“Tata” to the Public Limited Companies

April 13,2018
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Apurv Sardeshmukh (Partner, Legasis Partners)

The most crucial decision during incorporation of a company is deciding which kind/type of company is to be incorporated. It is that which determines the nature, characteristic, rights and liabilities, procedures to be followed and compliances of a company.

The types of companies which the Companies Act, 2013 (“Act”) provides for is Private Company, Public Company, One Person Company, Small Company and Dormant Company. The key differences between the types of companies are those related to number of members, the rights and liabilities of members, transferability of shares, reporting obligations and restrictions which are imposed on the functionality of the company. The Act also provides for conversion of one type of a company into another type of a company. Various companies resolve in favor of conversion, most popularly, from public to private or private to public. A number of international companies such as Dell, Burger King, Hilton Worldwide Holdings, etc which were initially public limited have opted to convert into private limited companies. The figures published by Ministry of Corporate Affairs (“MCA”) also indicate a rise in the public limited companies which have opted for conversion.

The most recent Company, which proposes to join the league of converted companies, is Tata Sons. In 1917, Tata Sons was originally formed as a private company under the then Indian Companies Act, 1913. Under the Companies Act, 1956 which replaced the erstwhile Act, it became what was termed a “deemed public company” however, its Articles remained unchanged. A deemed public company was a company with mixed features of a private and a public company. Further, an Amendment was introduced in the 1956 Act in 2000, which abandoned the concept of deemed public company and further gave deemed public companies the option to once again become private companies upon intimation to the registrar of companies. However, Tata Sons continued to retain its public nature.

Tata Sons, which is now the principal holding company for Tata Group which in turn comprises of over 100 companies, have been making the headlines for a number of reasons. The most recent reason of them all is its proposed conversion of Tata Sons from a public limited company to private limited company. The same has received a nod from the shareholders and the investors as well. The first question that arises is “Why now?” As previously mentioned, Tata Sons had a chance to go private in 2000 but it choose not to avail the same. Further, by virtue of the provisions of the 2013 Act, Tata Sons had to either conform its Articles to the laws applicable to public companies or convert to a private one. Even then, Tata Sons choose to retain its public status. Hence, the question remains unanswered. The next question that arises is “What is it that motivates companies like Tata Sons to convert?” The simple answer to this question lies in provisions of the Act which provides a number of advantages and exemptions to the private companies.

Advantages to Private Companies:

When the Act was introduced, plentiful concerns were raised by the stakeholders mainly because a number of exemptions which were previously provided to private companies were done away with. However, addressing the same, MCA vide Notifications in the subsequent years amended the Act to provide privileges to private companies.

The primary differences which have immense effect on the overall functioning of the company are enlisted below.

  • “Related Party” Relaxation:

Related Party is defined under Section 2(76) of the Act. However, the same is not applicable for private companies in relation to Section 188 of the Act which, subject to the conditions enumerated in the Section, restrict related party transactions. Any contract or arrangement by a private company with its holding/subsidiary/associate company or a subsidiary of a holding company of the private company falls beyond the ambit of Section 2(76) and Section 188. Further, the restriction placed upon the shareholders who are “related parties” which prohibits them from voting in relation to resolution for approving a related party transaction is also not applicable to the Private Companies. Hence, even though, most of the contracts by a private company with its other related parties like its directors, a firm in which its director is a partner, a private company in which its director is a member or director will still require either consent of the Board or a resolution, at least the related party will be permitted to vote in relation to the same. Hence, lesser restrictions on related party transactions provide more power in the hands of the members to make decisions regarding its functionality.

  • Loans to directors and Power to purchase its own shares:

Section 185 and Section 67 of the Act places restrictions on companies to advance loan to their directors and further purchase its own shares. The restriction is not applicable to a Private Company which meets the following criteria:

 i. no body corporate has invested in the share capital of the company;

ii. the borrowings from banks, financial institutions or bodies corporate is less than two times its paid up share capital or 500 Million, whichever is lower; and

iii. there are no defaults in the repayment of such borrowings subsisting at the time of the proposed transaction.

