MCA streamlines mechanism to privatise public companies

The Corporate Affairs Ministry (MCA) has streamlined the mechanism for considering applications to convert public companies into private companies. Such companies will now have an opportunity of being heard by the Regional Director of MCA if there are objections to the application.

Objections raised

This move is expected to sub serve the principle of natural justice while the application of conversion is being considered by the authorities. The Regional Director has to record in writing the specific objection against the application under the provision of Companies Act and hold a hearing within 30 days and record the consensus reached, post which the order has to be issued approving or rejecting the application along with the reasons.

Where no consensus is received from the stakeholders, the MCA has also now empowered the Regional Director to approve conversion of public company into a private company in the interest of the company. Again, the reasons have to be recorded in writing.

However, the MCA has now made it clear that no conversion should be allowed if any inquiry, inspection or investigation has been initiated against the company under the Companies Act 2013.

The latest MCA move is interesting as it comes on the heels of controversies surrounding the conversion of Tata Sons into a private company and the legal complexities in the adjudication of the Tata-Cyrus Mistry legal battle.

Also, in the wake of lockdown, several promoters in India Inc were looking to consolidate their holdings through buybacks, and this was seen as a prelude to taking the companies controlled by them into private entities.

Harish Kumar, Partner, L&L Partners, said this amendment will empower the Regional Director for disposing applications of conversion, where no consensus has been reached between stakeholders, on the ground that the said conversion is in interest of the company and is not intended to contravene or avoid any law.

Aseem Chawla, Managing Partner, ASC Legal, said the amendment in the incorporation rules do now provide an opportunity of being heard, which sub serves the principle of natural justice and at the same time would allow a considered adjudication of the application of conversion. This also is likely to obviate any avoidable litigation and is a mitigation exercise, he added. “The rules enjoins recording of reasons which would ensure a speaking order. The red herring of not allowing conversion in situations of investigation and impending prosecution still persists,” said Chawla.