Conversion of Public Company into a Private Company By CS Hitesh Jhamb


INTRODUCTION

Before the notification issued by the Ministry of Corporate Affairs dated December 18, 2018, to amend the Companies (Incorporation) Rules, 2014, NCLT was handling the cases of Conversion of Public Companies into Private Companies and it was a time-consuming process under NCLT Bench.
Due to plenty of Insolvency Cases, it was necessary to reduce some burden of NCLT so that the focus can be made on Insolvency cases for the speedy resolution.

Therefore, to reduce the Burden of NCLT, Government has taken following steps to shift the power of approval of the conversion of Public Companies into Private Companies:

1. The Companies (Amendment) Ordinance, 2018:

By inserting the second proviso to sub-section 1 of section 14 through Ordinance the Government has transferred the power of tribunal regarding approval of the conversion of public companies into private companies to the central government.

2. Companies (Incorporation) Fourth Amendment, Rules 2018:

MCA in December 18, 2018, by amendment inserted Rule 41 under Companies (Incorporation) Rules, 2014 for conversion of public Companies into Private Companies. 
By Rule 41 MCA has assigned its power to Regional Director for approval of the conversion of public companies into private companies.
 
WHY CONVERSION?

Through the Companies Act, 2013, the Compliances of Public Companies are increasing day by day, which has put a lot of restrictions on doing business. On the other hand, MCA has exempted the private companies from the compliances of various provisions of Companies Act, 2013 vide notification dated June 5, 2015, and June 13, 2017.

Keeping in view the relaxation given to Private Companies, a lot of public companies have converted into private companies and many are under process.
 
APPLICABLE PROVISIONS:

  1. Section 13: For alteration in Memorandum of Association of the Company
  1. Section 14: For alteration in Article of Association of the Company.
  1. Rule 41 of Companies (Incorporation) Rules, 2014 (inserted by Companies (Incorporation) Fourth Amendment Rules, 2018 on 18.12.2018): Approval of Regional Director for conversion of Public Companies into Private Companies.
E-FORMS INCLUDED:

  1. Form MGT 14: To file Special Resolution.
  2. Form RD-1: Application of Conversion
  3. Form RD-GNL-5: To file resubmissions
  4. Form INC-28: To file a copy of Order
PROCEDURE TO CONVERT PUBLIC COMPANY INTO PRIVATE COMPANY:

1. HOLD THE BOARD MEETING as per the provisions of Section 173, applicable Secretarial Standards and other applicable provisions of Companies Act, 2013:

  1. To discuss and approve the agenda of conversion and to recommend the same for the approval of Shareholders.
  2. To approve the alteration of Memorandum and Articles and to recommend the same for the approval of Shareholders.
  3. To fix the date, time and place of general meeting of Shareholder.
  4. To approve the draft notice along with Explanatory Statement of the general meeting and to authorize Company Secretary or any other person to issue the Notice of General Meeting as per provisions of Companies Act and Secretarial Standards.
2. ISSUE THE NOTICE OF GENERAL MEETING at least 21 clear days before the General Meeting.

3. HOLD GENERAL MEETING AND PASS THE SPECIAL RESOLUTIONS under Section 13 & 14 to:

  1. Approve the conversion of Public Company into Private Company
  2. Approve the Alteration of Memorandum of Company to comply with the provisions of Section 2 (68).
  3. Approve the Alteration of Articles of the Company to comply with the provisions of Section 2 (68).
4. File Form MGT-14 in compliance with the provisions of Section117 (3) within 30 days of the passing of Special Resolutions in the General Meeting and attach the following Documents with MGT-14.

Attachments of Form MGT-14:

  1. A certified true copy of the Resolution passed with Explanatory Statement.
  2. A Signed Copy of Notice of the General Meeting with all annexures
  3. Signed and Stamped Altered copy of Memorandum and Articles of the Company.
5. DRAFT AN APPLICATION for Conversion of Public Company into Private Company to be filed to Regional Director. Following Particulars shall be set out in the Application:

  1. The date of the Board meeting at which the proposal for alteration of Memorandum and Articles was approved;
  2. The date 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 the outcome thereof along with a copy of order;
6. At least TWENTY-ONE DAYS before the date of filing of the application advertise in Form No. INC-25A, 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.
 
7. At least TWENTY ONE DAYS before the date of filing of the application serve, by registered post with acknowledgement due, individual notice on each debenture holder and creditor of the company and a notice to the Regional Director and Registrar and to the regulatory body, if the company is regulated under any law for the time being in force.
 
