Understanding the difference between Private vs Public Company in India: There are many forms of companies that can be registered under the Companies Act, 2013 in India. Such types include Public Limited Company, Private Limited Company, Company Limited by shares, One Person Company, Company Limited by Guarantee. The popular forms of companies are Public Limited Company and Private Limited Company.
As the name suggests, a Public Company is a company where the shares are traded on the stock exchange and the fund is raised by the public whereas the Private Company is a company that is privately held, meaning the fund is raised by its founders and directors or a group of investors and such company’s shares are not traded on the stock exchange.
Over 5,000 companies are publically listed on Indian Stock Exchanges like Reliance Industries, HDFC Bank, Asian Paints, MRF, SBI, Tata Motors, Tata Consultancy Services, Wipro, HCL, etc. However, there are still many popular and wealthy companies in India that still chose to remain private and didn’t go public. For example, Amul, Patanjali, Zerodha, etc. However, these private companies may plan to become public companies in the future.
There are some other differences too which are not included in its definitions or meaning. This article aims to provide definitions of a private company and a public company. Moreover, we’ll also look into the key differences between the Private vs Public Company. Keep Reading.
The Definition of Private Company
Under the Companies Act, 2013, the definition of Private Company is provided as a company having a minimum paid-up share capital of one lakh rupees and which by its articles i) restricts the right to transfer its shares, ii) except for One Person Company, limits the number of its members to two hundred and iii) prohibits any invitation to the public to subscribe for its shares.
They also have limitations on the minimum number of members to 2 and the minimum number of directors to also 2. It is also called the closely held company as the shares are held by a close group of members.
If any private company wants to offer its shares to the public then it will have to comply with certain regulatory procedures to issue an Initial Public Offer (IPO) and through the IPO the private company can trade its shares on a recognized stock exchange and become a public company.
The Definition of Public Company
The Companies Act, 2013 suggests the definition of a Public Company as a company that is not a private company. This means that it is a joint-stock company and there is no restriction on the transfer of the shares, no prohibition on the invitation to the public to subscribe to its shares and debentures.
However, they must have a minimum of seven members and three directors. It must also have a minimum of Rs. Five Lakhs as its share capital. Unlike Private Companies, Public Companies can have any number of members as there is no restriction on the maximum number of members.
Key Differences between Private vs Public Company in India
— Raising Capital
With regards to the capital raising matter, Public Company is at the advantage of being able to raise the capital by issuing shares to the public which enables them to generate more funds.
Whereas the Private company has to rely on its small group of investors and members where the maximum number of members can only be 200. Hence, in terms of raising funds or capital Public Company is at the advantage.
— Complexity in Statutory and Other Legal /Regulatory Requirements
Being a Public Company, it has to comply with statutory, legal, and other regulatory requirements which are sometimes very complex and time-consuming.
Since the public companies are exposed to the public they will have to adhere to all the compliance-related procedures so that they can give a true and fair view of their activities and financial performance to its audience. Whereas for the private company, the extent of such requirements and complexity is at a quite low level.
— Ease of Valuation
Since the Public Companies are listed on the stock exchange, their details and information are easily accessible by the analysts and valuation officers. This will give a better picture of the valuation of such public companies. However, a private company’s valuation procedure is not as easy and fast as for a public company.
— Commencement of Business Operations
Public Companies can only start their business operations once they receive the Certificate of Commencement from the registrar of companies. While on the other hand, for private companies, they can commence their business operations as soon as they get the Certificate of Incorporation.
— Appointment of Directors
To become a director of a public company, the director will have to file a consent with the registrar to work as a director, sign the memorandum of the association, and to enter into a contract for the qualification of share. Whereas the private company’s director is not required to file his consent or follow any such procedure which makes it complex.
— Quorum Clause for the AGM
The quorum is a clause in the Articles of Association of a company where the term regarding the mandatory number of members needs to be present at each Annual General Meeting.
In the case of Public Companies, if the articles of association do not provide the minimum number, five members will have to be present for each AGM. While in the case of Private Companies, at least two members need to be present at each AGM.
— Use of Suffix
The Public Company is mandatorily required to include the words ‘Limited’ in its name while the Private Company must include ‘Private Limited’ in its name as a suffix.
— Conduct of Statutory Meetings
The Public Company is required by Law to conduct statutory meetings but in fact, for private companies, there is no such restriction.
— Issue of Prospectus
Public Companies are required compulsorily to issue the prospectus of their companies, while for private companies, there is no such compulsion. Private companies are not required to issue prospectus, however, they can do so voluntarily.
— Restriction on Transfer of Shares
If any shareholder wants to transfer his shares to some other person’s name then this is possible only in the case of Public Companies. The transfer of Shares in the case of Private Companies is not allowed.
— Minimum Number of Directors
The minimum number of directors in the case of a Public Company is three and for a Private Company such requirement is up to two directors.
— Maximum and Minimum Number of Members
There is no limitation on Public Companies to have a maximum number of members, however, Private Company can only have up to two hundred members.
In the case of a Public Company, they must have a minimum of seven members to form a new company, whilst a Private Company can be formed with at least two members.
— Subscription of Shares by Public
As the name suggests, public companies can get a subscription to their shares from the public but private companies can not get publicly subscribed. For the private companies, most of the funds are coming for Founders, Angel Investors or VCs.
— Managerial Remuneration
The Public Company is required by Law to follow instructions provided under Section 197 of the Companies Act, 2013 to provide managerial remuneration and the total remuneration should not exceed 11% of the net profit calculated as per the rules laid down under Section 198. However, private companies can pay remuneration in excess of 11% of the net profit.
— Issue of Financial Reports to the Public
Public Company has to mandatorily issue financial statements quarterly and annually for the public when private company need not issue their financial results for the public.
— Restriction on Issuance of Share Warrants
Public Company is allowed to issue Share warrants as opposed to the Private Company where they are not allowed to issue such share warrants.
— Further Issue of Share Capital
For the issue of subsequent share capital, private companies have been given certain relaxations to Section 62 of the Companies Act, 2013 but the public companies are required to strictly follow the timeline in which the notice should be issued.
In this article, we looked into the difference between Private vs Public company in India. The above differences also highlight that in some cases, private companies get advantages whereas, for certain other situations, public companies are better off.
However, if the Private Companies want to expand their operations and need funds from the public then such companies may apply for the Initial Public Offer (IPO) through which they can get their companies listed on the recognized stock exchange. Moreover, such procedures are lengthy and too costly also. The purpose, nature of business and potential investors are the key determinant factors on whether to select a Public Company or Private Company form to start a business.