Circumstances Under Which a Private Company Becomes a Public Company

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


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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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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http://www.myetymology.com/latin/companio.html


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.



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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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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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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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Circumstances Under Which a Private Company Becomes a Public Company

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