You are currently viewing Pros and Cons of Converting Private Company Into Public Company

Pros and Cons of Converting Private Company Into Public Company

Loading

While private companies offer advantages, many become publicly traded to boost their growth. This shift hinges on key differences. Unlike private companies that often restrict who can own shares, public companies can sell stock (ownership) to anyone through an IPO (Initial Public Offering). This vast pool of investors allows public companies to raise significantly more money for expansion. Going public is all about growth, flexibility, and easier access to capital. Unlike private companies with limited funding options, public companies can raise large sums through IPOs and future stock offerings.

Going Public: Weighing the Benefits and Drawbacks

Converting your private limited company to a public limited company can be a game-changer, but it’s crucial to understand both the advantages and potential downsides before taking the plunge. Without careful planning, unexpected challenges and financial strain could arise.

The Upsides of Going Public:

  • Capital Boost: Public offerings allow you to tap into a vast pool of investors, raising significant funds for growth and expansion.
  • Enhanced Credibility: Becoming a public company elevates your brand reputation and attracts more trust from potential partners and customers.
  • Smoother Share Trading: Publicly traded shares are easier to buy and sell, increasing shareholder liquidity.
  • Growth Opportunities: Public status opens doors to mergers and acquisitions, accelerating your company’s reach and influence.

The Downsides of Going Public:

  • Regulatory Burden: Becoming a public company means complying with stricter regulations and reporting requirements, which can be costly and time-consuming.
  • Diluted Control: Public ownership can lead to a loss of control for founders. With more shareholders to answer to, decision-making processes may become more complex.
  • Under the Spotlight: Prepare for increased scrutiny. Public companies attract more attention from the media, public, and regulatory bodies.
  • Stock Market Costs: Maintaining a public listing and managing share activities on the stock exchange involve ongoing costs.

Weighing the Move: Considerations Before Going Public

The decision to convert from private to public is not one-size-fits-all. Here are some crucial factors to weigh:

  • Your Business Landscape: Size, financial health, and future growth potential all play a role.
  • Benefits vs. Burdens: Consider the potential gains in market reputation and easier access to capital. However, balance these against the increased regulatory costs and potential loss of control over your company.
  • Long-Term Vision: Align the decision with your company’s long-term strategic goals. 

From Private to Public: Navigating the Legal Requirements

A private company takes more than just a flip of a switch to become public. There are legal obstacles to get beyond. The first step involves changing the company’s rulebook, called the Articles of Association (AOA). Specifically, three restrictions that only apply to private companies need to be removed. To make this change official, a special vote needs to be held by the company following specific rules outlined in Section 14.

There’s another important step alongside the AOA changes. The company name itself needs to reflect its new status. So, “Private” gets dropped. This name change also requires a special vote, following guidelines set in Section 13. But that’s not all. The company has to meet some basic requirements, too. If there are fewer than 7 members, that number needs to jump up. Similarly, if there are only 2 directors, another one must be added to bring the total to at least 3.

Once the company votes in favour of the changes following the rules in Section 14, it becomes a public company on paper. But there’s one more formality. The company name can’t officially lose the “Private” part until a government office, the Registrar of Companies (ROC), issues a brand new certificate. This final step confirms that everyone recognises the company as a public entity.

Small Businesses vs. Public Powerhouses: Private vs. Public Companies

  • Private Limited Companies: These have fewer owners than exclusive clubs. They don’t sell their shares on the stock market because they are usually smaller companies that keep their shares private.
  • Public Limited Companies (PLCs): Consider Public Limited Companies (PLCs) as sizable public arenas. A PLC’s shares, or units of ownership, are available to everyone and are exchanged on stock exchanges. PLCs typically have more intricate management systems and are larger as a result.

Thinking about going public? Think about the demands both present and future for your business before making a move. Are the additional duties and expenses associated with becoming a PLC too much for you to handle? Verify whether the advantages of your particular circumstance exceed the disadvantages. 

What Gains a Company Has from Converting from Pvt. Ltd. to Public Ltd?

