Privatization of Public Companies in India

In this article, the author has underlined the procedure that is to be followed by public companies for privatization along with the meaning of the same. It further discusses the reasons for privatization and the critical ideational changes shall also be discussed in this article followed by analysis and conclusion.
Estimated Reading Time: 10 minutes

Introduction

The term privatization is referred to the process of transferring the property, business, or ownership, owned by the government( public companies) to the private sector which results in the government ceasing to be the owner of such business. The procedure of privatization requires the company to acquire private limited in its last name. In India, the State is more often than not regarded as the “guardian of public interest” in relation to relative effectiveness of commercial activities. The Indian judiciary, on the issue of privatising government owned entities has often underlined its support for the state’s policies to divest but also emphasised the requirement for better and broader policies to be evolved.  When it comes to privatization disputes, the methods followed by the judiciary can be gathered into two known steps.[1] First, if the issue is concerned fundamentally with the choice to privatize, the courts are hesitant to intervene; a well- defined policy follows the decision.[2]  In a subsequent step the courts investigate the methods followed by the business’s administration to guarantee that the existing rules are considered.

The Conversion of Public Company into Private Company is referenced in the Companies Act, 2013, and Incorporation of Companies Rules, 2014.  Private companies have comparatively less compliance to be followed under the 2013 Act than public companies. This requirement for less compliance consistence prompts increment Conversion of Public Company into Private Company. Before the enactment of the Companies Act, 2013, the National Company Law Tribunal (NCLT) had the authority to allow for the conversion of a Public Company into a Private Company. Owing to specific amendments in the 2013 Act, any conversion procedures of public company into private company are presently associated with it. In this article, the author shall underline the procedure that is to be followed by public companies for privatization along with the meaning of the same. The reasons for privatization and the critical ideational changes shall also be discussed in this article followed by analysis and conclusion. 

Meaning and Procedure under Company Law

Apart from the abovementioned definition, it is also pertinent to note that privatization also includes corporate privatization which means the transition of a company from being publicly traded to becoming privately held. It is inclusive of numerous processes that eventually lead to the sale of the assets owned by the government and transition to a private economy. The first significant attribute is the transferring of ownership to private owners, the second being the restriction of state authority in public companies and thirdly operational measures such as improving productivity and efficiency in public undertakings.[3]

Conversion of Public Company into Private Company: Required Procedure

The Companies Act of 2013 broadly categorises companies into two kinds, Public companies[4] and Private companies.[5] Companies having a restriction on the transferability of shares are private in nature as they engage in preventing the general public from subscribing to them unlike in the case of public companies. The most essential distinction between both the types of companies is the number of subscriptions made to them. A company which is not a private limited company is to be referred as a public company and has a minimum paid-up capital of five lakh rupees or such more paid-up capital as may be prescribed. The method of converting a Public Limited Company into Private Limited Company is referenced in the Companies Act, 2013 and Incorporation of Companies Rules, 2014. Companies mostly initiate a conversion into a Private Limited Company.

Before that, we have to perceive any reason why it is required to change the Public Limited Company into a Private Limited Company. Being a Public Limited Company it is required and ordered to follow different legal rules as given under the arrangements of Companies Act, 2013 and rules made thereunder. Apart from this, there are different sorts of consistence to be done under the arrangements of Companies Act, 2013 (Act), and SEBI Act. Private Limited Company has less compliance to follow when contrasted with Public Limited Company which has to operate under various guidelines given under the provisions of Companies Act, 2013 (Act), and SEBI Act.

