Conversion of a private company into a Public company
The conversion of a private limited company into a public limited company can be grouped under the following heads:
1.By choice or volition;
2.By default; and
3.By operation of law.
1.Conversion by choice or volition
In accordance with Section 44 of the Companies Act, 1956 the conversion of a private limited company into a public limited company by choice will require the following:
a)Alteration of its Articles of Association by special resolution in such a manner that they no longer include the restrictive provisions of Section 3.
b)Alteration of name of the company by special resolution by deleting the word “private”.
c)Filing of copy of special resolution along with explanatory statement in Form No.23 along with fee prescribed under schedule X to the Companies Act.
d)Filing of prospectus or statement in lieu of prospectus with the Registrar.
e)Increase in the number of members to at least seven and in the number of directors to at least three.
f)Enhancement of paid-up capital to at least rupees five lakhs or such higher paid-up capital as may be prescribed.
2.Conversion by default
Under Section 43 of the Companies Act, 1956, if a private limited company fails to comply with any of the four restrictive provisions required by Section 3(1) to be incorporated in its articles, the company ceases to be a private limited company and ceases to have privileges and exemptions conferred on it by the Act as a private limited company. It becomes a public limited company and all the provisions of the Act as a private limited company. It becomes a public limited company and all the provisions of the Act applicable to such companies become applicable to it. However the Company Law Board/ Central Government has been vested with power to grant relief in suitable cases where it is satisfied that the infringement of the conditions was accidental and its is just and equitable to grant relief.
3.Conversion by operation of law
The provisions of Section 43A of the Companies Act, 1956 have been made inoperative by the Companies Act, 2000 by insertion of Sub-section. Instead a new Sub-section 2A to Section 43A has been inserted by the Companies Act 2000, which provides that a deemed public limited company which wants to become a private limited company on or after the commencement of the Companies Act 2000, shall inform the Registrar about its status of private company and then the Registrar shall substitute the word “private company” in the Registrar and shall also make necessary alteration in its Memorandum of Association and Certificate of Incorporation within four weeks from the date of application made by the company. Alternatively if a deemed public limited company shall have to increase its directors at least upto three, its members upto seven and alter its Articles of Association as applicable to a public limited company. Thereafter the company shall inform the concerned Registrar of Companies together with altered Memorandum and Articles of Association and certification of registration for making necessary alterations.
Conversion of a private limited company(which is a subsidiary of public company) into a public limited company
On and from the commencement of the Companies Act, 2000, a private limited company which is a subsidiary of a public limited company, is treated as a public limited company by virtue of change in the definition of the public company under Section 3(1) of the Companies Act, 1956. Such private company will have to take the following actions for its conversion into a public limited company on or after 13.12.2000 when the Amendment Act came into force:
1)Alter its Articles of Association so as to make it applicable to a public limited company.
2)Increase the number of directors to at least three.
3)Increase the number of members to at least seven.
4)Enhance its paid up capital to rupees five lakhs or such higher paid-up capital as may be prescribed.
5)Apply for changing its name for deletion of the word “private”.
6)Apply for amendment to its Certificate of registration.
Conversion of a Public limited company into a Private limited company
A public limited company can be converted into a private limited company only after the approval of the central government. It cannot be treated as a private limited company till the central government accords its approval.
Conversion of a public limited company into a private limited company will require:
i)Passing of a special resolution authorizing the conversion and altering the articles so as to include the matters specified in Section 3(1).
ii)Changing the name of the company by special resolution as required by Section 21.
iii)Obtaining the approval of the central government as required by Section 31. Provision to section 31(1) provides that no alteration made in the Articles which has the effect of converting a public limited company shall have effect unless such alteration has been approved by the central government.
iv)Filing of printed copy of the articles as altered within one month of the receipt of the approval of the central government with the registrar of companies.
Commencement of business
A private limited company or a company having no share capital may commence business and exercise its various powers immediately after it is registered. Once it has received its certificate of company registration, nothing further is required.
A public limited company, on the other hand, must obtain a certificate to commence business from the registrar before it can commence business or exercise its borrowing powers. In order to obtain this certificate, the company must comply with the provisions of the section 149(2) applies.
A public limited company having share capital, must obtain certificate to commence business from the registrar of companies before it commence its business or exercise its borrowing powers. In order to obtain this certificate, the company must comply with the provisions of the section 149 of the companies act, 1956.
“Commence any business” does not mean merely the business for which the company was started, but it includes the power to borrow and any transaction including sale, and purchase of property.
The certificate is conclusive evidence that a company is entitled to commence business. Once a certificate to commence business has been issued to a company a writ cannot be issued to cancel the certificate of a company under the Companies Act, 1956.
In case of a private limited company, there is no requirement to obtain a certificate to commence business . It can start business immediately on its registration. The effect of this section is to make the Public limited company, not bound by any contract or transaction until and unless the company is entitled to commence business. A contract made before a company registration of a company will not bind the company unless a new contract embodying the terms of the old one or adopting the old one is made afresh.
In case of a public limited company, contracts entered into by the company itself after registration will become binding on the company only on its becoming entitled to commence business. The expression “provisional”, means that the contract will not be binding on the company until the certificate of commencement of business is granted by the registrar. If it is liable to be avoided on grounds of fraud or misrepresentation, the company may question its validity.
where the organization has issued a prospectus
section 149(1) gives that if a company having an offer capital has issued an outline welcoming open to buy in for its shares, it will not initiate any business or exercise any getting forces except if:
a)shares held subject to the installment of the entire sum thereof in real money have been designated to a sum not less in the entire than the base membership.
b)every director of the company has paid to the company, on every one of the shares taken or contracted to be taken by him and for which he is obligated to pay in real money, equivalent to an extent payable on application and assignment on the offers offered for public limited company.
c)no cash is, or may progress toward becoming, at risk to be compensated to candidates for any offers or debentures which have been offered for public limited company by reason of any inability to apply for, or to acquire, authorization for the offers or debentures to be managed in on any perceived stock trade; and
d)there has been documented with the enlistment center an appropriately checked revelation by one of the directors or the secretary, or where the company has not selected a secretary in entire time practice, in the recommended shape.
where the company has not issued a prospectus
If a public limited company having share capital has not issued a prospectus, section 149(2) requires that it shall not commence any business or exercise any borrowing powers unless:
a)it has filed with the registrar a statement in lieu of prospectus;
b)every director of the company has paid to the company on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, the same proportion as is payable on application and allotment on the shares payable in cash;
c)there has been filed with the registrar duly verified declaration by one of the directors or the secretary or where the company has not appointed a secretary, a secretary in whole time practice in the prescribed form.
Commencement of new business by an existing company
Section 13 requires that every company formed on or after October 5, 965 must state in its memorandum (i) the main objects to be pursued by the company on its registration and objects incidental or ancillary to the attainment of the main objects; (ii)other objects not included in (i)above, separately. Section 149 prohibits a company from commencing any business stated under any objects without obtaining the prior approval of the shareholders in general meeting by a special resolution. It also requires the filing with the registrar a declaration in Form No.20A verified by one of the directors or the secretary or where the company has not appointed a secretary, a secretary in whole-time practice, that the approval by special resolution has been given by the company in general meeting. The central government, may, however, on application by the Board of directors allow the company to commence new business, even if the special resolution is not passed by the company in general meeting, but passed by a simple majority.
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