The aim of this article is to discuss in detail the fundamental differences between private and public companies in India under the Companies Act, 2013. It also looks into those areas under the Indian company law where the distinction between the two gets blurred.
A company is an Artificial Person created by the process of law and can only be destroyed by the process of law. A company is a Legal Person, it means that a company can sue and be sued “by its own name”. A company can hold property, acquire, sell, lease, mortgage, gift or otherwise transfer a property by its own name. In other words, a company as such can be a transferor or a transferee of a property.
A company is a separate legal entity distinct from its members. It means that the assets of a company are not the assets of its members. Conversely, the assets of the members are not the assets of the company. Further, since the company is created by the process of law, it can be killed only by the process of law. Until a company is dissolved, it continues to be a legal person. The Companies Act, 2013 provides for a variety of companies that may be promoted and registered under the Act.
The two common types of companies which may be registered under the Act are:
Before going through the differences between a private company and a public, let us first understand the basic meaning of the same.
As per Companies Act, 2013, a private company is referred as a business entity that defies the fundamental of the transferability of the shares. It also means that members of the private limited company are not allowed to issue shares and debentures to the general public. Also, the same act set out the provision on the number of members that can exist in such a business model. As of now, private limited companies are only allowed to retain a maximum of 200 members. Moreover, the privately-held business is liable to include the term “private limited” at the end of their company’s name.
The Companies Act, 2013 defines a public company which stick to the limited liability and may offer shares to the “general public” by Initial Public Offer (IPO). An individual can also acquire the shares of such a company where the company is listed via the stock market. A public limited company is often referred to as a joint-stock company. Such a business model is regulated by the provisions of the Indian Companies Act, 2013.
A public limited company can be set up by the group of volunteers (irrespective of their numbers). Unlike private business entities, this business model doesn’t impose any limitation on the transferability of the shares. It means that the company can send an invitation to the general public for the issuance of shares and debentures.
Following are the main points of difference between a public company and a private company:
1. Minimum Paid-Up Share Capital: A company to be incorporated as a private company must have a minimum paid-up capital of Rs. 1,00,000, whereas a public company must have a minimum paid-up capital of Rs. 5,00,000. (NOTE: The minimum paid up share capital requirement has been done away with by the Companies (Amendment) Act, 2015.)
2. Minimum Number of Members: The minimum number of members required to form a private company is 2, whereas a public company requires at least 7 members.
3. Maximum Number of Members: The maximum number of members in a Private Company is restricted to 200. The Public Company have no restriction on a maximum number of members.
4. Transferability of Shares: There is complete restriction on the transferability of the shares of a private company through its articles of association, whereas there is no restriction on the transferability of the shares of a public company.
5. Issue of Prospectus: A private company is prohibited from inviting the public for subscription of its shares i.e., a private company cannot issue prospectus, whereas a public company is free to invite public for subscription i.e., a public company can issue a prospectus.
6. Number of Directors: A private company may have two directors to manage the affairs of the company, whereas a public company must have at least three directors.
7. Consent of the Directors: There is no need to give the consent by the directors of a private company, whereas the directors of a public company must have filed with the
Registrar consent to act as director of the company.
8. Qualification Shares: The directors of a private company need not sign an undertaking to acquire the qualification shares, whereas the directors of a public company are required to sign an undertaking to acquire the qualification shares of the public company.
9. Commencement of Business: A private company can commence its business immediately after its incorporation, whereas a public company cannot start its business until a certificate to commencement of business is issued to it.
10. Shares Warrants: A private company cannot issue share warrants against its fully paid shares, whereas a public company can issue share warrants against its fully paid-up shares.
11. Further Issue of Shares: A private company need not offer the further issue of shares to its existing shareholders, whereas a public company has to offer the further issue of shares to its existing shareholders as right shares. Further issue of shares can only be offer to the general public with the approval of the existing shareholders in the general meeting of the shareholders only.
12. Statutory Meeting: A private company has no obligation to call the statutory meeting of the members, whereas a public company must call its statutory meeting and file statutory report with the Registrar of Companies.
13. Quorum: The quorum in the case of a private company is two members present personally, whereas in the case of a public company five members must be present personally to constitute quorum when the number of members as on the date of the meeting is 1000 or less, fifteen members are required to present in person when the number of members as on the date of the meeting is more than 1000 but less than 5000, and thirty members are required to present in person when the number of members as on the date of the meeting is more than 5000.
14. Managerial Remunerations — Total managerial remuneration in the case of a public company cannot exceed 11% of the net profits, and in case of inadequate profits a maximum of Rs. 87,500 can be paid. However, these restrictions do not apply on a private company.
15. Retirement of Directors: In a private company, the directors are not required to retire by rotation. The directors can be permanent. Whereas, in a public company 2/3rd of the total number of directors must retire by rotation.
The Companies Act provides for a variety of companies that may be promoted and registered under the Act. However, two basic types of companies which may be registered under the Act are “private” and “public” companies. As it can be seen, there are multifarious differences between a private company and a public company. These are important to understand in order to appreciate the functioning of these entities in the corporate world. However, there are certain grey areas in the realm of private and public company where the distinction between the two gets blurred.
The content of this document do not necessarily reflect the views / position of RKS Associate, but remains a probable view. For any further queries or follow up please contact RKS Associate at admin@rksassociate.com