the dynamic world of corporate structuring, companies frequently find it necessary to realign their organizational form to suit strategic intentions, regulatory ease, and operational flexibility. One such significant transformation is the conversion of a public limited company into a private limited company. This conversion involves altering the company’s legal status, thereby changing its compliance framework, shareholder base, and approach to capital funding. While public companies enjoy wider access to capital markets and greater visibility, private companies benefit from fewer regulatory requirements, greater control, and increased operational autonomy.
Why Convert a Public Company into a Private Company?
Several reasons may motivate a public company to convert into a private one.
- Reduced Regulatory Burden
Public companies in India are subject to strict compliance under SEBI, the Companies Act, and listing regulations. Converting into a private company significantly reduces these compliance obligations.
- Cost-Effectiveness
Operating a public company can be burdensome due to ongoing exposure conditions, inspection costs, listing fees, and legal formalities. Private companies can operate more cost-effectively.
- Operational Flexibility
Private companies can make faster decisions due to a close-knit shareholder structure, whereas public companies frequently benefit from a wide base of investors.
- Strategic Reorganization
If the promoters want to regain control, avoid market volatility, or restructure the business for long-term growth without being subject to public scrutiny, privatization becomes a feasible option.
- Delisting from the Stock Exchange
Some companies, after assessing their performance and shareholding patterns, may decide that remaining listed is no longer profitable.
Legal Framework and Governing Laws
The process of converting a public limited company into a private limited company in India is governed by
- The Companies Act, 2013
- Companies (Incorporation) Rules, 2014
- The Securities and Exchange Board of India (SEBI) regulations (in case the company is listed)
A public limited company cannot automatically become a private company. It requires approval from its shareholders, regulatory authorities, and, occasionally, creditors.
Step-by-Step Procedure for Conversion
- Board Meeting and Resolution
- The process begins with convening a board meeting for approval of the conversion of a public company into a private company, subject to the approval of the members and the regional director, and authorisation to issue a notice for an Extraordinary General Meeting (EGM).
- Fix the date and time for the EGM
- Special Resolution in General Meeting
A special resolution must be passed in the EGM with the approval of at least 75% of the shareholders for converting the company into a private limited company. The resolution should also include amendments in the Memorandum of Association (MoA) and Articles of Association (AoA) reflecting the new status.
- Revision of Articles and Memoranda
The AoA should be amended to incorporate restrictions specific to private companies
- Restriction on the right to transfer shares
- Limiting the number of members to 200
- Prohibition on inviting the public to subscribe to securities
- Form of MGT-14
Within 30 days of passing the special resolution, the company must file Form MGT-14 with the Registrar of Companies (RoC) along with the following:
- Certified copy of the special resolution
- Explanatory statement
- Altered MoA and AoA
- Newspaper publication
At least 21 days before the date of applying Form RD-1 (i.e., the gap between the filing of the application and the newspaper advertisement should be a minimum of 21 days), do the following:
Advertise in Form INC-25A, in English and the regional language of the state in which the registered office of the Company is situated;
Dispatch an individual notice to each creditor.
The Registrar of Companies (ROC) dispatches a notice to the Regional Director (RD) and any other regulatory authority, such as RBI, IRDAI, etc., in case applicable.
- Application to Regional Director
Form RD-1 must be filed with the Regional Director (RD), along with
- Board and shareholder resolutions
- Altered MoA and AoA
- List of creditors and debenture holders
- A declaration from the directors that no inquiry or examination is pending
- Affidavit verifying the list of creditors.
- Affidavit verifying the petition
- Auditors Certificate
- Approval from the Regional Director
The RD may direct the company to serve notices to creditors and/or publish a public notice inviting objections. However, if they’re resolved, the RD will issue an order approving the conversion if no objections are raised.
- Filing with the Registrar of Companies
Once the order from RD is attained, the company must file Form INC-28 along with the RD’s order and also Form INC-27 for final approval of the conversion.
- Allocation of Fresh Certificate of Incorporation
After successful form and verification, the RoC issues a fresh certificate of incorporation indicating the change in company status from public to private.
Crucial Points to Remember
- Conversion isn’t allowed if the company has listed securities, unless excluded as per SEBI norms.
- The rights of creditors and minority shareholders must be defended during the process.
- The company must ensure all pending periodic forms and statutory returns are completed before initiating the conversion.
Conclusion
Converting a public limited company into a private limited company is a strategic decision that can help businesses realign their structure to more suit long-term aspirations. Though the process is procedural and involves multiple approvals, the benefits of operational efficiency, reduced compliance costs, and enhanced promoter control make it a seductive option for numerous companies. With careful planning and professional guidance, the transition can be smooth, laying the foundation for renewed growth and long-term strategic direction.
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