Steps to Convert a Public Company into a Private Company

Public companies enjoy the ability to raise capital from the general public, but that privilege comes at a cost: heavier disclosure norms, mandatory independent directors, tighter related-party transaction rules and constant regulatory scrutiny. Once a company’s growth plans no longer need public capital, many promoters choose to shed this compliance load by converting the company into a private one. This shift is not a mere name change. It is a structured legal process under the Companies Act, 2013, involving shareholder approval, government sanction and multiple filings with the Registrar of Companies (ROC).

Why would a public company want to turn private? 🔗

The most common trigger is compliance fatigue. Public companies must appoint independent directors, constitute board committees, follow stricter norms for related-party dealings and meet minimum public shareholding requirements in some cases. A private company faces none of these obligations in the same measure. Promoters looking for tighter control over ownership, fewer disclosure requirements and lower compliance costs often find conversion to private status more practical than continuing as a public entity, especially when the company never actually raised funds from the public or has since bought back its widely held shares.

The legal foundation: sections 13, 14 and 18 🔗

Three provisions of the Companies Act govern this process. Section 14 allows a company to alter its articles of association by special resolution, including alterations that convert a public company into a private one, but such a change is not valid unless approved by an order of the Central Government. Section 13 deals with alteration of the memorandum of association, which becomes relevant if the memorandum does not already permit such a conversion. Section 18 gives an existing company the general power to convert itself into a company of another class by amending its memorandum and articles in line with the incorporation provisions of the Act.

A key administrative change happened in December 2018. The Ministry of Corporate Affairs amended the Companies (Incorporation) Rules, 2014 to insert Rule 41, shifting the power to approve such conversions from the National Company Law Tribunal to the Regional Director. This made the process faster, since companies no longer need to approach the Tribunal for a routine structural change.

Step-by-step process of conversion 🔗

Step 1: Board meeting 🔗

The process begins with a board meeting, convened after giving directors at least seven days’ notice as required under Section 173. The board considers the proposal, approves the draft altered memorandum and articles, and fixes the date, time and venue for an extraordinary general meeting (EGM) of shareholders.

Step 2: Special resolution at the general meeting 🔗

Members must receive at least 21 days’ notice of the EGM along with an explanatory statement as required under Section 102. At the meeting, shareholders pass a special resolution approving the conversion and the specific changes to the articles.

Step 3: Filing form MGT-14 🔗

Within 30 days of passing the special resolution, the company must file Form MGT-14 with the ROC, attaching the resolution, the explanatory statement and the altered memorandum and articles.

Step 4: Public notice to stakeholders 🔗

Before applying for government approval, the company must advertise the proposed conversion in Form INC-25A, in one English newspaper and one vernacular newspaper circulating in the district of its registered office, at least 21 days before filing the formal application. Individual notice must also be sent by registered post to every creditor, debenture holder, the Registrar, the Regional Director, and any sectoral regulator the company is subject to.

Step 5: Application to the Regional Director 🔗

The company then files Form RD-1 with the Regional Director, within 60 days of passing the special resolution. This application must include the altered memorandum and articles, minutes of the EGM, a board resolution or power of attorney authorising the filing, a declaration that membership will not exceed 200, and confirmation that there is no default in repayment of deposits or debentures and no pending prosecution against the company.

Step 6: Regulatory review and ROC filing 🔗

The Regional Director may seek additional information or documents if the application is incomplete, allowing up to two resubmissions. If an objection is raised, a hearing must be held and an order passed within the prescribed timelines. Once approved, the company files a certified copy of the Regional Director’s order with the ROC, along with the printed altered articles, within 30 days of receiving the order. The ROC then registers the change and issues a fresh certificate of incorporation reflecting the company’s new private status.

What actually changes in the articles 🔗

The special resolution is not just a formality; it rewrites the substance of the articles. Three changes are essential. First, the articles must include a clause restricting the right of members to freely transfer their shares, a defining feature of a private company. Second, the articles must cap the number of members at 200, excluding present and former employee-members, as prescribed under the definition of a private company. Third, the articles must prohibit any invitation to the public to subscribe for the company’s securities. Alongside this, the memorandum’s name clause is amended to insert the word “Private” before “Limited,” and this new name is reflected in the fresh certificate of incorporation issued after approval.

Conditions the company must satisfy 🔗

Regulators do not approve this conversion automatically. Rule 41 and related provisions require the company to demonstrate a clean compliance record. There should be no pending prosecution under the Companies Act, no default in filing annual returns or financial statements with the ROC, and no default in repaying matured deposits, debentures or interest on them. If the company was previously listed on a stock exchange and has since been delisted, it must confirm that all delisting procedures under SEBI regulations were properly completed. These conditions exist to prevent companies from using the conversion route to escape ongoing regulatory obligations or unresolved investor grievances.

Why the conversion matters: reduced obligations, reduced accountability 🔗

Once converted, the company steps out of several public-company obligations. It is no longer required to appoint the same number of independent directors, form certain mandatory board committees, or comply with the stricter related-party transaction norms that apply to widely held companies. Private companies also benefit from several exemptions issued by the Ministry of Corporate Affairs that ease requirements around loans to directors, managerial remuneration approvals and related disclosures. This lighter compliance regime lowers costs and administrative burden, but it comes with a trade-off: less mandated transparency for outside stakeholders, since the checks built into public-company governance exist precisely to protect dispersed shareholders and the investing public. A company that no longer has public shareholders to protect has a reasonable case for shedding these requirements, but the reduced scrutiny is a genuine consequence worth understanding, not just a compliance perk.

What do you think? If a company converts to private status mainly to escape compliance costs rather than because its ownership has genuinely narrowed, should regulators apply extra scrutiny before approving such applications? And do you think the shift of approval power from the Tribunal to the Regional Director has made this process too quick relative to the governance changes it permits?

References

1. https://www.mca.gov.in/content/dam/mca/pdf/CompaniesAct2013.pdf
2. https://ibclaw.in/section-14-of-the-companies-act-2013-alteration-of-articles/
3. https://indiankanoon.org/doc/4191968/
4. https://fintracadvisors.com/mgt-14-applicability-in-different-cases/
5. https://www.registerkaro.in/post/conversion-public-company-into-private-company
6. https://www.taxmann.com/post/blog/faqs-on-company-conversion-types-private-public-section-8-opc-llp/