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. Many entrepreneurs who initially set up a limited company online later consider restructuring options to better align with their evolving business objectives. 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 Section 2(71)) is a company that is not a private company. It needs at least seven members and three directors, has no upper limit on the number of members and may invite the public to subscribe to its securities. A public company may be listed or unlisted, and a listed company must also comply with SEBI regulations. Public companies, especially listed ones, are 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: Listed public companies incur listing fees and significant compliance costs. Many of these costs fall away once the company becomes private, although the statutory audit continues to be mandatory.
- 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). Under Section 14(1), the conversion must be approved by the Central Government, a power delegated to the Regional Director, on an application in Form RD-1. After the Regional Director’s order, the company files Form INC-27 with the Registrar of Companies (RoC). A listed company must first delist its shares from the stock exchanges, such as BSE and NSE, under the SEBI delisting regulations. 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 of the Regional Director: Conversion requires an order of the Regional Director, on behalf of the Central Government, on an application in Form RD-1. The order is then filed with the RoC in Form INC-27.
- SEBI Compliance: As listed companies, they must follow the delisting norms for a fair exit for all shareholders.
- Objections from Stakeholders: Creditors, debenture holders and other affected persons can object to the proposed conversion, and the Regional Director considers any objections before passing an order.
- Valuation Standards: Fair exit price determined by independent valuers acting in the interests of the shareholders.
- No Pending Inquiry or Prosecution: Conversion is not allowed while an inquiry, inspection or investigation has been initiated, or a prosecution is pending, against the company under the Companies Act, 2013.
- Compliance Declarations: A key managerial person (or a director, where the company is not required to appoint one) must declare that the company has limited its members to 200, has complied with the provisions on deposits (Sections 73 to 76A) and with Sections 177, 178, 185, 186 and 188, and, if it was listed, has completed the delisting of its shares.
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: Sending shareholders the notice of the general meeting with an explanatory statement under Section 102 that sets out the reasons for, and the effect of, the conversion. The same special resolution also approves the alteration of the Memorandum of Association and the Articles of Association
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 altered Articles take effect only after the Regional Director approves the conversion, after which they are filed with the RoC in Form INC-27.
4. Notice to Creditors and Public Advertisement
Before applying to the Regional Director, the company must give notice of the proposed conversion:
- Publish an advertisement about the proposed conversion in an English newspaper and a vernacular newspaper circulating in the State where the registered office is situated, inviting objections.
- Serve individual notices on each debenture holder and creditor by registered post with acknowledgement due.
- Where the company is regulated by a sectoral regulator, also serve a notice of the proposed conversion on that regulator.
5. Listed Companies to be Delisted
For public companies, delisting is an important process. This involves:
- Under the SEBI (Delisting of Equity Shares) Regulations, 2021, voluntary delisting needs the approval of shareholders by special resolution, and the delisting offer succeeds only if the promoter group’s shareholding reaches 90% of the total issued shares after the offer.
- Offering public shareholders an exit at a price not lower than the floor price determined under the SEBI regulations.
- Initiating a reverse book-building to discover the exit price.
- The company applies to the stock exchanges for in-principle approval and, after the offer, for final approval, making the required public announcements along the way. After approval, the company stops trading its shares on the exchange.
6. Application to the Regional Director in Form RD-1
After passing the special resolution, the company files an application in Form RD-1 with the Regional Director, with the prescribed fee. A listed company files only after its shares have been delisted, because the application must include a declaration to that effect. The main attachments are:
- Draft Memorandum of Association and Articles of Association as altered for a private company
- Copy of the minutes of the general meeting that passed the special resolution, showing the names of the dissenting members and the number of votes cast for and against
- Copy of the board resolution or power of attorney authorising the application, dated not earlier than 30 days before filing
- Declarations by a key managerial person on the limit of 200 members, compliance with the deposit provisions and Sections 177, 178, 185, 186 and 188, and the delisting of shares, where applicable
- List of creditors and debenture holders as on a date not earlier than 30 days before filing, showing the nature and amount of each debt, supported by an affidavit of the directors confirming that the list is correct
7. Order of the Regional Director
If no objection is received and the application is complete, the Regional Director passes an order approving the conversion. If the application is defective or incomplete, the Regional Director asks the company to rectify it and resubmit. Where objections are received, the Regional Director hears the company and the objectors before passing an order approving or rejecting the application.
8. Filing with the RoC and Fresh Certificate of Incorporation
Within 15 days of receiving the Regional Director’s order, the company files Form INC-27 with the RoC, attaching the order and a printed copy of the altered Articles. The RoC then issues a fresh Certificate of Incorporation in the company’s new name as a private limited company.
Post-Conversion Compliance
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- AChange the company’s name to end with “Private Limited” (for example, ABC Limited becomes ABC Private Limited).
- 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.
- Paint or affix the new name, along with the former name, outside every office and place of business, and print both on letterheads, invoices and other official documents for two years, as required by the first proviso to Section 12(3).
- Get new rubber stamps made and, if the company uses a common seal, a new seal bearing the new name.
- Issue share certificates in the new name for future allotments and transfers.
- Update the company’s name in its PAN and TAN records and with its banks.
- Amend registrations under GST, the Shops and Establishments Act, EPF, ESI, the Factories Act and other applicable labour and industry-specific laws.
- Inform lenders, insurers, utility service providers and parties to existing contracts of the change of name and status.
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, particularly for listed companies, because it needs delisting approvals from the stock exchanges, the Regional Director’s order and the RoC’s filings.
- Financing Risk: Debt-financed buyouts could lead to pressure on the company’s balance sheet.
- Market Perception: The privatisation process may be read as a sign of weakness (financial), which will tarnish the company’s image. In some cases, companies facing prolonged financial difficulties may also consider restructuring measures or the closure of private limited company processes as part of their long-term strategy.
Benefits of Going Private
But though privatisation poses obstacles, the prize is enormous:
- Less Compliance Burden: Privates must file fewer reports and have a lower compliance burden.
- Cost-Effective: Lower listing and compliance costs lead to meaningful savings
- Strategic Agility: Private companies have the freedom to focus on long-term innovation without market pressures.
- Secrecy: Important company plans are kept secret, of strategic competition value.
- Control Over Ownership: Promoters may concentrate control over decision-making.
Conclusion
Conversion of a Public company into a Private company in India under the Companies Act 2013 and SEBI regulations is a complex yet revolutionary move. With the step-by-step process — board approval, shareholder resolution, delisting (for listed companies), Regional Director approval, RoC filing and post-conversion compliance — businesses can realise cost efficiency, operational expediency, and control. Though they face hurdles from high costs to regulatory scrutiny, the rewards of privatisation 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.
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