Relevant provisions under the Companies Act, 2013 (Act) for Privatization of company

  • Section 13 of the Companies Act, 2013 states that alteration in the memorandum of any company may take place as per the rules given in the Act itself and further goes on to explain all adjustments in the modification of the memorandum. This section further states that no such approval is required in case of privatization if expansion/cancellation concerning “Private” signifies that the whole name is changed, in that conditions earlier consent is required as conceive in said the section.
  • Section 14 of the Act talks about the alteration in the company’s memorandum and conversion process to be implemented when converting Public Company into Private Company, it is additionally referred that earlier authorization is required. Moreover, this Section is to be read along with Companies Incorporation (Fourth Amendment) Rules 2018 wherein the detailed process for conversion of Public Company into Private Company has been underlined.
  • Section 18 of the Act is in regards with the conversion of Companies which are as of now registered or enrolled under the provisions of the 2013 Act.  Section 18 expressly states that a Company of any class may change over itself into a company of different class under the due provisions of the Act by altering the articles and memorandum of the company. The company needs to maintain specific compliance and the registrar is ought to fulfil the said compliances. This section further expresses that registration of the Company will not influence any obligations, liabilities, debts or agreements whatsoever.

When we read Section 13, 14 and 18 of the Companies Act, 2013 along with Rule 41 of the Companies (Incorporation) Rules, 2014 following steps need to be implemented for the conversion of Public Company into Private Company:

  1. With regards to the decision for conversion, a board meeting shall be convened wherein all the formalities in accordance to the secretarial standards will have to be adhered to as it forms a significant part of the conversion process. The minutes of such a meeting should also be recorded with precision.
  2. The representatives are to be authorized by the company to operate on its behalf for further conversion process. It is also required to obtain one certified true copy on behalf of the company in favour of any representative, in order for representative to represent the Company before the Regional Director.
  3. As per Sec. 17 of the Act, “The necessary E form should be filed pertaining to the decision of conversion of the Company, the mandate to file certain documents at the time of said filling. The said documents should be carefully submitted. The said application has to file within 60 days from the passing of the said resolution.”
  4. Moreover, such documents that are mentioned under R. 41 of Companies (Incorporation) Rules, 2014 are required to be submitted before the Regional Director together with the abovementioned application along with particulars mentioned in Rule 41 (2) of the said rules.
  5. Annexation of a list of creditors and debenture holders is required along with the said application along with the annexation of liabilities, claims, uncertain debts and due amounts.
  6. The form has to be filed in the form no. INC 25 A in vernacular and English language and the duly authenticated copy of the list of creditors and debenture holders is to be kept at the registered office, the same can be verified and inspected during the ordinary hours of business.
  7. The Regional Director may require additional information even after submission and information regarding the same needs to be submitted in the period of 15 days in E Form No. RD GNL -5. The applicant cannot file more than two resubmissions. The application may be rejected by the regional director within a period of 30 days after the submission of such application.
  8. In cases wherein no order of approval, or rejection or resubmission has been passed by the Regional Director, then said the application will be deemed to have been allowed and automatically the order would be passed.
  9. In case of any objection, the same shall be recorded in writing and the regional director shall conduct hearing within a period of 30 days upon the receipt of such said objection. In case of any consensus the Company can file an application for the same and the regional director shall pass an order within a period of 30 days.
  10. The Conversion order has to be filed in Form No. INC 28 within 15 days upon receipt of the order.

Why Privatize? Advantages of Privatization for Public Companies

There are a few major advantages of privatization. Firstly, when it comes to incentives, they are much higher in Private owned companies than in public companies. The directors and authorities of a privately owned business typically take care in the business, on the grounds that their salary is related with the presentation of the organization, while this motivating force is absent in open associations. Subsequently, privatization produces more prominent productivity of the firm. Second, there is a lot of political impedance in a public company, and this intrudes on the company while taking financially apt choices. Conversely, privately owned businesses don’t for the most part permit political components to impact their presentation. Third, all the objectives in the process might be short lived, in light of the fact that the government regularly hopes to acquire more votes from general public and along these lines the drawn out objectives of the organization are regularly founded on political choices. At long last, privatization may improve the serious limit of the firm in the market and therefore benefits customers.