The provisions have a direct impact on the alteration of capital of a company. Hence, exemption from the restrictions is giving more autonomy to its members to change the composition of the   capital or money which is possessed by the company.

  • Appointment and remuneration of senior management:

Section 194 states that the appointment, terms of appointment and remuneration payable to a managing director, whole-time director or manager shall be approved by the Board of Directors in the manner prescribed in the Sections. The companies appointing Senior Management are also required to comply with inter alia the terms and conditions set out in Schedule V of the Act. The importance of this Section is highlighted since a number of boardroom battles have recently been initiated in relation to the meetings which are conducting for the above purposes. However, private companies are exempted from the above requirement, which in turn relaxes the restrictions placed when a change in the management of a company is initiated.       

  • Participation by Interested Directors:

Section 184 deals with disclosure of interest by director. Section 184(2) prohibits interested director from participating in the Board meeting. In a private company, an interested director may participate in a board meeting after disclosing his interest; however, he will not be counted for the purpose of computing quorum.

  • Means by which capital can be raised:

Section 43 of the Act provides for only two kinds of share capital i.e. equity shares and preference shares. Shares with differential rights as to voting, dividend etc. are permitted subject to the conditions enumerated in the Act. However, private limited companies are free to issue any kind of shares subject to their memorandum and articles of association.  Similarly, in relation to voting rights, a private company can determine voting rights of its equity and preference shareholders in any manner it desires by incorporating suitable provision in its memorandum or articles of association.

Further, in relation to accepting of deposits from members, the conditions which are enumerated in the Act are not be applicable to private limited wherein the deposits are less than 100% of its paid up share capital and free reserves. However, such exempted private companies are required to file the details of such deposits from members with the Registrar of Companies (ROC).

These relaxation boosts investment in private companies which in turn will help to raise capital for the company.

  • Employee Stock Option Plan:

Section 62(1) (b) of the Act provides that rights offer shall be made to employees under a scheme of employees stock option by passing a special resolution.  In case of a Private Company, only a simple resolution is sufficient.

  • Other Exemptions:

Besides the above exemptions, which have a direct impact on the structure and functioning of the company, various exemptions in relation to conducting meetings of the board and filing of the board resolutions have been provided to private company. Provisions related meetings such as those related to notice, chairman, quorum, proxies, voting, demand of poll, etc are examples of such exemptions. Further, even the Secretarial Standards which regulate the conduct of meeting, in a number of provisions state that the private companies are exempted from the provisions in case they provide for the same in the memorandum of association or article of association.

Procedure for conversion of a Public Company into a Private Company:

The first step towards conversion of a Public Company into a Private Company is issuing a notice for a Board Meeting wherein the main agenda enumerates that the meeting is held for seeking the approval for conversion of the compnay. Further, an Extraordinary General Meeting is also required to be held wherein a special resolution by the members of the company in favor of the conversion shall be passed. The Articles of the Company are also required to be altered to that effect. A copy of the resolution along with the prescribed documents is to be filed with the ROC. Post which, an application is to be furnished in the National Company Law Tribunal (“NCLT”) which shall be accompanied by a number of documents enumerated in the Act and the Rules made there under. On the approval of by the NCLT, E-Form INC-27 is to be filed with the ROC within 30 days from the date of receiving of order of NCLT. Finally, a fresh certificate of incorporation is registered by the ROC.

The way ahead for Tata Sons:

The official statements released by Cyrus Mistry clearly indicate his unhappiness in relation to the decision taken by Tata Sons to go Private. Considering that the conversion is approved by the NCLT taking note of whether or not the same is for the benefit of the company, there exists a possibility that the Mistry group of Companies may prefer an appeal and try to prove otherwise. Further, the court may also analyse the effect that the conversion will have on the holding and subsidiary companies of the Tata Sons, which are over 100 in number. Hence, the road for the conversion of the company may face a number of speed breakers; however, once it reaches its destination, the benefit of a number of exemptions will be awarded to Tata Sons.