Difference between a Private Company and a Public Company

This article studies the Difference between a Private Company and a Public Company in accordance with the Company Law in India. It also studies the essential features of private and public companies.
Estimated Reading Time: 9 minutes

Introduction

A company is an artificial person created by the process of law and hence, can only be destroyed by the process of law. A company is a legal person. It means that the company can sue and be sued in its own name, the emphasis being on the words “in its own name”. A company can hold property, acquire, sell, lease, mortgage, gift or otherwise transfer a property in 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 the assets of the company are not the assets of the 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 (perpetual succession).

Kinds of companies

The Companies Act, 2013 provides for the kinds of companies that can be promoted and registered under the Act. The three basic types of companies which may be registered under the Act are:

(a) Private Companies (b) Public Companies (c) One Person Company (to be formed as Private Limited Company)

Private Company

Statutory meaning

As per Section 2 (68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles, –

  • restricts the right to transfer its shares.
  • (ii) except in case of One Person Company, limits the number of its members to two hundred and
  • (iii) prohibits any invitation to the public to subscribe for any securities of the company; It must be noted that it is only the number of members that is limited to two hundred.

Issue of debentures

A private company may issue debentures to any number of persons, the only condition being that an invitation to the public to subscribe for debentures is prohibited. The aforesaid definition of private limited company specifies the restrictions, limitations, and prohibitions, which must be expressly provided in the articles of association of a private limited company.

Alteration in Article of association

As per proviso to Section 14 (1) of the Act, if a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, such company shall, as from the date of such alteration, cease to be a private company. The words ‘Private Limited’ must be added at the end of its name by a private limited company.

Minimum number of members and directors

As per section 3(1), a private company may be formed for any lawful purpose by two or more persons, by subscribing their names to a memorandum and complying with the requirements of this Act in respect of registration. Section 149(1) further lies down that a private company shall have a minimum number of two directors. The only two members may also be the two directors of the private company. To start a company, minimum number of 2 members is required and a maximum number of 200 members as per the provisions of the Companies Act, 2013.

Limited liability

The liability of each member or shareholders remains limited. It means that if a company faces loss under any circumstances then its shareholders are not liable to sell their own assets for payment. Thus, the personal, individual assets of the shareholders are not at risk. The Company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members. This leads to perpetual succession of the company. The life of the company keeps on existing forever.

Index of names

A concept of index of names exists here. An index of the names entered in the respective registers of members and the index shall, in respect of each folio, contain sufficient indication to enable the entries relating to that folio in the register to be readily found. The maintenance of index of members is not necessary in case the number of members of the company is less than fifty. When it comes to directors, a private company needs to have minimum two directors. With the existence of 2 directors, a private company can come into existence and can start with its operations.

A company incorporated after the commencement of the Companies (Amendment) Act, 2019 and having a share capital cannot commence any business or exercise any borrowing powers unless –

(a) A declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and

(b) The company has filed with the Registrar a verification of its registered office.[1]

Circumstances when a private company will be treated as a deemed public limited company

A private company will be treated as a deemed public limited company in any of the following circumstances: Where at least 25% of the paid-up share capital of a private company is held by one or more bodies corporate, the private company shall automatically become a public company on and from the date on which the aforesaid percentage is so held. If the annual average turnover of the private company during the period of three consecutive financial years is not less than 25 crores, the private company shall be, irrespective of its paid-up share capital, become a deemed public company.

If not less than 25% of the paid-up capital of a public limited company is held by the private company, then the private company shall become a public company on and from the date on which the aforesaid percentage is so held. If a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives), such company shall become a public company on and from the date such acceptance or renewal is first made.

Public Company

Meaning

 By virtue of Section 2(71), a public company means a company which:

(a) is not a private company; and

(b) has a minimum paid-up share capital, as may be prescribed

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.

Minimum number of members

As per section 3(1)(a), a public company may be formed for any lawful purpose by seven or more persons, by subscribing their names or his name to a memorandum and complying with the requirements of this act in respect of registration. A public company may be said to be an association consisting of not less than 7 members, which is registered under the Act. In principle, any member of the public who is willing to pay the price may acquire shares in or debentures of it. The securities of a public company may be quoted on a Stock Exchange. The number of members is not limited to two hundred. [2]

Freely transferable interest

As per section 58(2), the securities or other interest of any member in a public company shall be freely transferable. However, any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.

Relevant case law

The concept of free transferability of shares in public and private companies is very succinctly discussed in the case of Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd. [2010][3], it was held that the Companies Act makes a clear distinction in regard to the transferability of shares relating to private and public companies. By definition, a “private company” is a company which restricts the right to transfer its shares. In the case of a public company, the Act provides that the shares or debentures and any interest therein, of a company, shall be freely transferable. The provision contained in the law for the free transferability of shares in a public company is founded on the principle that members of the public must have the freedom to purchase and, every shareholder should have the freedom to transfer. The incorporation of a company in the public, as distinguished from the private, realm leads to specific consequences and the imposition of obligations envisaged in law.[4] Those who promote and manage public companies assume those obligations. Corresponding to those obligations there are some rights, which the law recognizes as inherent in the members of the public who subscribe to shares of the company.

Characteristics of Private and Public Company

Here are certain characteristics by the nature of private and public companies; they can be seen as their differences:

A company to be incorporated as a private company must have a minimum paid-up capital of 1, 00,000, whereas a public company must have a minimum paid-up capital of 5, 00,000. Maximum number of members in a private company is restricted to 50; there is no restriction of maximum number of members in a public company.  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.

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.

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. 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.  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. It cannot issue share warrants against its fully paid shares, whereas a private company can issue share warrants against its fully paid-up shares. 

They 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.  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. 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. However, the articles of association may provide for the number of members to be more than required under the Act. 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 87,500 can be paid. However, these restrictions do not apply on a private company. A private company enjoys some special privileges, which are not available to a public company.

Conclusion

So, from the above research, we have seen the nature and working of private companies as well as the differences when researched about public company characteristically. Unless a Private company is converted to public company, a private company cannot raise deposits from public. There are certain points discussed above as to conversion. However, there are other various ways of raising funds by private limited company.

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.


[1] COMPANIES (AMENDMENT) ACT, 2019

[2] WWW.ICSI.EDU/PORTALS

[3] [2010] 154 Comp Cas 593 (Bom)

[4] WHDC V BAJAJ AUTO, 2010

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