When does it private company deemed to become a public company?

According to section 3(1)(iii) of the companies Act, 1956, a private company means a company with a minimum paid-up capital of 1,00,000 and which it's by articles;-

a) Restricts the right to transfer its shares if any

b) Limits the number of its members to 50, not including the employee members

c) Prohibits any invitation (or) acceptance of deposits from persons other than its members, directors (or) their relatives

d) Prohibits any invitation to the public to subscribe for any shares in, (or) debentures of the company.

The above 4 restrictive clauses must be specified in the articles of the private company. Thus, every private company must have registered articles. There should be at least two subscribers to form a private company. Also, it should have at least two directors. The word ‘private limited’ must be added at the end of the name of a private company. The number of debenture-holder may exceed 50 as there is no restriction on their number in the definition. A private company must also have its own Articles of Association which contains all the conditions mentioned in the definition.

Procedure for conversion of a private company into a public company:

1. Conversion by default :

Under section 43, of the companies Act, if a private company fails to comply with any of the four restrictions provided under section 3(1)(iii) and applicable to private companies, the company ceases to be a private company from the date of default. In such a case the following would be the consequences:-

a) The company will lose all the privileges and exemptions conferred on it, by the Act as a private company.

b) The officers in default shall be punishable with a prescribed fine.

If infringement were accidental, and if the Company Law Board is satisfied that it is just and equitable to grant relief, it may relieve the company on such terms and conditions as seem to the company Law Board just, an application from the company (or) any other person.

(2) Conversion by operation of law (deemed public company):

Private companies are exempted from the operation of several sections of the Act, under section 43-A, a private company becomes a public company, known as a deemed public company. (Known as deemed [public company):-

a) Where at least 25% of the paid-up share capital of the private company is held by one (or) more body corporate. For the purposes of section 43-A(1), ‘body-corporate’ means public company (or) private companies which had become public companies by virtue of section 43-A.

b) Where the average annual turnover of a private company during the relevant period is Rs.10 crores (or) more. A relevant period means 3 consecutive financial years.

c) Where the private company holds not less than 25% of the paid-up share capital of a public company, having a share capital.

d) Where a private company invites, accepts (or) renews deposits from the public, such private companies becomes a deemed public company from the date on which such invitation, acceptance (or) renewal as the case may be,

Within 3 months from the date on which a private company becomes a public company, it shall inform the Registrar that it has become a public company. There upon the Registrar shall delete the word private before the word Limited in the name of the company. It shall also make the necessary alternations in the certificate of incorporation issued to the company and its Memorandum of Association.

(3) Conversion by Choice (or) Violation: (section 44)

a) A private company can be converted into a public company by amending the articles of association to delete the four restrictive clauses in its articles.

b) Convene the board meetings to discuss the proposed conversion and also convene the E.G.M

c) At the E.G.M., pass the following special resolutions:-

(i) Deleting the four restrictive clauses pertaining to a private company.

(ii) Amending all those articles which are inconsistent with that of a public company.

d) File from no.23 with the R.O.C., within 30 days of passing the special resolution.

e) A prospectus as per Schedule II (or) statement in lieu of prospectus as per Schedule IV should be filed with R.O.C., within 30 days of passing the special resolution.

f) If the number of members below 7 steps should be taken to increase the members to at least 7 either by allotment of shares (or) registration of transfer done in board meetings. Similarly, the number of directors should be increased to at least 3, if there are only 2 directors, by appointing an additional director in the board meeting. Also, the paid-up capital of the company should be increased by 5 lakhs,

g) Obtain a fresh certificate of incorporation from R.O.C., consequent to the conversion of the company into public limited.

h) Alter the regulations contained in the articles which are inconsistent with those of a public company.

i) The company becomes a public limited from the date of passing the special resolution. However the change of name by deleting the word private will take effect only on the issue of such a fresh certificate by R.O.C.,