When does a private limited company becomes a public limited company?

Answer 1

A private company can be converted into a public limited company by two ways: (1). Automatic Conversion and (2) Deliberate Conversion.

A private company automatically gets converted into a public company by operation of law in the follow­ing cases:

(a) Conversion by Default : Where a private company defaults in complying with the essential statutory requirements as laid down infection 3(1)(iii) of the. Act, such as for example,

(1) if its membership exceeds fifty,

(2) it permits free transfer of shares, or

(3) invites public to subscribe to its shares or debentures.

It then becomes a public company automatically. However, the Court, may relieve the company from being treated as a public company, on such terms and conditions as it thinks just and equitable, if it is of opinion that the default was due to inadvertence or accident or some other sufficient cause, on an application of the company or any interested person (Sec. 43).

(b) Where a private company becomes a 'subsidiary' of a public company,

(c) Where a private company becomes a 'deemed to be public company' by virtue of Section 43A.

A private company becomes a public company automatically by virtue of the above provision and it need not follow any legal formality prescribed in the case of deliberate conversion.

Again, in spite of the conversion, such a company maycontinue to be treated as a private company i.e., it can have restric­tions as to transfer of shares, membership and public subscription. It can continue to have only two members and two directors.

Deliberate conversion

A private company may, also pass a special resolution removing from its articles the- three compulsory restrictions as to membership, transfer of shares and public subscrip­tion. It then becomes a public-company from the date of alteration . Within 30 days of passing this resolution, a copy of special resolution, a copy of altered articles, together with a copy of 'prospectus' or a 'statement in lieu of prospectus' must be filed with the Registrar of Companies.

The 'prospectus' must state the matters and set out the-reports specified in 'Schedule H" of the Act. In case the company decides to file a 'statement in lieu of prospectus', it must be in the "form" and contain particulars set out in "Schedule -IV" to the Companies Act (Sec. 44).

On becoming a public company, the company will have to increase the number of its members to at least seven and that of its directors to at least three, to comply with the statutory minimum required for a public company. Further the word 'Private' should be deleted from the name of the company.

To this effect, a Board meeting has to be convened to finalize the plan of conversion and pass the necessary resolution. The secretary should prepare a new set of Articles and inform the members about the place and date of the extra-ordinary general meeting, individually as well as through an announcement in the newspapers. Separate notices with the text of the resolutions to be passed at the meeting are to be sent to all the members of the company. On the fixed date, general meeting will be held and the necessary resolutions will be passed.

Finally, a copy of special Resolution, a copy of altered articles, along with a copy of prospectus or statement in lieu of prospectus shall be filed with the Registrar of Companies, together with the scheduled fees. The company then becomes a public company from the date of passing the special resolution by the members to that effect at the extra-ordinary general meeting.

M.J. SUBRAMANYAM, XCHANGING.