I. What is conversion?
Theoretically, conversion is a method of changing from one type of the Company/entity to another which involves certain procedures, approvals and intimation as per the requirement of the Companies Act, 2013 (“the Act”) and rules made thereunder.
II. Following are a few common conversion which we come across:
1. Conversion from a private Company to a public limited company and vice versa
2. Conversion from a private Company to One person company and vice versa
3. Conversion from an LLP to a public/private limited company and vice versa
4. Conversion from a partnership firm to public/private limited company and vice versa
5. Conversion of unlimited liability company to a limited liability company by shares/guarantee
6. Conversion of section 8 company to any other kind
III. Notable provisions of the Act and rules (for reference):
1. Section 13 of the Act: Alteration of Memorandum of Association
2. Section 14 of the Act: Alteration of Articles of Association
3. Section 18 of the Act: General section for conversion
4. Rule 6 of the Incorporation Rules ,2014: From OPC to private company
5. Rule 7 of the Incorporation Rules ,2014: From Private to OPC
6. Rule 21,22 of the Incorporation Rules ,2014: From section 8 company to any other kind
7. Rule 33 of the Incorporation Rules ,2014: Alteration of Articles for conversion from private to public limited company and vice versa
8. Rule 37 of the Incorporation Rules ,2014: From unlimited liability company to a limited liability company
9. Rule 39 of the Incorporation Rules ,2014: From a company limited by liability to limited by shares
10. Rule 41 of the Incorporation Rules ,2014: From private to public limited company
Among all kinds of conversion, this Article shall focus upon conversion of a Private Company into a Public Company
IV. Why would a private limited company convert to a public limited company?
Proposed listing of its shares (IPO), easy accessibility by the investors/lenders, brand requisition, making transfer of shares easy etc.
V. Management and Company Secretary of such private limited companies should keep following compliances in mind before/on conversion:
1. Directors and shareholders: Needless to say, this is the basic requirement of a public limited company and has to be kept in mind before conversion i.e. minimum 3 Directors and 7 shareholders.
2. Alteration of Articles(certain provisions) : AoA of a Private Company can provide for certain relaxations for ease of operations which otherwise are mandatory in case not provided in the AoA or to a public limited company such as, Section 101 Notice of the General Meeting, Section 102 Explanatory Statements, Section 103 Quorum for the General meeting, Section 104 Chairman of the General Meeting, Section 105 Proxy, Section 106 Restriction on voting rights, Section 107 Voting by show of hands, Section 109 Demand for Poll.
Provisions of the above sections are required to be complied as it is once converted and hence, AoA to be altered accordingly.
3. DEMAT of shares: As per the requirement of Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014, all the unlisted public companies are required to facilitate dematerialisation of all its existing securities in DEMAT form.
4. Appointment of certain Directors/KMP: For a private Company, following provisions were exempt:
|Woman Director: Atleast one WD||Rs. 100 crores||Rs. 300 crores||–|
|Independent Director: Min 2 Directors||Rs. 10 crores||Rs. 100 crores||Rs. 50 crores|
|Appointment of KMP except CS||Rs. 10 crores||–||–|
However on conversion, the Company would be required to appoint directors/KMP as above.
5. Constituting statutory committees :
|a. Audit Committee
b. Nomination and Remuneration Committee
|Rs. 10 crores||Rs. 100 crores||Rs. 50 crores|
6. AGM/EGM Compliances: Applicability of retire by rotation, closure of registers, postal ballot(if the number of members exceeds 200), e-voting (if the numbers exceed 1000) upon conversion.
7. Number of Directorships(Section 165): All the Directors of such a converted company to note that maximum number of directorship in public companies is 10 and necessary plan/actions to be taken accordingly.
8. Qualification of the Auditor(Section 141): The Auditor has to consider this freshly converted company for checking its limit of 20 companies.
9. Following have to be complied considering the specific criteria for public companies:
|Requirement||Now required (upon conversion) (amount more than Rs.)||Earlier criteria (when the company was private company) (amount more than Rs.)|
|p.u. capital||Turnover||debt||p.u. capital||Turnover||Debt|
|Internal Auditor(section 138)||50 cr||200 cr||100 cr/ deposit- 25 cr||–||200 cr||100 cr|
|Appointment of Auditors(Section 139) : Not appointing Auditors beyond one/two years||10 cr||–||50 cr||50 cr||–||50 cr|
10. Borrowing beyond 100% of the paid-up capital, free reserves and security premium: Section 180 provides for certain powers which the Board can exercise only after passing special resolution by shareholders. The said restriction is exempt for a private company. Hence, if the newly converted public company has borrowed beyond the above limit before conversion(Section 180(c)), it would be required to ratify the same through a special resolution.
11. Managerial Remuneration (Section 197): This is one of the most important section to be considered by the management before the conversion. The remuneration of Directors is governed by the limits provided under Section 197 and Schedule V. The particular section is exempt for the private companies.
12. Secretarial Audit(Section 204): The particular section was exempt for private companies. However, if any of the following criterias are met, the converted company would be required to conduct secretarial audit
Hence, basically all those advantages which the company was enjoying as a private limited company would cease to exist.
There are some more compliances which are transaction/event based which earlier didn’t require certain approvals/ procedures but would be required to comply now. Some examples:
1. Filing of MGT-14 after taking approval from the Board for transactions under Section 179.
2. Section 62: ESOP would now require special resolution and the exemption of time period under right issues shall no longer be available.
3. Regarding Director’s appointment: Requirement of Section 160 (2) of depositing Rs. 1 lakh for the proposed appointment and Directors to be voted individually (Section 162).
4. Transactions under Section 180: Sell/dispose-off the undertaking, invest amount of compensation received from mergers etc. require passing of special resolution in the General Meeting which is exempt for a private company.
5. Disclosure of Interest and participation Section 184: In a private company, an interested director can participate in the meeting after disclosure of interest. However, in a public company, such participation is not permitted.
6. Participation in related party transaction Section 188: A related party member can vote for the resolution to approve any contract or arrangement which may be entered into by the company. However, in a public company, the same is not permitted.
Please note that the above are a few common transactions and is not an exhaustive list of the transaction/event based compliances.
Disclaimer: The entire contents of this article have been prepared on the basis of relevant provisions and information existing at the time of preparation, i.e. June 16, 2020. The observations of the author are personal view and the author does not take any responsibility of the same and this cannot be quoted without the written consent of the author.