Circumstances when a private ltd company becomes a public ltd company
The private limited company form of organization is preferred by businessmen because of the special privileges it enjoys. Capital is sourced from close friends, relatives and known persons and not from the public. Therefore, the Companies Act, 1956 does not impose stringent rules and regulations as those imposed on Public limited companies. In certain circumstances, a private limited would become a public company.
- Conversion by default
- Conversion by operation of law
- Conversion by choice or by option
Once a private company becomes a public company under any of the above mentioned circumstances, it would lose the privileges it enjoyed as a private company. On conversion, the rules and regulations applicable to public limited companies would become applicable.
1. Conversion by default
A private company:
- restricts the right to transfer shares,
- limits the maximum number of members to 50 and
- prohibits invitation to the public for subscription of shares or debentures.
If any of these conditions are violated, a private company would become a public Company by default.
2. Conversion by operation of law
In the following cases, a private company becomes a public company by the operation of law:
- When not less than 25% of the paid up share capital of a private company is held by one or more public companies,
- When the average total turnover of the private company is not less than Rs.25 crores for three consecutive years,
- When the private company holds not less than 25% of the paid up share capital of a public company.
- When the private company invites, accepts or renews deposits from the public.
The Companies Amendment Act, 2000 has given an option to these companies, either to continue as public limited companies or convert themselves into private limited companies by making the necessary changes in their Articles.
3. Conversion by Choice or Option
A private company out of its own free will can choose to convert itself into a public company. Generally, when private companies plan to expand and require more capital resources, they would convert themselves into public companies.
By becoming public companies they can issue shares or debentures to the public and get the required amount of capital. In India, many organizations which commenced operations as private companies have got themselves converted into public limited companies in order to expand and diversify.
Any private company which desires to get converted into a public company should make the necessary changes in the Articles and follow the below mentioned steps:
- It should convene a general meeting and pass a special resolution duly altering the Articles.
- The copy of the resolution along with the amended Articles should be filed with the Registrar within 30 days of passing the special resolution.
- The number of members should be increased to 7.
- The company has to apply to the Registrar for obtaining a fresh certificate of incorporation with the words ‘Private’ deleted from its name.