Why a company thinks of going public, what compliances they have to
follow key consideration of pre-conversion and post-conversion, detailed steps from going private to public with the role played by merchant bankers.

Why Companies go Public

Going public and offering stock in an initial public offering represents a milestone for most privately-owned companies. A large number of reasons exist for a company to decide to go public, such as obtaining financing outside of the banking system or reducing debt.

Furthermore, taking a company public reduces the overall cost of capital and gives the company a more solid standing when negotiating interest rates with banks. This would reduce interest costs on existing debt the company might have. The main reason companies decide to go public, however, is to raise money – a lot of money – and spread the risk of ownership among a large group of shareholders. Spreading the risk of ownership is especially important when a company grows, with the original shareholders wanting to cash in some of their profits while still retaining a percentage of the company.
One of the biggest advantages for a company to have its shares publicly traded is having their stock listed on a stock exchange.

Advantages for a Company Having Listed Stock
In addition to the prestige, a company gets when their stock is listed on a stock

exchange, other advantages for the company include:

• Being able to raise additional funds through the issuance of more stock.
• Stock and stock options programs can be offered to potential employees,
• making the company attractive to top talent.
• Companies have additional leverage when obtaining loans from financial institutions.
• Market exposure – having a company’s stock listed on an exchange could attract the attention of mutual and hedge funds, market makers and institutional traders.
• Brand equity – having a listing on a stock exchange also affords the company increased credibility with the public, having the company indirectly endorsed through having their stock traded on the exchange.

Law Related to Conversion

Legal Provisions related to Conversion of Private Company into Public Company are given in Section 14 read with section 18 of the Companies Act, 2013 read with Rule Section and Rule 33 of Companies (Incorporation) Rules, 2014.

Text of the provisions of Section 14(1) of Companies Act, 2013:

Subject to the provisions of this Act and conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alteration having the effects of the conversion of –
 a private company into a public company;
Provided that where a company is a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from the date of such alteration, cease to be a private company.
Rule 33 of Companies (Incorporation) Rules, 2014, are reproduced for your quick reference.
Rule 33: Alteration of Articles

(1) For effecting the conversion of a private company into a public company or vice versa, the application shall be filed in Form No.INC-27 with a fee.
(2) A copy of the order of the competent authority approving the alteration shall be filed with the Registrar in Form No. INC-27 with fee together with the printed copy of the altered articles within fifteen days of the receipt of the order from the Central Government.

Explanation – For the purposes of this sub-rule, the term “competent authority” means, the Central Government.

Conversion of Companies already registered [Section-18]

Section 18 of the Companies Act, 2013 allows an existing Company to convert itself as a Company of other class by altering its memorandum and articles of association in the manner prescribed in Chapter II of the Companies Act 2013. Section 13 provides for alteration of Memorandum of Association whereas Section 14 provides for alteration of Articles of Association.

Key Considerations Pre-Conversion

Articles of a Private Company usually contains certain restrictions so during conversion process it is advisable to adopt a new set of articles for resulting public company in order to avoid any future administrative inconvenience.

• Members of the Company shall approve the conversion of Company into Public Company by Special Resolution.
• The name clause of Memorandum needs to be amended to exclude the word ‘Private’.
• If the Company has less than 7 members, appropriate steps should be taken to increase them to at least 7.
• If the number of directors of the Company is two, the number of directors should be increased to at least 3.
• Increase the authorized share capital and paid-up share capital as prescribed for a public company, if required.
• The Articles of the Company shall be suitably amended for the removal of restrictive provisions applicable to a Private Company. It is advisable to adopt a new set of Articles applicable to a Public Company.
• Company has not defaulted in the filing of Annual Returns or Financial
• Statements or any other document due for filing with the Registrar.
• Company has not defaulted in repayment of matured deposits or
• debentures or interest on deposits or debentures.

Procedures for Conversion of a Private Limited Company to Public Limited Company

Conversion of company does not affect any debts, liability, obligations or contracts incurred or entered into, by the company or on behalf of the company before conversion. Such debts, liability, obligations or contracts shall be enforceable in the same manner as if such conversion has not been done.

Conversion of the company does not affect any debts, liability, obligations or contracts incurred or entered into, by the company or on behalf of the company before conversion. Such debts, liability, obligations or contracts shall be enforceable in the same manner as if such conversion has not been
done.

Conversion of a Private company into a Public company involves alteration of the article of association of Private Company u/s 14 which cannot be done without passing a special resolution of Shareholders in the General Meeting

1. Calling of Board Meeting: Issue not less than 7 days notice and agenda for board meeting notice, in writing to every director of the company at his address registered with the company, for convening a meeting of the Board of Directors. The main agenda for this Board meeting would be:

• Pass a board resolution to get in-principal approval of Directors for the conversion of a private company into a public company by altering the AOA.
• To approve the draft new set of Memorandum and Articles of Association meeting the requirement of a Public limited company.
• Fix date, time and place for holding Extra-ordinary General meeting (EGM) to get an approval of shareholders, by way of Special Resolution, for the conversion of a private company into a public company.
• d. To approve the notice of EGM along with Agenda and Explanatory Statement to be annexed to the notice of General Meeting.
• To authorize the Director or Company Secretary to issue Notice of the Extra-ordinary General meeting (EGM) as approved by the board.

2. Issue of EGM Notice: Issue Notice of the Extra-ordinary General meeting (EGM) to all Members, Directors and the Auditors of the company in accordance with the provisions of Section 101 of the Companies Act, 2013.

