circumstances under which a private company becomes a public company
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WEST BENGAL NATIONAL UNIVERSITY OF JURIDICAL SCIENCES
TOPIC
CIRCUMSTANCES UNDER WHICH A PRIVATE COMPANY BECOMES A PUBLIC COMPANY
Prepared By:
NIVEDITA SEN
3RD YEAR
WBNUJS
CIRCUMSTANCES UNDER WHICH A PRIVATE COMPANY BECOMES A PUBLIC COMPANY
INDEX
INTRODUCTION...................................................................................................................................2
CHAPTERS.............................................................................................................................................5
1. Conversion by Default.....................................................................................................................5
2. Conversion by Law..........................................................................................................................7
(i) Section 43A of the Companies Act, 1956...................................................................................7
(ii) Section 3(1)(iv)(c) of the Companies Act, 1956......................................................................10
3. Conversion by Choice....................................................................................................................11
CONCLUSION......................................................................................................................................13
BIBLIOGRAPHY..................................................................................................................................14
Cases..................................................................................................................................................14
Statutes...............................................................................................................................................14
Book and Treatises.............................................................................................................................14
Regulations........................................................................................................................................15
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CIRCUMSTANCES UNDER WHICH A PRIVATE COMPANY BECOMES A PUBLIC COMPANY
INTRODUCTION
The term ‘company’, derived from the Latin term companio,1 has not been comprehensively
or exhaustively defined under the Companies Act, 1956. It merely defines ‘company’ in
Section 3(i) as a company formed or registered under the Act or an existing company. The
Apex Court has defined company as an institution like a State functioning under its basic
constitution consisting of the Companies Act and the Memorandum of Association.2
However, irrespective of its definition, one of the fundamental classifications of a ‘company’
is ‘private company’ and ‘public company’.
A private company is a company which has a minimum paid-up capital of one-lakh rupees,
restricted rights of transfer of shares, members not exceeding fifty in number (excluding
employees of the company and former employees who were members during their
employment), prohibits invitation to the public to subscribe to its shares or debentures and
prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives.3 A private company having a share capital must have provisions in
its articles in accordance with Section 3(1)(iii) and for any other type of private company,
must have provisions in accordance with Section 3(1)(iii)(b) and 3(1)(iii)(c).4 A public
company, on the other hand, is a company which has a minimum paid-up capital of five-lakh
rupees or a private company which is a subsidiary of a public company.5
Since, a private company has more restrictions than a public company; it also has certain
benefits and privileges over a public company. Such advantages include forming a company
1 See http://www.myetymology.com/latin/companio.html (Last visited on February 17, 2011). 2
Life Insurance Corporation of India v Escorts Limited (1986) 59 Com Cases 548.
3 Sec. 3(1)(iii) of the Companies Act, 1956.
4 Sec. 27(3) of the Companies Act, 1956.5
Sec. 3(1)(iv) as incorporated by the Companies (Amendment) Act, 2000.
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CIRCUMSTANCES UNDER WHICH A PRIVATE COMPANY BECOMES A PUBLIC COMPANY
by two people,6 allotting shares without issuing a prospectus or delivering to the Registrar a
statement in lieu of prospectus,7 no restrictions governing commencement of business, no
necessity to hold a statutory meeting,8 no entitlement to the public to inspect the profit and
loss account,9 and so on. As a consequence of these privileges available to a private company
it is necessary to regulate the private companies to ensure that they fulfil all the pre-requisites
of a private company. If these pre-requisites are not fulfilled and there is such an omission in
law, then the company ceases to be a private company and becomes a public company. Also
at certain times, a private company willingly may want to convert itself into a public
company. Consequently, the Companies Act envisages three circumstances where a private
company becomes a public company.
This project will delve into and analyse these circumstances under which a private company
becomes a public company which include conversion by default, conversion by law and
conversion by choice. For this purpose, the researcher has two research questions. These are:
1. Does a company change its legal personality on becoming a public company from a
private company, that is, does it need to be registered again and frame a new
memorandum of association?
2. Does a private company that has converted into a public company, loses all the
characteristics of a private company that it formerly had?
The project will be divided into three chapters to analyse the circumstances under which a
private company becomes public. The first chapter titled “Conversion on Default” which will
study Section 43 of the Companies Act, 1956 which envisages conversion on failure to
comply with the measures under Section 3(1)(iii). The second chapter titled “Conversion by
Law” will examine the ‘deemed public company’ concept by analysing Section 3(1)(iv)(c).
