+91 76790 91881

Step by Step Guide: Conversion of Private Company to Public Company

The Companies Act, 2013, enacted by the Indian Parliament, provides a comprehensive legal framework for the functioning and regulation of companies in India. Among its various provisions, one significant aspect is conversion of private company into a public company. This transformation enables the public trading of shares on a recognized stock exchange, bringing numerous benefits such as increased access to capital, enhanced market presence, and improved credibility.

Why should one do conversion of Private Company to Public Company?

Raising Capital

Public companies can access a broader pool of investors and raise funds by issuing shares through Initial Public Offerings (IPOs). This influx of capital can be instrumental in expanding the business, funding new projects, or reducing debt. Conversion of a private company to a public company ensures expanded access to capital markets, facilitating larger fundraising efforts.

Increased Valuation

A public company’s valuation is often higher than that of a private company due to wider market recognition and potential liquidity. Conversion of private company to public company can enhance the overall value and attractiveness of the business.

Exit Strategy

Converting to a public company can provide an exit route for existing shareholders, including founders and early investors, who may wish to monetize their investments and unlock value. The conversion of a private company to a public company offers shareholders a viable exit strategy through market trading of shares.

Enhanced Transparency and Governance

Public companies are subject to greater regulatory scrutiny and stricter corporate governance norms. This can instil investor confidence, attract institutional investors, and foster transparency in operations. Conversion of a private company to public company ensures adherence to rigorous governance standards, enhancing credibility and trust among stakeholders.

Benefits of Conversion of Private Company to Public Company

Access to Capital

One of the primary advantages of converting a private company to a public company is the ability to raise capital from the general public. By issuing shares through an IPO, a company can attract investments from a wider pool of investors, including institutional and retail investors. This infusion of capital can fund expansion, research and development, acquisitions, and other strategic initiatives. Conversion of private company to a public company ensures expanded access to capital markets, facilitating larger fundraising efforts and strategic initiatives.

Enhanced Brand Visibility

Going public can significantly enhance a company’s brand visibility and reputation. Public companies are subject to increased scrutiny and disclosure requirements, which can help build trust among stakeholders, including customers, suppliers, and partners. The status of being a public company can instill confidence in the market, attract new customers, and provide a competitive edge. Conversion of private company to a public company ensures heightened brand visibility and market recognition, bolstering trust and credibility among stakeholders.

Liquidity for Shareholders

Conversion of a private company to a public company can provide an exit strategy for existing shareholders. In a private company, shares are often illiquid, making it challenging for shareholders to sell their stakes. By going public, shareholders can sell their shares on stock exchanges, providing liquidity and the ability to realize their investments. This increased liquidity can make the company’s shares more attractive to potential investors. The conversion of a private company to a public company offers shareholders enhanced liquidity through public trading, facilitating easier monetization of investments.

Expansion Opportunities

A public company enjoys better access to growth opportunities. With increased capital resources, a public company can undertake expansion plans, enter new markets, invest in research and development, and execute strategic acquisitions. The ability to tap into public markets allows for greater flexibility in pursuing growth strategies and achieving economies of scale. Conversion of a private company to a public company enables greater access to capital, supporting robust expansion initiatives and strategic growth endeavours.

Valuation and Exit Options

Public companies generally have a higher valuation compared to private companies. The market value of a public company’s shares is determined by market forces and investor sentiment. This can provide a benchmark for valuing the company and can be advantageous in scenarios such as mergers and acquisitions or raising further capital through follow-on offerings. Being a public company offers an exit option for promoters and early investors who can gradually sell their shares in the market. Conversion of private company a public company offers enhanced valuation potential and provides viable exit strategies through public market trading.

Employee Incentives

Conversion of a private company to a public company can open up opportunities for employee stock ownership plans (ESOPs). ESOPs allow employees to become shareholders and benefit from the company’s growth and success. This can be an effective tool for attracting and retaining top talent, as employees have the potential to share in the company’s financial success and align their interests with the long-term goals of the organization. The conversion of private company to a public company facilitates the implementation of ESOPs, fostering employee ownership and alignment with organizational goals.

Regulatory Compliance and Governance

Public companies are subject to stricter regulatory requirements and corporate governance standards compared to private companies. This can lead to improved transparency, accountability, and investor protection. Compliance with these regulations enhances the company’s credibility and reduces the risk of corporate governance-related issues. Adopting robust governance practices can also attract institutional investors and strengthen the company’s reputation in the market. Conversion of private company to a public company ensures adherence to rigorous regulatory standards, enhancing transparency, accountability, and investor confidence in governance practices.

