 "Private Limited, Tata")
Following the decision of Tata Sons, the holding company of the Tata group that voted in favour of turning itself into a private limited company, there is apprehension that the move may embolden some debt-laden promoters to strengthen their grip on their companies.
Ramesh Vaidyanathan, managing partner, Advaya Legal, says the larger message for corporate India from Tata Sons’ decision to go private is “promoters should re-arrange their holdings and agreements such that they continue to retain a controlling role in the company”.
For Sumit Agrawal, founding partner, Suvan Law Advisors, the message is the need for more flexibility in management. “Becoming and remaining private gives a larger degree of freedom to company managements,” he adds.
Experts point out since a private company is required to make limited disclosures about its debt, liabilities and operations, turning private is one of the tools to achieve that objective, given the lower compliance requirements.
However, going private may not be smooth for promoters with stressed assets on their companies’ balance sheets if they are to go down this path. According to Shriram Subramanian, managing director, Ingovern Research Services, Tata Sons’ situation is unique. It was easy for shareholders of Tata Sons to take the decision to go private, as they could muster the requisite voting strength of 75 per cent.
“It will not be easy for debt-laden listed companies to go private. Not many of these companies will be able to muster the votes needed. Also, delisting requires greater than 90 per cent shareholding with a single hand,” says Subramanian.
Experts aver that going private may not solve their debt problems. “Certain relaxations that are provided to private companies under the Companies Act, 2013, are not available if they have borrowed funds from banks or public financial institutions,” says Ankit Singhi, partner, Corporate Professionals.
Further, a conversion to private limited company will cut off avenues for public funding. “A company drowning in debt will need a wide range of options to come out of it, else it would be a case of shooting oneself in the foot,” says Vaidyanathan. Securing approval from the NCLT could turn out to be another hurdle for these companies, say experts.
Several corporate law experts are not in favour of the holding companies of large business conglomerates going private. Citing the case of Tata Sons, Sandeep Parekh, founder, Finsec Law Advisors, argues that going private will create opacity, not just for Tata Sons “but for all the listed companies it holds, which will obtain lesser information about the holding company”.
There are clear provisions for the protection of the interest of minority shareholders in a private company, but the fact remains that any transfer of shares requires the approval of the board. This could curb the bargaining power of minority shareholders when it comes to transfer of shares, say experts.
“Of course, the board is expected to act in good faith in such situations,” says Vaidyanathan.
When a public company goes private
- Key differences in compliance, disclosure and governance
- Shares of a public company are freely transferable (unless the restrictions are contractually agreed between shareholders). There are restrictions on transferability of shares in a private company
- While a private company can give financial assistance to buy its own shares, a public company is not allowed to give any financial assistance from which its own shares will be bought
- Yearly rotation of directors at annual general meeting is not applicable to a private company
- Limits on remuneration for managerial personnel is not applicable to a private company
- Interested members can vote on related-party transaction in a private company, while this is not allowed in a public company
- Provisions of loan to directors and entities, in which directors are interested, are not applicable to a private company if certain conditions are met
- Interested director in a private company can participate in a meeting in which she/he is interested, provided the interest is disclosed
- Certain restrictions on the board, like borrowing beyond net worth, sale of undertaking of the company, etc. are not applicable if the company is a private company
- Certain provisions applicable to the shareholders’ meeting of a private company, like minimum notice period, contents of explanatory statement, minimum quorum, proxy, voting by poll and show of hands, are not applicable if the articles of the private company so provide
How to convert a public company into private
1. A company is required to pass a special resolution in order to effect changes in its Articles of Association
2. This has to be followed up with approval from National Company Law Tribunal (NCLT)
3. Every NCLT approval of such conversion, along with the altered Articles of Association, is required to be filed with Registrar of Companies
4. For converting a public listed company into private, the company will have to be delisted for which the provisions of Sebi Delisting Regulations, 2009, will apply, in addition to the Companies Act, 2013
Safeguarding minority interest in a private company
- Minority shareholder (irrespective of the shareholding) has right to receive the incorporation documents; to be invited to the general meeting; right to speak at the general meeting; right to vote; inspect corporate governance documents (but not the accounts)
- Shareholder(s) having more than 1 per cent shares can move a resolution for consideration of the general body by giving a notice to the company
- Shareholder(s) holding 10 per cent or more can bring suit for oppression and mismanagement before the NCLT
