Switching from a public company to a private company in India is a strategic move that lets businesses reduce administrative overhead, increase operational flexibility, and reclaim capital from unnecessary decision-makers. Regulated by the Companies Act, 2013, and SEBI regulations, it has legal, financial, and procedural aspects.
Public to Private Company Conversion
A public company under the Companies Act, 2013 and SEBI regulations is a company that is either a listed company on a stock exchange or a company having not less than 200 members (shareholders), who are not qualified to be regarded as private shareholders, primarily subjected to stricter regulation and legislation. Private companies restrict trading shares, cap shareholders at 200 and have reduced reporting obligations. That transition allows companies to function with more privacy, flexibility and cost-efficiency.
Reasons for Conversion
There are several compelling reasons why Indian businesses prefer the route of privatization:
- Reduced Compliance Burden: Unlike the submission requirements and compliance pertaining to quarterly filings and SEBI disclosures that public companies must meet. These responsibilities are minimized with privatization.
- Savings: Public companies incur important listing fees, audit costs, and compliance costs. These expenses vanish once the public market is no longer involved.
- Strategic Flexibility: Being private enables companies to pursue longer-term objectives without pressure from public shareholders or interference from stock market volatility.
- Confidentiality: The privacy of work with persistent business secrets, out of the reach of competitors and the public.
- Increased Management Control: Founders/promoters will hold an even greater majority stake if they own shares post-IPO, hence possibly creating less influence from outside shareholders.
Legal Framework Governing Conversion
Conversion in India is in accordance with the Companies Act, 2013 (Sections 13, 14, and 18), SEBI (Delisting of Equity Shares) Regulations, 2021, and under the supervision of the Ministry of Corporate Affairs (MCA). In case of listed companies, the NCLT and stock exchanges such as BSE or NSE also have a role. Adherence to such regulations will ensure a hassle-free and lawful transition.
Key Regulatory Requirements
- Shareholder Approval: 75% shareholder approval will be required by way of a special resolution.
- Approval from MCA and RoC: Conversion requires the approval of the Registrar of Companies (RoC) / Regional Director.
- SEBI Compliance: As listed companies, they must follow the delisting norms for a fair exit for all shareholders.
- Need for NCLT Oversight: NCLT may question the manner of such a process to safeguard the interest of minority shareholders.
- Valuation Standards: Fair exit price determined by independent valuers acting in the interests of the shareholders.
Step-by-Step Process of Conversion of Public to Private Company
The process of converting a public company to a private company in India is organized and involves careful planning. Here’s a detailed post describing the process.
1. Strategic Planning and Approval by the Board
The process begins with the board of directors, which has to determine whether conversion is even viable. This involves:
- Cost-benefit analysis to evaluate financial and operational implications.
- Retaining legal and financial consultants to comply with the laws of India.
- Preparation of privatization proposal and reasons, fiscal plan, and timetable. The board passes a resolution to start the process, kick-starting shareholder approval.
2. Securing Shareholder Approval
Shareholder Approval is Important and Involves:
- Calling a Special General Meeting (EGM) to approve by special resolution (75% of the vote).
- Filing of the resolution with the RoC in form MGT-14, within 30 days.
- Two: Issuing a prospectus to shareholders which sets out the case for conversion. The resolution needs to be consistent with the company’s Articles and Memorandum of
3. Alterations to the Articles of Association
To satisfy the definition of a personal company, the Articles of Association should be amended to provide that:
- Transfer restrictions on shares.
- A cap of 200 shareholders (not counting employees).
- Restrictions on invitations to the public to subscribe for shares or debentures. The amended Articles are filed with the RoC in Form INC-27, along with a special resolution.
4. To be Filed with the ROC
The company applies to the RoC by making the following application:
- The form INC-27 is for a conversion application.
- Copies of the special resolution, Articles as amended and minutes of the EGM.
- A declaration regarding provisions of the Companies Act,
- Financials and valuation report of listed companies. The application is reviewed by the RoC, which can ask for further documents or clarification.
5. Listed Companies to be Delisted
For public companies, delisting is an important process. This involves:
- Pursuant to SEBI (Delisting) Regulations, 2021, the company needs 90% consent of shareholders for the voluntary delisting.
- Providing a reasonable exit to the public shareholders, through a fair value, to be decided by valuer (Registered with SEBI).
- Initiating a reverse book-building to discover the exit price.
- The company submits the applications for delisting to the stock exchange and the SEBI, along with making public announcements. After approval, the company stops trading its shares on the exchange.
6. Regulatory Approvals
Approval for conversion is granted by RoC or Regional Director who issues certificate of conversion. In case of listed companies, the NCLT may scrutinize the process for ‘fairness’ and ‘in the interest of protecting minority shareholders”.
Post-Conversion Compliance
- Add “Private Limited” in the parent company name (Example: ABC Ltd will be renamed as ABC Pvt. Ltd.). Ltd.).
- Inform banks, suppliers, and concerned authorities, such as the GST and Income Tax authorities, about the change in status.
- Adapt the internal governance arrangements to address the needs of a private company.
- Maintain with minimal reporting requirements following the Companies Act.
Challenges in Conversion
A number of barriers remain to be cleared when taking a public company private in India:
- High Barriers to Entry – The cost of delisting and share buybacks is a huge amount of money, and unless they have the money in the bank, private equity or debt often fund the operation.
- Opposition by Shareholders: When a minority shareholder feels the exit price is unfair, they may fight in court.
- Regulatory Bottlenecks: The process may take several months due to approvals from RoC, SEBI, or NCLT.
- Financing Risk: Debt-financed buyouts could lead to pressure on the company’s balance sheet.
- Market Perception: The privatization process may be read as a sign of weakness (financial), which will tarnish the company’s image.
Benefits of Going Private
But though privatization poses obstacles, the prize is enormous:
- Less Compliance Burden: Privates must file fewer reports and have a lower compliance burden.
- Cost Effective: Reduced costs on listing fees, audit, and compliance lead to increased
- Strategic Agility: Private companies have the freedom to focus on innovation in the longer term without market pressures.
- Secrecy: Important company plans are kept secret, of strategic competition value.
- Control Over Ownership: Promoters may concentrate control over decision-making.
Case Studies of Privatization in India
Some of the successful privatization initiatives in India are:
- Vedanta Limited (2020): Vedanta’s promoters carried out a $2.3 billion delisting on BSE and NSE to strengthen control and reduce market volatility.
- Hexaware Technologies (2020): Baring Private Equity-backed Hexaware raised $1.2 billion by delisting from Indian exchanges to focus on long-term growth. Such cases demonstrate how privatization allows Indian companies to simplify operations and focus on strategic objectives.
Conclusion
Conversion of a Public company into a Private company in India under the Companies Act 2013, SEBI regulations is a complex yet revolutionary move. With the step-by-step process — board approval, shareholder resolution, RoC filing, delisting, and post-conversion compliance — businesses can realize cost efficiency, operational expediency, and control. Though they face hurdles from high costs to regulatory scrutiny, the rewards of privatization mean that it holds its allure for Indian firms that have an eye on the long term. Work with seasoned legal and financial experts to work your way through smoothly and take advantage of your private company status.
Related Services