This chapter will also study Section 43A of the Companies Act which, though, has now been
6
Sec. 12(1) of the Companies Act, 1956.
7 Sec. 70 of the Companies Act, 1956.
8 Sec. 165 of the Companies Act, 1956.
9 Sec. 220 of the Companies Act, 1956.
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rendered ineffective by the Companies (Amendment) Act, 2000; provided for conversion on
account of shareholding and turnover beyond a certain limit. The third chapter titled
“Conversion by Choice” will elaborate on the ways in which a private company keen on
converting itself into a public company can do so, and the essential formalities that need to be
fulfilled in respect of that.
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CIRCUMSTANCES UNDER WHICH A PRIVATE COMPANY BECOMES A PUBLIC COMPANY
CHAPTERS
1. CONVERSION BY DEFAULT
Section 43 of the Companies Act, 1956 states that if any default is made by a private
company in complying with the provisions of Section 3(1)(iii), the company shall cease to be
entitled to any of the privileges and exemptions conferred on a private company, and shall not
be treated as a private company under the Act. Therefore, a private company becomes a
public company by default.
However, there is a proviso to this conversion. If the Central Government,10 is satisfied that
the default in complying with the conditions of Section 3(1)(iii) is accidental or due to
inadvertence or some other sufficient cause, or if the Government feels that on just and
equitable grounds, relief should be granted from the consequence of being converted into a
public company. To get such a relief a company or any interested person has to first file a
petition praying for relief by making an application,11 along with a fee of two-hundred rupees
as stated in the Company Law Board (Fees on Application and Petitions) Rules, 1991. The
documents required for this application comprise a copy of the memorandum and articles of
association, copy of the document showing that the default has been committed, affidavit
verifying the petition, a bank draft as an evidence of payment of the application fee and a
memorandum of appearance filed in accordance with Form 5 of Annexure 1.12 Prior to the
Central Government, under the Companies Act, 1956, the power to grant the relief was
vested with the Court. By the Companies (Amendment) Act, 1988 the power was transferred
from the Court to the Company Law Board. Finally by the Amendment in 2002, this power
was vested with the Central Government. Hence, the position now is that the Central
Government must be satisfied that a private company has defaulted in its obligations that it
needs to meet to remain private in nature.13
10 Companies (Second Amendment) Act, 2002.11
Form no. 1 of Annexure II to the Company Law Board Regulations, 1991. 12
Justice Y.V. Chandrachur & Dr. S.M. Dugar, A. Ramaiya Guide to the Companies Act, Part 1 Sec 1 to Sec. 245 (2008, LexisNexis Butterworths, 16th Ed. Reprint, New Delhi), Pg 565.13
Justice P.S. Narayana, The Companies Act, 1956 (Companies Rules & Allied Laws), vol. 1 (Hyderabad, Alt Publications, 2006), pg 172.
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Therefore, if a private company has more than fifty members, or invites the public to
subscribe to its shares or debentures, or accepts deposits from the public then by default it
converts into a public company. However, section 43 is a very general provision and does not
impose any time period within which the petition praying for relief has to be filed.14 Neither
does it impose any special penalty for default in complying with the provisions that should
have been compulsorily complied with.15 However, if the formal requirements of a public
company are not complied with, the company will attract penalties.16 For example, it
compulsorily has to drop the word ‘private’ from its name and has to continue its existing
proceedings under the altered name.17
A company which becomes public under Section 43 is not to be treated like a different legal
entity from the moment it becomes public. Its identity does not get altered by such
conversion.18 The reasoning is that the legal personality of a company is unchanged on
converting from private to public.19 There is no need for framing a new articles of association,
as amending few provisions in the original articles of association is workable.20 Therefore, if
a company becomes public not out of its own choice but by default, it does not lose all its
original characteristics. It has to make certain essential changes but need not change all its
original provisions.
14 A.K. Majumdar & Dr. G.K. Kapoor, Taxmann’s Company Law and Practice (2010, Taxmann Allied Services (P.) Ltd., 15th Ed., New Delhi).