1. Public Companies: Anyone Can Trade Shares More Easily

Being able to easily buy and sell shares is one benefit of being a public company. Unlike private companies, which may have complex transfer restrictions, public companies have a smooth process. It usually involves just a form and handing over the ownership certificate.

2. Public Powerhouse: Unleashing Funding Potential

Public companies hold a significant advantage when it comes to raising capital. Here’s how:

  • Public Offerings: By directly selling ownership shares (stock) to the general public through a stock exchange listing, public enterprises, as opposed to private ones, can access a sizable pool of investors. As a result, they are able to produce vast amounts of money for growth and development.
  • Beyond Shares: Options for public corporations don’t stop with equities. In addition to convertible debentures—loans to the company that can be converted into ownership—they can provide fixed deposits, which are similar to savings accounts, and debentures for the general public. They are able to reach a wider audience and attract more investors as a consequence.  

3. Enhanced Dependability

Public limited companies are obligated to inform regulatory authorities of any structural modifications, disclose audited financial statements, and conduct annual general meetings for shareholders. These adherence practices significantly bolster the company’s trustworthiness and brand reputation, attracting increased attention.

4. Liability Limitation

Even following the shift from Pvt. Ltd. to Public Ltd., the core concept of limited liability remains intact, safeguarding shareholders from excessive financial obligations.

5. Effortless Share Transfers

Shares in Public Companies can be freely transferred, adhering to regulations stipulated in the Securities and Exchange Board of India Act, 1992 and Companies Act, 2013, which promotes liquidity and simplifies ownership transfers.

6. Simplified Deposit Acceptance

Publicly traded corporations have more financial flexibility because they are allowed by Section 76 of the Corporations Act of 2013 to take deposits from the general public.

Techniques for Managing a Public Limited Company Effectively

A clear plan and adept navigation of a challenging environment are necessary for the efficient management of a public limited company. This entails following strict legal requirements, managing a board of directors, and scheduling frequent shareholder meetings. Having a capable management team and a thorough awareness of all applicable laws and regulations are essential for success.

Obstacles to Surmount: Minimum Needs to Become Public

Prior to making the big decision to go public, your Pvt. Ltd. business must fulfil these prerequisites:

  • Shareholder Threshold: You’ll need to have a minimum of 7 shareholders.
  • Requirements for Directors
  • Every director is required to have a DIN or director identification number.
    • DSC of at least one shareholder is mandatory
    • Minimum Number: Three directors are now required at all times. (Previously, just two were needed.)
  • Paid-up Capital: No minimum sum is necessary to qualify for paid-up capital.
  • Allowed to Play Two Roles: A person may be a shareholder in the public corporation as well as a director.

Going Public: A Step-by-Step Guide

The 7-step journey to becoming public:

  • Board Meeting: Propose conversion, schedule shareholder vote (EGM), and authorise EGM notice.
  • Board Meeting (Part 2): Gain shareholder approval and finalise the EGM agenda with governing document updates.
  • EGM Notice: Inform shareholders (min. 21 days) about the upcoming EGM vote.
  • Extraordinary General Meeting: Shareholders vote on conversion and updated governing documents.
  • Government Filings: Submit forms within deadlines with supporting documents (conversion details, EGM notice, resolutions, etc.).
  • ROC Approval: The government reviews your application.
  • Public Status Confirmed: Receive a new certificate confirming your public limited company status.

Conclusion

Conversion of a private limited company to a public company is a significant step that warrants careful consideration of its pros and cons. Public Limited Companies can offer substantial benefits such as access to capital, enhanced credibility, and growth opportunities, but they also come with regulatory burdens, diluted control, and increased scrutiny. With the support of Kanakkupillai’s expertise in legal navigation, businesses can navigate the complexities of this transition, ensuring compliance and maximising the potential for growth in the public.

Divya

Telecom engineer turned content creator with a knack for crafting compelling narratives. Experienced in client management and community engagement, and ventured into freelance content creation, contributing tailored and impactful content across diverse industries. Currently, collaborating with companies like Kanakkupillai, dedicated to delivering inspiring technical content rooted in a solid foundation.