Conversion of Pvt Ltd to Public Ltd

Overview of Converting a Private Limited Company to a Public Limited Company

A Private Limited Company is a business entity that is managed privately by individuals. It is one of the most preferred and highly recommended business structures in India. Chosen by young entrepreneurs for startups, there are approximately 1.61 million private companies registered in India. The requirements to set up a private limited company are simple and quick. You need a minimum of two shareholders, a registered office address in India, and a minimum paid-up capital as per regulatory requirements. Additionally, obtaining a Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the directors is mandatory. As a business grows, many entrepreneurs think that their private limited company needs to break its boundaries.

Therefore, in order to raise capital from the public through Initial Public Offerings (IPO), private limited companies get converted into public limited companies. A public listing of a company has a better reputation in the market, enhanced credibility, attracts investors, and provides liquidity for shareholders by allowing free trade of shares on stock exchanges. Some government contracts require a public structure of the business to enter into a contract. To set up a Public Limited Company, a minimum of three Directors is required, and there is no cap on the maximum number of members. In India, both private and public limited companies are regulated by The Ministry of Corporate Affairs (MCA).        

What is a Public Limited Company?

A Public Limited Company (PLC) is a business entity in India that can raise capital from the public by issuing shares through the stock market. It operates as a separate legal entity, meaning its existence is independent of its owners, and shareholders are only liable for their shareholding extent. It requires a minimum of 3 directors and seven shareholders, and there is a bar on the number of shareholders.

Features of a Public Limited Company

Unlike a private limited company, a Public Limited Company has fewer restrictions on ownership and share transfers. It has the following features:

• Minimum Requirements: To register a public limited company in India, a business must have at least three directors and seven shareholders. However, there is no upper limit on the number of shareholders, which makes it possible to raise capital from a large number of investors.
• Limited Liability: One of the biggest advantages of a public limited company is limited liability. The shareholders are not personally liable for the company’s debts or losses. Their financial risk is limited to the amount they have invested in shares.
• Ability to Raise Capital: A major reason businesses choose to register as a public limited company is the ability to raise funds from the public through an Initial Public Offering (IPO), where shares are issued to investors for the first time, or by getting listed on a stock exchange for regular trading.
• Separate Legal Identity: A Public Limited Company is considered a separate legal entity from its owners. The company can own assets, enter into contracts, take legal action, or be sued in its own name. Even if the shareholders change, the company continues to exist.
• Strict Compliance and Regulations: Public limited companies in India must comply with the Companies Act, 2013, as well as regulations set by the Securities and Exchange Board of India (SEBI) if they are listed on a stock exchange. These companies are required to file annual financial reports, undergo audits, and follow corporate governance.
• Higher Transparency: Since public companies raise funds from multiple investors, they must disclose financial statements, performance reports, and other relevant business information to regulators and shareholders. This builds trust among investors and helps maintain confidence in the company’s operations.

Advantages of a Public Limited Company

• Access to Large-Scale Capital: Public limited companies have the unique advantage of being able to raise substantial capital from the public, private investors, and institutional lenders.
• Easy Share Transferability: Shares in a public limited company can be freely bought and sold on stock exchanges, giving investors flexibility. This also makes it easier for early investors and founders to exit the business when needed.
• Increased Credibility and Trust: Public listing brings greater credibility to a company. Since these companies operate under strict regulations, customers, investors, banks, and other financial institutions see them as more stable and reliable.
• Expansion Opportunities: With access to large funds and a broad investor base, public limited companies can expand their operations, enter new markets, and increase production capacity. Due to their strong financial standing, they also have an easier time securing loans and partnerships.

Why Do Private Limited Companies in India Convert into Public Limited Companies?

A Private Limited Companies in India convert into a Public Limited Company due to the following reasons:

• Access to Public Investment: Private limited companies have restrictions on raising capital, as they can only issue shares to a limited number of investors. When a business needs large-scale funding, converting into a public company allows it to sell shares to the general public through an Initial Public Offering (IPO).
• Business Expansion: A private company can have a maximum of 200 shareholders, which limits its ability to bring in more investors. By becoming a public company, a business can increase its investor base and raise funds more easily.
• Improved Credibility and Trust: Public companies are required to follow strict regulatory and financial disclosure norms, which makes them more transparent. As a result, they gain greater trust from investors, customers, banks, and business partners.
• Easier Share Transfer and Liquidity: In a private company, selling or transferring shares is restricted and requires approval from other shareholders. However, once a company becomes public, its shares are freely traded on stock exchanges.
• Mergers and Acquisitions (M&A) Opportunities: Public companies often find it easier to acquire other businesses or form strategic partnerships. Since their shares are publicly traded, they can use them as part of the payment for acquisitions.
• Attracting and Retaining Talent: Public companies can offer Employee Stock Ownership Plans (ESOPs), which allow employees to become shareholders in the company. Many businesses use ESOPs as an incentive to attract top talent.
• Better Borrowing and Financing Options: Public companies have easier access to bank loans and financial instruments such as bonds and debentures. Banks and investors consider publicly listed companies less risky and make it easier for the Public Limited Company to secure funding at better terms.