15 Id.16
Laxman Bharmaji v Emperor, AIR 1946 Bom 18.17
Gur Narain Jagat Narain & Co. v Motor & General Sales Ltd ., 1980 All LJ 508.18
All India Reporter Limited v Ramachandra , AIR 1961 Bom 292. 19
Hindustan Lever Ltd. v Factory , AIR 1964 Mys. 173.20
All India Reporter Limited v Ramachandra , supra note 18.
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CIRCUMSTANCES UNDER WHICH A PRIVATE COMPANY BECOMES A PUBLIC COMPANY
2. CONVERSION BY LAW
A private company which becomes public by conversion of law is called a deemed public
company. There are two provisions under the Companies Act which envisage the concept of
deemed public company. These are Section 43A, which has now been rendered inoperative,
and Section 3(1)(iv)(c).
(i) Section 43A of the Companies Act, 1956.
Section 43A envisaged certain cases in which a private company would become a public
company by virtue of law. The first such circumstance was that if a private company having
share capital, has not less than twenty-five percent of its share capital held by one or more
bodies corporate, it would become a public company. However, it would not be deemed
public if certain exceptional conditions were fulfilled like share forming part of the subject
matter of trust, share not for benefit of the body corporate, share held by a banking company
as a trustee or executor or administrator of a dead person, share forming a part of the estate of
a deceased person, or has not been bequeathed by the deceased person by his will to any body
corporate.21 Secondly, if the average annual turnover of a Company is beyond a certain
amount, which by notification was set at twenty-five crore rupees,22 then irrespective of its
paid-up share capital it would become a public company on the expiry of a period of three
months from the last date of the mentioned average annual turnover.23 Thirdly, if a private
company accepts or renews deposit from the public who are not part of its members, directors
or their relatives, then the company would become a public company from the date of the
acceptance or renewal.24
Section 43A was introduced in 1960 to prevent misuse of private company status by
companies that actually in some way functioned by the private company.25 Hence by law they
were deemed to be public companies. It has been held by the Apex Court that on becoming a
21 Proviso to sub-part (1) (a) and (b) of Sec. 43 A, Companies Act, 1956.22
GSR No. 130(E) dated 23/12/1999. 23
Part (1-A) of Sec. 43A of the Companies Act, 1956.24
Part (1C) of Sec. 43A of the Companies Act, 1956.25
K.V.Shanbhogue, M.L. Maheshwary, R.N. Bhaduri, Company Law- Problems and Solutions (Calcutta, Calcutta study Circle on Corporate Law and Allied Subjects, 1984), pg 14.
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public company by default, the recovery of arrears of Income Tax cannot be made personally
from the directors unless the law expressly authorises such recovery since it is prohibited
under Article 265 of the Constitution of India, 1950.26 However, such companies, like under
Section 43, did not lose their identity completely on becoming a deemed public company.
In the case of Needle Industries (India) Ltd. V Needle Industries Newey (India) Holding,27 it
was held that a company which becomes public by virtue of Section 43A has a separate
existence from other public companies. It stated that Section 3(1)(iv) cannot be equated with
private company which has become a public company by virtue of Section 43A as such a
company can never be incorporated and registered as public company such under the Act. It
is registered as a private company and becomes a by operation of law a public company. The
fact that Section 43A provided that a deemed public company may continue to retain in its
articles, matters which are specified in Section 3(1)(iii), and the number of its members may
at any time be reduced below seven, reflected that there is a one extra category of companies
beyond public and private, which is where such deemed public company belong, because
otherwise like other public company such provisions would attract severe penalties too if
such deemed companies were considered strictly as public companies.28 The provisos to each
of the clauses that deems a company to become public, clarify the legislative intent that
companies may retain their registered corporate shell of a private company but will be
subjected to the discipline of public companies.29 Such companies are, therefore, ‘proviso
companies’, and any provision of the Companies Act which would endanger the corporate
shell of a 'proviso company' cannot be applied to it because, that would constitute an
infraction of one or more of the characteristics of the 'proviso company'.30 Therefore, Clause
(c) of Section 81(1); which provides the right to renounce shares in favour of any other
person, after expiry of either two years from the formation of the company, or expiry of one
year from the allotment of shares in the company; cannot apply to the private companies
which have become public companies under Section 43A and which include, that is, which
26
M.Rajamoni Amma v Deputy Commr of IT , (1993) 1 SCC Supp 604. 27
Needle Industries (India) Ltd. V Needle Industries Newey (India) Holding , (1981) 51 Comp Cas. 743.28
Id, ¶148. 29
Id, ¶152.30
Id.