The following points are why Public companies are opting for privatization:

·      Improved Efficiency

The most crucial argument in favour of privatization is that privately owned businesses have a benefit of motivation to reduce expenses and be progressively effective. In the event that you work for an administration run industry, directors don’t generally partake in any benefits.[6] In any case, a private company is keen on making benefit thus it is bound to reduce expenses and be proficient. Since privatization, companies, for example, BT and British Airways have demonstrated degrees of improved effectiveness and higher productivity.

·      Lack of Political Interference

It is contended that governments make poor financial supervisors. They are inspired by political pressures instead of sound financial and marketing prudence.[7] For instance a state enterprise may utilize surplus labourers which are wasteful. The administration might be hesitant to dispose of the labourers in light of the negative exposure involved in job losses. Subsequently, state owned undertakings regularly utilize such a large number of labourers expanding wastefulness.

  • Short Term view

The government may limit its thinking just as far as the next political decision. In this way, they might be reluctant to put resources into foundation upgrades which will profit the firm in the long haul since they are progressively worried about ventures that give an advantage before the political election.

  • Shareholders

It is further contended that a private company has to also deal with the pressure from the shareholders of the company to perform efficiently otherwise the company could be subject to a takeover. A state owned company does not have this standard of accountability or pressure, making it easier for them to be inefficient.

Analysis and Discussion

The procedure for privatization is elongated and needs to consider different compulsory formalities as mentioned in the Act and Rules. In any case, after change into a Private Company, the Private Company will have benefits regarding adherence to less rules and compliances. A public company needs to follow and carefully maintain the different compliances. However, a few precautionary measures should be taken during the transformation procedure. A few companies’ choices with respect to change into the privately owned business are dubious due to which all the precautionary measures should be taken. Likewise, the information and data submitted before the Regional Director must be right and in the event that there is an accord between all the shareholders for conversion, there will be a smooth procedure for the transformation. Notwithstanding, at times members of the company may additionally raise questions and issues over the conversion method.

Conclusion

Privatization in India has prompted noteworthy improvement in benefit and effectiveness of firms. It has also given an unobtrusive money related lift to the legislature through privatization receipts. In any case, the effect on business is negative. This is valid for SOEs (State Owned Enterprises) privatized through share issues and sale of assets, short term and since a long time ago run, and subsequent to controlling for the effect of deregulation and advancement on SOE execution. The legislature should proceed with the approach of privatization, fundamentally in view of its capability to release the beneficial capability of state-claimed ventures through noteworthy upgrades in their benefit and effectiveness. In order to improve the performance of Indian SOEs[8], the government has agreed upon to permit them more noteworthy self-governance and improve corporate administration by adjusting the boards and upgrading their power to make vital strategic choices.[9]


[1]See, for instance, the Supreme Court judgments in BALCO Employees Union v. Union of India, (2002) 2 SCC 333 and Centre for Public Interest Litigation v. Union of India , (2003) 7 SCC 532.

[2]BALCO Employees Union v. Union of India,  Ibid.

[3]Saul Estrin, Adeline Pelletier, Privatization in Developing Countries: What Are the Lessons of Recent Experience?, The World Bank Research Observer, Volume 33, Issue 1, February 2018, Pages 65–102, https://doi.org/10.1093/wbro/lkx007

[4]S. 2 (68) of the Companies Act, 2013

[5]S. 2 (69) of the Companies Act, 2013

[6]Pettinger, T. 2017. “Advantages and Problems of Privatization.”Economics 12 May.

[7]Vickers, J., and G. Yarrow. 1991. Privatization: An Economic Analysis. Cambridge, MA: MIT Press.

[8]Ahuja, G., and S. K. Majumdar. 1998. “An Assessment of the Performance of Indian State-Owned Enterprises.” Journal of Productivity Analysis 9(2): 113–32.

[9]Khanna, S. 2012. “State-Owned Enterprises in India: Restructuring and Growth.” Copenhagen Journal of Asian Studies 30(2): 5–28.

Hey there!

come here often?

Login To Come In