8. File Form RD-1 within 60 days of the passing of Resolution with Regional Director along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 with following attachments:

Attachment of RD-1

  1. Signed Copy of Application
  2. A draft copy of Altered Memorandum of Association and Articles of Association.
  3. Copy of the MINUTES of the general meeting with details of votes cast in favour and or against with names of dissenters.
  4. Copy of Board resolution dated not earlier than THIRTY DAYS authorising to file application for such conversion
  5. Scanned, Signed and Stamped Copy of ADVERTISEMENTSas mentioned in Point No. 6.
  6. DECLARATION by KMP (If no KMP in the Company by any of the Directors) that:
    1. The company limits the number of its members to TWO HUNDRED.
    2. NO DEPOSIT has been accepted by the Company in violation of the Act and rules made thereunder.
    3. There has been NO NON-COMPLIANCE of sections 73 to 76A, 177, 178, 185, 186 and 188 of the Act and rules made thereunder.
    4. NO RESOLUTION is pending to be filed in terms of sub-section (3) of section 179 and
    5. The Company was never listed in any of the Regional Stock Exchanges and if was so listed, all necessary procedures were complied with in full for complete delisting of the shares in accordance with the applicable rules and regulations laid down by Securities Exchange Board of India.
Other Mandatory Attachments:

a. There shall be attached to the application, a LIST OF CREDITORS, DEBENTURE HOLDERS, of a date NOT MORE THAN 30 DAYS before the filing of Application with Regional Director, SETTING FORTH THE FOLLOWING DETAILS:

  1. Name and Address of every creditor and debenture holder.
  2. Nature and 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 or claim.
b. The Company shall file AN AFFIDAVIT, signed by the Company Secretary of the Company, if any, and not less than two directors of the company, one of whom shall be managing director, where there is one, to the effect that they have made a full inquiry into 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 contingency or not ascertained are proper estimates of the values of such debts and claims that there are no other debts, or claims against, the company to their knowledge

c. Proof of Serving the Notice to all Creditors, Debenture holders, Registrar, and other Regulatory Bodies.
 
9. If any objection is received from any person in response to the advertisement or notices mentioned above, the Company shall submit the copy of Objection with the Regional Director.
 
10. Where an objection is received the regional director will call the person who raised an objection and to the Company (any Representative on behalf of the Both) for hearing and after giving the proper opportunity to being heard, the regional director will take the decision.
 
11. Where 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 thirty days from the date of receipt of the application, give intimation of such information called for or defects or incompleteness, 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.
 
Provided that the maximum of two re-submissions shall be allowed.
 
12. 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 i.e. FIFTEEN DAYS, the Regional Director shall reject the application with reasons within thirty days from the last date up to which resubmission was required to be made or from the date of the last re-submission made as the case may be.
 
13. If No Objection is received or Objection received then after complying with the decision of Regional Director as given above in point 10, and the application is complete in all respects, the same may be put up for orders and the concerned Regional Director shall pass an order approving the application within thirty days from the date of receipt of the application or the date of last resubmission made, as the case may be.
 
14. Obtain certified copies of the order of Regional Director.
 
15. File E-form INC-28 with ROC within 30 days of confirmation of shifting by Regional Director along with certified copy of the order of Reginal Director.
 
IMPORTANT NOTE

VALIDITY OF INC-27 in respect of Conversion of Public Company into Private Company:

RULE 33 (2) of Companies (Incorporation) Rules, 2014 provides that a copy of the order of the Tribunal approving the alteration, shall be filled with the Registrar in Form No. INC -27 with fee together with the printed copy of altered articles within FIFTEEN DAYS from the date of receipt of the order from the Tribunal.

But since Companies (Incorporation) Fourth Amendment Rules, 2018 has been effective i.e. since December 18, 2018, the Tribunal i.e. NCLT has no power regarding approval of the conversion of Public Company into a private company, so there is no question of filing of order of Tribunal. HENCE E-FORM INC-27 is not required to be filed in respect of Conversion of Public Company into Private Company but the same is required to be filed in vice versa case.
 
POST CONVERSION STEPS:

  1. Use the copy of altered Memorandum and Articles of the Company.
  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 changes in PAN, TAN, GST Portal, Bank Accounts.
  4. Intimate the changes to Banks, Income Tax Department, PF Department, ESI Department and all other departments.
IMPORTANT NOTE:

USE “FORMALLY KNOWN AS _________________” FOR 2 YEARS ATLEAST ON EVERY DOCUMENT OF THE COMPANY WITH THE PRESENT NAME.
 
FORMAT OF SPECIAL RESOLUTION
 
SPECIAL BUSINESS:

1. CONVERSION OF COMPANY INTO PRIVATE LIMITED COMPANY:

To consider and, if thought fit, to pass, with or without modification(s), the following resolution as a Special Resolution:

“RESOLVED THAT pursuant to the provisions of section 13, 14 and any other applicable provisions of the Companies Act, 2013, if any and subject to the approval of the Regional Director__________ Region, (powers delegated to the Regional Director by Central Government vide Companies (Incorporation) Fourth Amendment Rules, 2018) the consent of the shareholders of the Company be and is hereby given to convert the Company from 'Public Limited' to 'Private Limited' and consequently the name of the company be changed from “____________ LIMITED” to “_____________- PRIVATE LIMITED” by inserting the word 'Private' before the word 'Limited'.
 
RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, the Board of Directors of the Company be and is hereby authorized to execute all such documents, instruments and writings as may be required and to take all such steps and actions and give such directions as may in its absolute discretion deem necessary and to settle any question that may arise in this regard.
 
