Under what circumstances a Private Company be converted into a Public company and a Public Company into a Private Company?
Ans. When can a Private Company Become Public Company?- A private company can get itself converted into a public company by amending its Articles by a special resolution in such a way that all the restrictions on it as a private company come to an end. It shall also send information of such conversion along with a copy of the Prospectus to the Registrar within a prescribed period. A pertinent question raised in the case of Ram Parshotam Mittal & Another v. M/s. Hillcrest Realty Sdn.-Bhd. & others etc., AIR 2009 S.C. was whether a private company becomes a public company immediately after a Resolution for conversion is passed or only after necessary alterations to this effect are recorded by the Registrar of Companies. In the instant case, the private company ‘HR’ passed three resolutions one after the other on 30th September, 2002 showing its intention to convert itself from a private company to a public company. The Court held that the company had become a public company with immediate effect without having to wait for any decision to be rendered by the Registrar of Companies who, in any event, had no authority to make any decision in that regard. The Court clarified that the very fact that FORM 23 was filed along with the Resolutions, coupled with the fact that a statement in lieu of Prospectus, which is required to be filed by a private company when it converts itself into a public company, was filed on behalf of I I illcrest Realty (HR) Company, was sufficient for the purpose of arriving at a prima facie conclusion that it had altered its status and become a public company even though the necessary alterations had not been effected in the records of the Registrar of Companies. Thus, the Court in this case ruled that it is not the records of the Registrar of Companies which determines the status of a Company because such records only reflect the status of the Company as per the information received from the Company in accordance of the provisions of the Act. In Needle Industries (India) Ltd. Vs. Needle Industries Newly (India) Holding Ltd. (1981) 3 SCC 333,416, the Supreme Court has held that by force the statutory provisions, “deemed public companies” havebecome companies of third category. Neither they are wholly public companies nor are they treated as private companies. First, such a company is permitted to retain the characteristics of a private company, which a public company cannot do, and therefore, the two can not be equated. Second, the membership of a public company cannot go below seven, whereas the membership of a deemed public company can be below seven. Third, a deemed public company cannot be incorporated directly as such. It has to begin as a private company. This shows that the legislature intended to create a third” category of companies which can retain the corporate shell of a private company and yet be subject to the discipline of public companies. Applying these principles to a deemed public Company the court held that the provisions of S.81 entitling shareholders to renounce their rights share in favor of their nominees cannot apply because such a company has to exercise control over membership. Conversion of a Public Limited Company into a Private Company A public company must adopt the following procedure for its conversion into a private company. First of all, it should convene a Board meeting and get the proposal for conversion approved by it. Thereafter, the company shall convene a general meeting and pass a special resolution for amending the articles to provide for the three restrictions as specified in the Companies Act, namely, (i) restriction on transfer of its shares, (ii) to limit its membership to fifty, and (iii) restriction on the company to float its shares and debentures to public. A copy of special resolution would be filed with the Registrar within thirty days along with Form 23 of the Companies (Central Government’s) General Rules and Forms. An application on Form 1-B has to be made within three months of the passing of the special resolution. Six copies of the amendments made in the articles must be forwarded to the stock exchanges with which the company is listed. On receipt of the application, the Government, i.e. the Registrar may require the company to publish a suitable notice in a newspaper and a cutting thereof be sent to the Registrar. Three copies of notice should also be sent to the Stock Exchanges. The company, on receipt of the approval of the Central Government, shall file a printed copy of the altered articles with the Registrar within one month of the date of receipt of the order of approval so as to get its certificate of incorporation amended by the Registrar. The company shall incorporate consequential changes in its name, memorandum and articles and also in all its bills, invoices, letter-heads, etc.