Conversion of Companies from

Public to Private and Private to

Public
The process of conversion of the Companies
from Public to Private and Private to Public shall
be done as to the process described in the
Companies Act 2063 as amended in 2074 as to
the Provision of s.13 and s.14 as mentioned in
the following slides:
 The Provision of the Nepalese Companies Act
s.13
(1) Any private company may be converted into the public company upon
fulfillment of the following conditions:
(A) if the Company’s AGM has passed special motion (Proposal प्रस्ताव) to convert
the private company into public company.
Provided the private company can not be converted into the public company
unless the private company fulfills the necessary terms and conditions as to the
Act.
(B) s.15….(repealed by the Ist Amendment)
(C) s.16….. The same
 Continuation of the Act s.13
(2) Pursuant to the above mentioned sub-section (1) (A) private company has to apply to the
OCR along with prescribed conversion fee in order to convert into the public company within
the 30 days from the date of the above decision of the AGM.
(3) Upon fulfillment of the above mentioned process of sub-section (2) and if the private
company has fulfilled all the conditions to work as the public company, OCR has to provide with
the certificate of conversion into public company within 60 days in prescribed formate by
specifying in written the same in the register (registration book).
(4) s.17….(repealed by the Ist Amendment)
(5) s.18….. The same
(6) s.19….. The same
(7) s.20….. The same
(8) Upon the conversion of any private company into the public company, all the conditions
applicable to such public company shall apply automatically to such private company from the
date of conversion.
(9) All the property and liability of the private company which has been converted into the
public company shall be considered as that of that private company automatically.
 s.13: No mandatory conversion requirement for private
companies
(a) Pursuant to Section 13(1)(b) and (c) of the Companies Act, a private company
is required to be converted into a public company in following conditions-(a) 25%
or more shares of such company are held by one or more public companies, or
(b) if such private company acquires 25% or more shares of a public company.
This mandatory conversion provision has forced a private company to comply
with all the requirements applicable to the public companies. For instance the
following conditions are applicable-(a) minimum paid up capital of 10 million (1
Crore) Nepalese Rupees or more, (b) minimum number of shares to be raised to
7, (c) minimum number of directors to be 3 with a requirement to appoint at
least 1 independent director. Further Section 13(1)(b) and (c) of the Companies
Act stand contrary to the provision of Section 14 which has required a public
company to be converted into a private company in a situation where the
number of shareholders is reduced below 7. Maximum number of directors to be
11 as before and at least 2 female direstor if directors’ number is > 7 in the BoDs.
Any one of them (BoDs) may be selected as Chairman upon their choice.
 Public Company
2. Mandatory requirement for telecommunication service provider companies to be
converted into a public company
(a) Section 12 of the Companies Act provided for provision pursuant to which certain
business activities like banking, insurance, mutual funds and other notified business
activities are required to be incorporated as public limited companies. The Amendment has
inserted additional provision in Section 12 of the Companies Act pursuant to which
telecommunication service provider companies having paid up capital exceeding Nepalese
Rupees 50 Million will have to be registered as public limited companies.
(b) Further, in the case of the existing telecommunication service provider companies
(while the Amendment does not define telecommunication service providers, it does
appear to include internet service providers by relying on the provision of the
telecommunication laws) which have paid-up capital of more than NPR 50 Million are
required to be converted into public limited company within a period of 2 years. Section 12
of the Companies Act only covers the form of incorporation and does not deal with the
mandatory requirement for issuance of shares to the general public. In view of this such
entities will not be required to issue shares to the general public unless mandated under
the Telecommunication Act or directives from the telecommunication regulator.
 Investment Companies exempted from Investment
Ceiling
(a) Section 176 of the Companies Act restricts a company to invest,
in excess of (i) sum total of 60% of its paid up capital and free
reserve or (ii) 100% of free reserve, whichever is higher, in any other
company (the “Investment Ceiling)” . The said Section 176 has also
excludes certain companies from application of the Investment
Ceiling. For instance, Section 176 of the Companies Act excludes,
amongst others, companies having main objective of buying and
selling securities" from the application of the Investment Ceiling. In
practice, the OCR had implemented Section 176 in the manner that
only the activity of trading in shares and not investment activity falls
within the coverage of exclusion. This meant that 40% of the equity
would be trapped and could not be utilized for making further
investments.
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 Contradiction on s.176 & Company Directive 2015 to be
matched
(b) The Amendment has inserted “Investment Company” within the
excluded business activity for which Investment Ceiling will not be
applicable. Recently, investors have widely used investment companies
(including foreign private equity funds) as an investment vehicle and
will stand to benefit by this regulatory clarification.
(c) It may be noted that the Company Directive 2015 issued by the
OCR (Clause 90), currently still provides that even the excluded business
activities (excluded under Section 176 of the Companies Act) can make
investment only up to invest up to (i) sum total of 90% of its paid up
capital, and (ii) 100% of free reserve. This provision still compels the
investment companies to keep 10% of their share capital idle. The said
Clause 90 is inconsistent with the provisions of Section 176 of the
Companies Act and will need to be streamlined with Section 176.
 Provision of Maximum Shareholders
(a) Pursuant to Section 9 of the Companies Act, a
private company can not have more than fifty (50)
shareholders. The Amendment has increased this
number to One Hundred and One (101). A private
company can now have a maximum of 101
shareholders. It is traditional to define the companies
as public companies or private companies in terms of
the minimum or maximum number of promoters or
shareholders.
 Continuation of the Previous Slide
Though the Companies Act and the Amendment still retain
this conventional concept, the Amendment has provided
flexibility to the private companies in terms of the
maximum number of the shareholders. The threshold of
maximum number of the shareholders does not apply in
case of the employee shareholders.
(b) The Amendment has removed Section 13(1)(b) and (c)
thereby allowing a public company to hold hundred percent
shares of private company and vice versa without the
requirement of mandatory conversion..
 Conversion of Companies from Public to Private: s.14
(1) A Public Company shall be converted into the Private Company upon the following
circumstances:
(A) If number of a Public Company’s shareholders reduces less than 7.
(B) If the Public Company could not maintain its paid-up capital as to the s.11 or could not
maintain the paid-up capital as to the s.11 because of the reduction of the paid-up capital as
to the s.57.
Provided the provision shall not be applicable to the company pursuant to s.11 (2)
(2) Upon the existence of the circumstances as of sub-section (1), the Public Company shall be converted into
the Private Company only after all the necessary process of amendments in its MOA and AOA within 6
months.
(3) The company shall apply to the OCR along with the amended MOA & AOA including prescribed fee within
30 days from the date of that amendment.
(4) Upon the receipt of the application from the company as to the above mentioned sub-section (3) the OCR
shall confer the certificate of Private Company specifying the same (about the process of conversion of the
company into the private company) in the register.
(5) Upon the conversion of the public company into the private company, all the property and the liability of
the former Company shall be transferred automatically into the later company.
 The Slide is
Prepared by
Narayan Prasad Giri