A private limited company may either automatically become a public limited company or can be deliberately converted into a public limited company :
Conversion of a Private limited Company into a Public limited Company
Automatic conversion :
Automatic conversion of a private company into a public company takes place by operation of law in the following three cases:
(a) Conversion by default : Where a private company makes a default in complying with the essential statutory requirements as laid down infection 3(1)(iii) of the. 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 Court, 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 (Sec. 43).
(b) Where a private company becomes a ‘subsidiary’ of a public company, (For the meaning of ‘subsidiary company’, refer back in this chapter to the heading “Holding Company and Subsidiary Company.”)
(c) Where a private company becomes a ‘deemed to be public company’ by virtue of Section 43A. (For details of’ Section 43A, refer back in this chapter to the heading “Deemed to be Public Companies.”)
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 prescribed in the case of deliberate conversion. 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.
A private company may, at any time, pass a special resolution deleting from its articles the- three compulsory restrictions as to membership, transfer of shares and public subscription, and then from the date of alteration it becomes a public-company. Within 30 days of passing the resolution referred to above, a copy of special resolution, a copy of altered articles, together with a copy of ‘prospectus’ or a ‘statement in lieu of prospectus’ must be filed with the Registrar, The ‘prospectus’ filed must state the matters and set out the-reports specified in ‘Schedule H” of the Act. In case the company decides to file a ‘statement in lieu of prospectus’, it must be in the “form” and contain particulars set out in “Schedule -IV” to the Companies Act (Sec. 44).
Upon becoming a public company, the company will have to increase the number of its members to at least seven and -that of its directors to at least three, if already their number was fewer than the aforesaid statutory minimum required in that connection for a public company. Further the word ‘Private’ will be deleted from the name of the company.
Procedure. First of all a Board meeting shall be convened to finalize the plan of conversion and pass the necessary resolution. The secretary is then instructed to prepare a new set of Articles and to inform the members about the place and date of the extra-ordinary general meeting, both individually as well as through an announcement in the newspapers. Separate notices with the text of the resolutions to be passed at the meeting are sent by post to all the members of the company. On the appointed date general meeting will be held and the necessary resolutions will be passed.
Finally, a copy of special Resolution, a copy of altered articles, along with a copy of prospectus or statement in lieu of prospectus shall be filed with the Registrar together with the scheduled fees. The company becomes a public company from the date of passing the special resolution by the members to that effect at the extra-ordinary general meeting.
Conversion of a Public Company into a Private Company :
A public company may be converted into a private company without resorting to winding up of the company. For doing so, a special resolution will be passed to alter the articles so as to, suit- the requirements of a private company and a copy of the same shall be filed with the Registrar of Companies within 30 days of passing the resolution. After this, sanction of the Central Government must be obtained, for no alteration made in the articles which has the effect of converting a public company into a private company shall have effect unless such alteration has been approved by the Central Government [Proviso to Sec. 31 (1)]. If the government approves the changes in the articles of association the company becomes a private company from the date of the order of approval.
Within 30 days of the receipt of the approval from the Central Government, a copy of altered articles together with a copy of Government’s letter of approval must be filed with the Registrar [Sec. 31 (2A)]. After the conversion of the company from public to private it will have to (i) reduce fie number of its members in accordance with the legal requirements if the existing number is more than that, and (ii) add the word “private” in its name. So far as the procedure of convening a public company into a private company is concerned it will be almost similar to that discussed under the preceding heading.
It may be recalled that a private company which has become a ‘deemed to be public company’ by virtue of Section 43A also requires the approval of the Central Government for becoming a pure private company again [Sec. 43A (4)].