RESOLVED FURTHER THAT any of the Directors be and are hereby severally authorized to do all such acts, deeds, and things as may be necessary or expedient to give effect to this resolution.”
 
2. ALTERATION OF NAME CLAUSE CONTAINED IN THE MEMORANDUM OF ASSOCIATION:
To consider and, if thought fit, to pass, with or without modification(s), the following resolution as a Special Resolution:
 
“RESOLVED THAT pursuant to the provisions of Section 13 and any other applicable provisions of the Companies Act, 2013 (including any amendment thereto or re-enactment thereof) and the rules framed thereunder the consent of the Members be and is hereby accorded for substituting Clause I of the Memorandum of Association of the Company with the following clause:
 
“The Name of the Company is __________ PRIVATE LIMITED.”
 
3. ADOPTION OF NEW SET OF ARTICLES OF ASSOCIATION OF THE COMPANY PURSUANT TO THE COMPANIES ACT, 2013 AND CONVERSION TO A PRIVATE LIMITED COMPANY:
To consider and, if thought fit, to pass, with or without modification(s), the following resolution as a Special Resolution:
 
“RESOLVED THAT pursuant to the provisions of Section 14 and other applicable provisions, if any, of the Companies Act, 2013 (“the Act”) read with Companies (Incorporation) Rules, 2014, including any statutory modifications or re-enactment thereof from time to time, the Articles of Association of the Company be and is hereby altered to be in conformity with the provisions of the Act relating to a private limited company and thereby inserting the restrictive clause as per Section 2(68) of the Act.
 
RESOLVED FURTHER THAT the new set of Articles of Association pursuant to the Act primarily based on the Form of Table F of Schedule I under the Act, be and is hereby approved and adopted as a new set of Articles of Association in the place of existing Articles of Association of the Company.
 
RESOLVED FURTHER THAT any of the Directors be and are hereby severally authorised to do all such acts, deeds, and things as may be necessary or expedient to give effect to this resolution.”
 
 
For and on behalf of the Board
_______________ Limited
 
 
_________________
Director
DIN:_________
 
Place:___________
Date: __________, 201
 
FORMAT OF EXPLANATORY STATEMENT U/S 102 OF THE COMPANIES ACT, 2013
 
ITEM 1:

As the members are aware that the Company was originally incorporated on _________ as a public limited company. The Board of directors considered that since there is no involvement of the public in the shareholding or management of the Company, it would be appropriate to convert the Company into the Private Limited Company to avoid unnecessary formalities and to obtain privileges which are available to the Private Limited Companies under the Companies Act, 2013 which would help the management to carry out its affairs efficiently & economically.
 
As per the provisions of the Companies Act, 2013, the consent of the members by way of special resolution is required for conversion of the Company to a private limited company.
 
The Members are requested to note that the amendment is subject to the approval granted by the Registrar of Companies, ___________, Ministry of Corporate Affairs and such other regulatory authorities, as may be required.
 
Directors and their relatives are concerned or interested in the said resolution only in their capacity as a member of the Company.
 
ITEM 2:
 
The conversion of the Company to a private limited company will result in amending the name clause of the Memorandum of the Company since the name of the Company will change from “_________ LIMITED” to “___________ PRIVATE LIMITED”.
 
In terms of Section 13 of the Companies Act, 2013, the consent of the members by way of special resolution is required for amendment of the Memorandum of Association of the Company. The Board has approved the amendment at its meeting held on ________, 201__.
 
 
The Members are requested to note that the amendment is subject to the approval granted by the Registrar of Companies, __________, Ministry of Corporate Affairs and such other regulatory authorities, as may be required.
 
Directors and their relatives are concerned or interested in the said resolution only in their capacity as a member of the Company.
 
ITEM 3:
 
The Company was incorporated under the provisions of The Companies Act, 1956 and deemed to exist within the purview of The Companies Act, 2013. Hence the existing Articles of Association (AOA) were based on the Companies Act, 1956 and several clauses/regulations in the existing AOA contain references to specific sections of The Companies Act, 1956 which are no longer in force.
 
With the coming into force of The Companies Act, 2013, several regulations of the existing AOA of the Company require alteration or deletions at several places. Also, as it is proposed to convert the Company into a Private Limited Company, it is considered expedient to adopt new set of Articles of Association (primarily based on Table F set out under the Companies Act, 2013), in place of existing Articles of Association of the Company instead of amending the Articles of Association by alteration/incorporation of provisions of the Companies Act, 2013 applicable to a private limited company.
 
In terms of section 5 and 14 of the Companies Act, 2013, the consent of the members by way of special resolution is required for adoption of a new set of Articles of Association of the Company.
 
The Members are requested to note that the amendment is subject to the approval granted by the Registrar of Companies, __________, Ministry of Corporate Affairs and such other regulatory authorities, as may be required.
 
Directors and their relatives are concerned or interested in the said resolution only in their capacity as a member of the Company.
 
For and on behalf of the Board
___________ Limited
 
 
__________________
Director
DIN: ______
 
Place: _____
Date: -_______, 201

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