Kinds of Companies & Conversion of a Private Company into a Public Company

Kinds of Companies

Classification on the basis of liability

Companies with limited liability

(a) Companies limited by shares– where the liability of the members of a company is limited to the amount unpaid on the shares, such a company is known as a company limited by shares.

(b) Companies limited by guarantee– where the liability of the members of a company is limited to a fixed amount which the members undertake to contribute to the assets of the company in the event of its being wound up, the company is called a company limited b guarantee.

Unlimited companies– A company without limited liability is known as an unlimited company. In the case of such a company, every member is liable for the debts of the company.

Classification on the basis of the number of members

Private company-a private company is normally what the Americans call a ‘close corporation’. According to Section3(1), a private company means a company that has a minimum paid-up capital of Rs. 1,00,000 or such higher paid-up capital as may be prescribed, and by its Articles-

(i) restricts the right to transfer its shares, if any. The restriction is meant to preserve the private character of the company
(ii) limits the number of its members to 50, not including its employee-members
(iii) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company
(iv) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Every private company, existing on the commencement of the Companies(Amendment)Act, 2000, with a paid-up capital of less than Rs. 1,00,000 shall, within a period of 2 years from such date of commencement, enhance its paid-up capital to Rs. 1,00,000.

Public company– A public company means a company that –

(i) has a minimum paid-up capital of Rs. 5 lakh or such higher paid-up capital, as may be prescribed

(ii) is a private company that is a subsidiary of a company that is not a private company.

Every public company, existing on the commencement of the Companies(Amendment)Act, 2000, with a paid-up capital of less than Rs. 5,00,000 shall, within a period of 2 years from such date of commencement, enhance its paid-up capital to Rs. 5,00,000.

Classification on the basis of control

Holding company-Section 4(4)– a company is known as the holding company of another company if it has control over that other company
Subsidiary company-Section 4(1)—a company is known as a subsidiary of another company when control is exercised by the latter(called holding company) over the former called a subsidiary company.

A company is deemed to be a subsidiary of another company when-

(i) where the company controls the composition of the Board of Directors of the subsidiary company
(ii) where the company holds more than half the nominal value of equity share capital of another company.
(iii) where a company is a subsidiary of another company, which is itself is subsidiary of the controlling company.

Classification on the basis of ownership

Government company-a Government company means any company in which not less than 51 % of the paid-up share capital is held by-

(i) the Central government
(ii) any State government or governments
(iii) partly by the Central government and partly by one or more State governments.

Non-government company

Foreign company– it means any company incorporated outside India which has an established place of business in India. (Section 591(1))

Government Company

A Government company means any company in which not less than 51% of the paid-up share capital is held by-

(a) the Central Government, or
(b) any State Government or Governments, or
(c) partly by the Central Government and partly by one or more State Governments.

Example– State Trading Corporation of India

Rules applicable by Government companies

1. Appointment of auditor and audit reports-Section 619-the auditor of a Government company shall be appointed or re-appointed by the Comptroller and Auditor-General of India. The Comptroller and Auditor-General shall have the power to direct the manner in which the company’s accounts shall be audited by the auditor. A copy of the audit reports is to be submitted to the Comptroller and Auditor-General who shall have the right to comment upon it or supplement it.

2. Annual report to be placed before Parliament-Section 619-A-where the Central Government is a member of a Government company, it shall cause an annual report on the working and affairs of the company to be prepared within 3 months of its annual meeting before which the audit report is placed. The report shall be laid before both Houses of Parliament together with a copy of the audit report.

3. Provisions of Section 619 to apply to certain companies-the provisions of Section 619 shall apply to a company in which not less than 51% of the paid-up capital is held jointly by Government, Government companies, and public financial corporations.

4. Certain provisions of the Companies Act do not apply-Section 620-the Central Government may, by notification in the Official Gazette, direct that any of the provisions of the Companies Act(other than Sections 618, 619), specified in the notification –

(a) shall not apply to any Government company,
(b) shall apply to any Government company, with such exceptions, modifications, and adaptations, as may be specified in the notification.

Conversion of a Private Company into a Public Company.(M)

A private company may become a public company by-

1. Conversion by default-Section 43– Where default is made by a private company in complying with the essential requirements of a private company, the company ceases to enjoy the privileges and exceptions conferred on a private company. In such a case, the provisions of the Companies Act apply to it as if it were not a private company. Company Law Board may relieve the company from the consequences as aforesaid, if it is of opinion that the non-compliance was accidental or due to inadvertence or other sufficient cause.

2. Conversion by operation of law (deemed public company)-Section 43A–a private company becomes a public company-

(a) where not less that 25% of the paid-up share capital of the private company is held by one or more bodies corporate.
(b) where the average annual turnover of the private company at ny time is not less than such amount as may be prescribed for 3 consecutive financial years.
(c) where the private company holds not less than 25% of the paid-up share capital of a public company, having a share capital.
(d) where the private company invites, accepts, or renews deposits from the public.

3. Conversion by choice or volition-Section 44-if a private company so alters its Articles that they do not contain the provision which makes it a private company, it shall cease to be a private company as on the date of the alteration. It shall then file with the Registrar, within 30 days, either a prospectus or statement in lieu of a prospectus. When this is done, the company becomes a public company

A private company that becomes a public company shall also-

(i) file a copy of the resolution altering the Articles, within 30 days of passing thereof, with the Registrar;
(ii) take steps to raise its membership to at least 7 if it is below that number on the date of conversion, and also increase the number of its directors to more than 2 if it is below that number;
(iv) alter the regulations contained in the Articles which are inconsistent with those of a public company.

What are the Advantages of a Private Company?

Number of members-its formation requires only 2 persons. This facilitates its harmonious functioning and makes the choice of a private company must suitable for friendly or family concerns.
Allotment before minimum subscription-a private company can allot shares before the minimum subscription is subscribed for or paid.
Kinds of shares-a private company may issue share capital of any kind and with such voting rights as it may think fit.
Commencement of business-a private company can commence business immediately on incorporation without having to obtain a certificate for commencement.
Number of directors-a private company need not have more than 2 directors. All the directors can be given permanent appointments by a single resolution.
Index of members-a private company need not keep an index of members.
Prospectus or statement in lieu of prospectus– a private company may allot shares without issuing a prospectus or delivering to the Registrar a statement in lieu of prospectus.
Issue of new shares-it can issue new shares to outsiders. Section 81 does not apply.
Statutory meeting and statutory report–a private company need not hold statutory meeting or file with the Registrar the statutory report.
Rules regarding directors-the rules regarding directors are less stringent.