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retain or continue to include, in their articles of association the matters specified in Section
3(1)(iii) and do not amend them.31
The Companies (Amendment) Act, 2000 inserted sub-section 11 to Section 43A which has
been rendered inoperative this section except for sub-section 2A. Therefore, consequently the
concept of deemed public company now stands abrogated. This change was made based on
the recommendation of the Working Group on the Companies Act, 1956.32 According to sub-
section 2A which was also inserted by the 2000 Amendment, a private company which has
been deemed public, on or after the commencement of the 2000 Amendment, and hence
needs to inform the Registrar who has to alter the word ‘private’ to ‘public’ in the name of
the company and also make necessary changes in the certificate of incorporation and
memorandum of association. An existing deemed company can opt to become a private
company by complying with Section 3(1)(iii). The Department of Company Affairs has
stated that fixing of any time limit because it is not feasible.33 Therefore, at any time such a
company can file an application for reconverting to a private company, and filing of no
application indicates that the company wants to remain as a public company.
Hence, deeming a private company as public has been invalidated under Section 43A, the
Companies Act still envisages other provisions under which a private company can be
deemed public. This provision can be seen in Section 3(1)(iv)(c). However, as the law now
stands, a private company will not automatically become a public company on account of
shareholding and turnover.
(ii) Section 3(1)(iv)(c) of the Companies Act, 1956.
31
Id ¶ 160.32
A. Ramaiya Guide to the Companies Act, supra note 12, pg 570.33
Vide Circular No. 3/2002.
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Section 3(1)(iv) defines a public company. One type of public company, envisaged under
sub-section (c), is a private company which is a subsidiary of a company which is not a
private company. A company is a subsidiary of another company if either the other company
controls the composition of its board of directors, or if the other company is controlling more
than fifty-percent of the voting rights in the Company, or if the other company is controlling
more than half in nominal value of the equity share capital.34 Therefore such a company
which is governed or controlled by another company, called the holding company, is a
subsidiary company.
Under Section 3(1)(iv)(c) if a holding company is public, then the subsidiary company cannot
remain private. The reason for this is that a subsidiary company is controlled by the holding
company and treated as having the characteristics of the holding company, as they have the
same rights and privileges and are subject to the same restrictions, duties and liabilities.35
However if the holding company is a private company, the position of the subsidiary as a
private company is not affected. On the question of whether certain provisions for private
companies can continue to apply to such a company, the Apex Court has held that the basic
characteristics of a private company, in terms of Section 3(1)(iii), do not get altered just
because it is a subsidiary of a public company in view of the fiction that it is a public
company under section 3(1)(iv)(c) of the Act.36 Therefore, it was held, the restrictions in
matter of transferability of shares contained in the articles of association shall remain even on
becoming a subsidiary of a public company.37
34
Sec 4 of the Companies Act, 1956.
35 A. Ramaiya Guide to the Companies Act, supra note 12, pg 109.
36 Hillcrest Realty Sd. Bhd. V Hotel Queen Road (P.) Ltd ., [2006] 71 SCL 41 (CLB-Delhi).37
Id.
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3. CONVERSION BY CHOICE
A private company can become public by choice by altering its article of association.38
Section 44 of the Companies Act, 1956 enables a private company, wanting to convert on its
own accord, to become a public company on filing a prospectus in lieu of that. Certain
prerequisites have to be complied with in order to convert voluntarily into a public company.
First, a Special Resolution has to passed to delete from the articles of association of the
company, the requirements of private company under Section 3(1)(iii). A copy of the special
resolution must necessarily be filed with the ROC within 30 days from passing of the
resolution.39 Secondly, membership of the company needs to be increased to not less than 7 if
it is less than 7 members.40 Thirdly, the number of directors of the company has to be
increased to a minimum of three.41 Fourthly, the paid-up share capital has to be raised to a
minimum of five-lakh rupees. Fifthly, within thirty days of passing the resolution, a
prospectus or statement in lieu of the prospectus in the prescribed form must be filed with the
Registrar.42 The conditions and requirements laid down in Section 44 (2)(a) and Section 44
(2)(b) should also be met. Care needs to be taken by the company that the correct application
is filled with the ROC, that is, Form No. 23 or e-Form No. 62.43
On the matter of the time from which a company becomes public by choice it has been held
by the Apex Court that, where a special resolution is passed by the company to convert itself
into a public company with immediate effect, and Form No. 23 along with other necessary
documents has been filed, it is sufficient for arriving at a prima facie conclusion that the
company had altered its status and had become a public company, even though the necessary
alterations had not been effected in the records of the ROC.44 The reasoning for this
judgment is that the resolutions being passed indicates the same thinking process or meeting
