Concept of Private Listed Company

Well any literate will take the above title as contradictory and absurd as there can be no such company which is privately held and still a publicly traded company. I want to assure our readers that the title is not my creativity, but what is proposed by Companies Bill, 2012 (herein after referred as Bill). I will elaborate the same in the later section of this article.

Let me start with first explaining the concept of private company under the present Companies Act, 1956 (herein after referred as Act). Private company as defined u/s 3 of the Act is a company which has a minimum paid-up capital of Rs. 1 Lakh, has restricted right to transfer its shares, members limited to 50 and prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. 50 members limit is in consonance with proviso of section 67(3) of the Act according to which issue becomes public where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more. Hence if a company has invited 43 people for subscription of shares that will be termed as private issue. This private issue term is quite important as section 73 of the Act provides for listing of the said security if it is issued to public in accordance to section 67 of the Act. This was the bone of contention in the much hyped Sahara case, in which we are currently witnessing freezing of assets of the companies involved. We should here note that a private company is prohibited from inviting or accepting any deposits other than its members which are restricted to maximum of 50. As soon as the invitation exceeds the mark of 50, it has to be listed in a recognized stock exchange pursuant to section 73 of the Act.

Now we should look upon the provisions as prescribed in the Bill as the premise of the article is based on the changes brought in by the Bill. Pursuant to clause 2(68) of the Bill private company™s definition has been altered significantly with respect to no. of members. Requirement as to minimum no. of members have been lowered to one with the introduction of One Person Company in India while, the maximum no. of members have been quadrupled to 200. However, it should be noted that the bill still prohibits any public invitation pursuant to clause 2(68) of the Bill. Private placement is covered under clause 42 of the Bill and still restricts the invitation of deposits to 50 members as was provided under section 67(3) proviso of the Act. Clause 40 of the Bill on the other hand is corresponding provision of section 73 of the Act, which provides compulsory listing of securities offered to public, and the relevant provision still is the same, as even now also only public deposits are to be listed.

So here is the paradox, now if the private company after the enactment of Bill wants to invite deposits from its members, which are now up to 200, it would have to go for listing pursuant to clause 40 of the Bill as even though private company is inviting deposits from its members but still it would be considered as Public Issue. Hence, the whole essence of Private Company will be doomed; if pursuant to clause 40 it has to list its securities.

I sincerely hope, that this not the legislative intent otherwise we will be seeing Private Listed Company for sure, albeit judicial interpretation will surely iron out such errors.