Procedure for Conversion

Step 1: Conduct a Board Meeting

  • Notice: Issue a notice to all directors at least 7 days before the meeting.
  • Agenda:
    • Approval for adopting a new/amended Memorandum of Association (MoA) and Articles of Association (AoA).
    • Approval for the conversion of the private limited company into a public limited company.
    • Set a date, time, and place for the Extraordinary General Meeting (EGM).
    • Increase the number of directors to a minimum of three, as required for public companies under Section 149(1)(a) of the Companies Act, 2013.

Step 2: Issue Notice for EGM

  • Recipients: Directors, shareholders, and auditors.
  • Notice Period: At least 21 days before the EGM, unless 95% of members consent to a shorter notice period.
  • Mode of Consent: Writing or electronic mode.

Step 3: Hold the EGM

  • Resolutions:
    • Approve the new/amended MoA and AoA.
    • Approve the conversion of the private company to public company.
  • Documentation: Certified copies of resolutions, new MoA, and new AoA.

Step 4: File Forms with Registrar of Companies (RoC)

  • E-Form MGT-14: File within 30 days of passing the resolutions, along with:
    • Notice of the EGM with the explanatory statement.
    • Certified copies of the resolutions.
    • Copies of the new MoA and AoA.
  • E-Form INC-27: File within 15 days of passing the resolutions, along with:
    • Minutes of the meeting.
    • Copies of the new MoA and AoA.
    • List of company members with essential details.

Step 5: Obtain New Certificate of Incorporation

  • After the RoC approves the filings, they will issue a new Certificate of Incorporation, reflecting the change from “Pvt Ltd” to “Ltd”.

Post-Conversion Requirements

  1. Apply for a New PAN Card: Update the company’s PAN card with the new status.
  2. Update Business Stationery: Ensure all business letterheads and stationery reflect the new company name.
  3. Update Bank Details: Inform your bank about the change and update the account details.
  4. Notify Authorities: Intimate tax authorities and other relevant entities about the conversion.
  5. Print New MoA and AoA: Ensure the new documents are printed and distributed.

Documents Required

  • Digital Signature Certificates (DSC) and Director Identification Numbers (DIN) for all directors.
  • Identity and address proofs of directors.
  • Passport-size photographs of directors.
  • Proof of business address (ownership documents or rent agreement, NOC from owner, utility bills).
  • Certified copy of the latest financial statements and income tax return acknowledgment.

Compliance with Additional Requirements

  1. Alter MoA and AoA: Amend these documents to reflect the new status and file them with the RoC.
  2. Increase Paid-Up Capital: Ensure the minimum paid-up share capital is INR 5 lakhs or more.
  3. Appoint Independent Directors: As per the Companies Act, appoint the required number of independent directors.
  4. Comply with Listing Regulations: If listing on a stock exchange, adhere to SEBI regulations and other listing requirements.
  5. Public Company Reporting: Maintain additional statutory registers, hold annual general meetings, and file regular financial statements.

Frequently Asked Questions

Can a private company voluntarily convert into a public company?

Yes, a private company can voluntarily convert into a public company. Under Section 18 of the Companies Act, 2013, a private company can be automatically converted into a public company. This can be done simply by altering the Memorandum of Association (MoA) or Articles of Association (AoA) of the company.

What are the benefits of changing from a private limited company to a public limited company?

Benefits of Conversion:

  • Raising Capital: Public limited companies can raise capital from the general public through Initial Public Offerings (IPOs). Additionally, they can issue fixed deposits, debentures, and convertible debentures to the general public.
  • Market Recognition: Public limited companies enjoy better market recognition, credibility, and confidence in the minds of stakeholders.
  • Enhanced Opportunities: Public companies often have greater opportunities for growth, mergers, and acquisitions due to increased access to capital and market resources.
  • Share Liquidity: Shares of a public company can be freely traded on the stock exchange, providing liquidity to shareholders.

What happens to employees when a private company goes public?

When a company goes public, shares and options held by employees are often subject to a lock-up period, typically ranging from 90 to 180 days. During this period, company insiders, including employees, cannot sell their shares or exercise stock options.

When should a private company go public?

Companies may choose to go public when they are making money and there is high demand for their shares. Usually, an entrepreneur uses their savings and money from angel investors to start a business. As the business grows and starts making money, venture capitalists and private equity firms may be interested in investing more.

Conclusion

Conversion of a private limited company into a public limited company under the Companies Act, 2013, is a structured process that requires meticulous compliance with legal requirements. The benefits, including access to capital, increased valuation, and enhanced market presence, make this transition an attractive option for many growing businesses. Engaging with legal and financial professionals can ensure a smooth and compliant conversion process. InstaFiling specializes in facilitating the conversion of private limited companies to public limited companies under the Companies Act, 2013. They provide expert guidance, ensure meticulous compliance with legal requirements, streamline documentation processes, and offer tailored financial advisory services.

Request A Callback





    You may Also Call Us At

    +91 76790 91881
    Scroll to Top