3. Holding of Extra-Ordinary General Meeting: Hold the Extra-ordinary General meeting (EGM) on the due date and pass the necessary Special Resolution, to get shareholders’ approval for Conversion of Private Company into a Public company along with alteration in articles of association under section 14 for such conversion. For conversion 3/4th majority of shareholders is required as per Section 14.

4.ROC Form filing: For alteration in Article of Association for the conversion of Private Company into a Public company under section 14, few E-forms will be filed with concerned Registrar of Companies at different stages as per the details given below:

a. E-form MGT.14 – For filing special resolution with ROC, passed for conversion of Private Company into a Public company

In case of alteration in Article of Association for the conversion of Private Company into a Public Company Special resolution is required to be passed under section 14. Accordingly as desired by section 117(3)(a), a copy of this special resolution is required to be filed with concerned ROC through the filing of form MGT.14 within 30 days of passing a special resolution in the EGM. It is relevant to note that First you have to file form MGT.14 as SRN No. of form MGT.14 will be used in form INC.27.

Attachments of E-form MGT.14:

• Notice of EGM along with a copy of the explanatory statement under section 102;
• Certified True Copy of Special Resolution;
• Altered memorandum of association;
• Altered Articles of association
• Certified True Copy of Board Resolution may be attached as an optional attachment.

b. E-form INC.27 – Application for conversion of a private company into a public company As per Rule 33 of Companies (Incorporation) Rules, 2014, for effecting the conversion of a private company into a public company or vice versa, the application shall be filed in Form No.INC-27 with a fee. Accordingly, an application for conversion of a private company into a public company is required to be filed in e-Form INC.27 to the ROC concerned, with all the necessary annexures and with the prescribed fee.

Attachments of E-form INC.27:

• It is mandatory to attach Minutes of the member’s meeting where approval was given for conversion and altered articles of association.
• Altered Articles of Association;
• Altered Memorandum of Association
• List of members with numbers of shares held, details of members voting in favor of and against the resolution and abstained from voting.
• Certified True Copy of Board Resolution may be attached as an optional attachment.
• Other information if any can be provided as an optional attachment(s)

Approval BY ROC

As per Section 18, after receiving the documents for conversion of a Private
Company into a Public Company, ROC shall satisfy itself that the Company has complied with the requisite provisions for registration of the company. If so satisfied, ROC shall close the former registration and issue fresh certificate of incorporation, after registering the documents submitted for change in the class of the company.
It is further clarified in section 18(3) that conversion of the company does not affect any debts, liability, obligations or contracts incurred or entered into, by the company or on behalf of the company before conversion. Such debts, liability, obligations or contracts shall be enforceable in the same manner as if such conversion has not been done.

Post Conversion Formalities

Action Points required to be taken after getting a fresh certificate of Incorporation:

1. Every Alteration made in the memorandum or articles of the company shall be noted in every copy of the memorandum or articles as the case may be.
2. Arrange printing of fresh copies of Altered Memorandum and Articles of Association with new Certificate of Incorporation; Record minutes of the Board meeting and shareholder’s meeting in the minute’s book within 30 days of the conclusion of meeting along with the date of such entry.
3. Intimate about the conversion of the Company to all concerned persons/government authorities like Central Excise Authorities, Customs Authorities, Sales Tax Authorities, Service Tax Department, Chief Inspector of Factories, and Regional Provident Fund Commissioner, etc. all the other concerned authorities about the status change.
4. Make application to the Income Tax Department for Arranging New Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN).
5. Intimate all the Banks where Company is operating Bank Accounts about its conversion and file necessary applications and documents, as required by Bank, with regard to change in the name and status of the Account holder.
6. Inform all other Companies where Company has made Investments, taken loans, taken Insurance Policies, entered agreements of any kind and to all stakeholders.
7. Arrange new rubber stamps with the new name, and all the stationery with the new name of the Company.

The role played by Merchant Banker

IPO process for SME is easy in comparison of main board IPO. But it is still long and complicated process. It takes at least 4 months from the day company appoints lead manager(merchant banker).

The merchant banker is the overall process manager and does everything needed
to sell the shares. A typical IPO process consists of 5 stages:

1. Preparation
2. Approval
3. Marketing and distribution
4. Subscription
5. Allotment and listing.

First Stage
In the first stage, a draft prospectus is prepared by lawyers under the supervision of the merchant bankers. This document serves the twin purpose of mandatory disclosure to potential investors as well as presenting the investment thesis to convince the investors to invest in the issue. SEBI casts the responsibility of due diligence of everything written in the draft prospectus on the merchant banker.
Second Stage
In the second stage, the draft prospectus is filed with SEBI for approval. The merchant banker coordinates between the company and SEBI to satisfy SEBI’s queries and gets SEBI’s approval to market the issue to investors. The merchant banker also coordinates with the stock exchanges to obtain their in-principle approval for listing the shares

Third Stage
In the third stage, the merchant banker helps markets the issue to investors in India and around the world through in-person roadshows, advertisements and press meet and broker meets. During this process, it gets an idea about the demand for the issue and the price band in which the issue can be sold. It also coordinates the printing and distribution of application forms all over the country. Several other intermediaries like ad agencies, printers, brokers, etc. involved at this stage which is coordinated by the merchant banker.
Fourth Stage
Finally, the issue is opened for subscription generally through the book building route for price discovery and the merchant banker tracks the progress and ensures that the applications are duly received and transmitted to the registrar for processing
Fifth Stage
Lastly, the application forms received are processed, shares allotted and credited to the investors’ demat accounts, refunds processed and the shares are listed on the stock exchanges for trading. The final updated prospectus is also filed with the registrar of companies for their records. This entire process is coordinated by the merchant banker with the help of the registrar.