38 Sec 31(1), Companies Act, 1956.
39 Sec 31(2-A), Companies Act, 1956.
40 Sec 12, Companies Act, 1956.41
Sec 252, Companies Act, 1956.42
Sec 44(1)(b), Companies Act, 1956. 43
Vide GSR 56(E), 10.2.2006.44
Ram Purshottam Mittal v Hillcrest Realty Sdn. Bhd ., 2009 94 SCL 120 (SC).
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of minds, and hence the record of the ROC does not determine the status of the company
because it takes some amount of time to make the changes.45 It was held in the case of Tyres v
Printers (Mysore) Ltd,46 that so far as the rights and obligations of company are concerned, a
private company by virtue of voluntarily becoming a public company, it does not render
defective any legal proceedings by or against it. Hence, a company by its choice can become
public, but this act does not take away all the rights and obligations imposed on the company.
45 Id.46
Tyres v Printers (Mysore) Ltd . , 2008 86 SCl 171 (Kar.)
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CONCLUSION
A private company becomes a public company in three ways, that is, by default, by law or
by choice. A company which has become public by default can file for relief and remedy if
there is a genuine case of mistake. A private company which is a subsidiary of a public
company is controlled and governed by the public, and hence is considered to be private. For
conversion by choice, passing of special resolution is sufficient to indicate that the company
has converted, as there consensus amongst the members. However, cases have held that such
companies do not lose all the characteristics that they had while they remained a private
company and do not acquire a new legal identity. Though the company needs to file an
application with the ROC, it does not need to register itself again as it has already been done
when the company was created as a private company. The law regarding such conversion is
laid down, in a sufficient and clear manner, through the Companies Act, 1956, Government
notifications, regulations set by the Company Law Board and precedents of the Apex Court,
High Courts and Company Law Board.
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BIBLIOGRAPHY
CASES
All India Reporter Limited v Ramachandra
Gur Narain Jagat Narain & Co. v Motor & General Sales Ltd
Hillcrest Realty Sd. Bhd. V Hotel Queen Road (P.) Ltd
Hillcrest Realty Sd. Bhd. V Hotel Queen Road (P.) Ltd
Hindustan Lever Ltd. v Factory
Laxman Bharmaji v Emperor
Life Insurance Corporation of India v Escorts Limited
M.Rajamoni Amma v Deputy Commr of IT
M.Rajamoni Amma v Deputy Commr of IT
Needle Industries (India) Ltd. V Needle Industries Newey (India) Holding
Ram Purshottam Mittal v Hillcrest Realty Sdn. Bhd
Tyres v Printers (Mysore) Ltd
STATUTES
Companies (Amendment) Act, 2000.
Companies (Second Amendment) Act, 2002.
Companies Act, 1956.
BOOK AND TREATISES
Chandrachur, Justice Y.V. & Dugar, Dr. S.M., A. Ramaiya Guide to the Companies Act, Part
1 Sec 1 to Sec. 245 (2008, LexisNexis Butterworths, 16th Ed. Reprint, New Delhi)
Majumdar, A.K. & Kapoor, Dr. G.K., Taxmann’s Company Law and Practice (2010,
Taxmann Allied Services (P.) Ltd., 15th Ed., New Delhi).
Narayana, Justice P.S., The Companies Act, 1956 (Companies Rules & Allied Laws), vol. 1
(Hyderabad, Alt Publications, 2006
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Shanbhogue, K.V.; Maheshwary M.L;. Bhaduri, R.N.Company Law- Problems and Solutions
(Calcutta, Calcutta study Circle on Corporate Law and Allied Subjects, 1984),
REGULATIONS
Department of Company Affiars, Circular No. 3/2002
Company Law Board Regulations, 1991.
GSR 56(E), 10.2.2006
GSR No. 130(E) dated 23/12/1999
GSR No. 130(E) dated 23/12/1999.
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