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In the earlier days, traders operated business through common law constructs like a partnership. Traders formed alliances for a shared profit motive, employed workers, and appointed trustees for the management of the business. With the passing off the Bubbles Act in 1720, two types of partnerships were recognised in England. They were known as merchant guilds. let us discuss the provisions for a Public Limited Company.
- Commanda: In such a partnership, the financier used to lend money to a trade in return for a share in the profits of the business. The liability of the financier was limited to the amount of money he lent.
- Societas: In such a partnership, the liability of all the partners was unlimited.
The English government subsequently created corporations under Acts of Parliament. One such example was the royal charter. The charter was granted to corporations to acquire monopoly or trade in a specified territory, for e.g. British East India Company. These companies were formed as partnerships and were known as regulated companies as they Acted on behalf of the government. Each member had limited liability, they traded with their own stock as per the regulations of the company. This ensured that the liability of each member was detached from the debts of the company and other members. These companies had a legal identity and a common seal. By the end of 16th century, most companies were formed as partnerships, by agreements under seals. Further, it provided the division of the enterprise into shares. These shares were transferable by the original partners. These partnerships were generally small in number and raised additional capital with help of members, instead of inviting public to subscribe to its shares.
Soon members started to operate on a joint account with a joint-stock, ensuing the origin on Joint stock companies. In a joint-stock company, a number of English traders would stock a ship with different items, hence ‘joint-stock’ and would sell it at a profit in faraway wealthy lands. These traders formed a contract between themselves and agreed to share the benefits from the sale of the joint stock. The captain of the ship was in a fiduciary relationship with the traders and Acted as a trustee of their goods.
Eventually, many indigenous monopolistic syndicates started germinating in the market. By the end of the 17th century, companies began inviting the public to subscribe to their shares. This led to a spurt of companies in the market prompting the infamous South Sea bubble. Most companies operated without charters or in pursuance of old charters. Thereupon, the Bubbles Act, 1720 prohibited the formation of joint stock companies, unless approved by the royal charter. The intent behind the Act was to prevent small companies from sprouting up as it abatedthe power in the hands of the Parliament and to subside the clash with major companies, e.g. South Sea Company. The Act remained in force until 1825. The Act proved to be a failure as many companies ceased to obtain charters for incorporations. Unincorporated companies could hardly be sued as their ownership kept changing, and the members apprehended the risk of unlimited liability. Likewise, there was no check on the Actions of unscrupulous promoters. This set back the growth of several companies. The Act became a dead letter of law post 1825, and the Board of Trade handed responsibility for overseeing company legislation in England.
After the annulment of the Bubbles Act, 1720, Industrial Revolution was in full swing. This led to the creation of new statutes, The Trading Companies Act, 1834 and The Chartered Companies Act, 1837. The latter provided for limited liability to members to the amount of shares paid by them, by an express provision in the letters of patent. The Parliamentary Committee on Joint Stock Companies headed by William Gladstone spearheaded the passing of The Joint Stock Companies Act, 1844. The Act prohibited the formation of unregistered companies, and provided for the registration of companies with 25 or more members, without obtaining a royal charter. The Parliament successively enacted the Limited Liability Act. The Act provided for limited liability to members of a registered company. Likewise, it introduced the concept of Memorandum and Articles of Association. Companies Act, 1862 was the first statute to bear the name ‘Companies’ in its title. It provided for the incorporation of companies limited by guarantees. Most Acts have considerably retained the same fundamental features with a few alterations until the present Companies Act, 2006.
It is pertinent to appreciate the history behind company law in England, as it is adopted by several Commonwealth jurisdictions, including India. It helps provide an insight into the origins of company law and the evolution of Public companies.
Company law in India
Company laws in India have been earnestly influenced by their counterparts in England. The first company law in India was the Joint Stock Companies Act. 1850. This Act recognised the concept of separate legal entity, corporate identity. However, it did not grant the privilege of limited liability to members of a company. It was soon replaced by the Joint Stock Companies Act, 1857 which recognised the concept of limited liability, excluding banking companies.
The first comprehensive Act which aimed at consolidating and amending laws relating to incorporation, regulation, and dissolution was the Companies Act. 1866. This too was traced on top of the blueprint of its English correspondent. Subsequent to several amendments and revocation of Act, the Indian Companies Act, 1912 was passed. Thereafter, the government of India appointed a 12-member committee headed by H.C. Bhabha to review the former Act and recommend suggestions as there was flagrant malpractices in management and promotion of companies. Consequently, the Indian Companies Act, 1956 was enacted.
However, the new Act failed to keep pace with the burgeoning Indian economy and growing international market post the 1991 economic reforms. Hence, piecemeal amendments in the Act could not serve the changing needs. Therefore, in harmony with recommendations made by the Parliamentary Standing Committee on Finance and suggestions of stakeholders and investors, the Companies Act, 2013 was passed. This was a landmark legislation as it brought about manifold concepts such as one person company, independent director, woman director, corporate social responsibility, etc. This legislation too was based on the companies Act in England. However, it has been drafted so as to accommodate the Indian circumstances and the socio-capitalist pattern of Indian economy to the best possible extent.
What is a Company?
A company in common parlance is the association of persons who have come together for a common motive. This common motive may be for the object of trade, sports, business, etc. Many authors and notable jurists have defined the term company. Prof. L.H. Haney defines company as “an artificial person created by law having a separate entity with a perpetual succession and a common seal.” Chief Justice Marshall defines a corporation as “an artificial being, invisible, intangible, and existing only in the contemplation of law. Being a mere creation of law, it possesses only the properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.
In summary, a company is incorporated association of persons, an abstraction of law, in a sense that it is an artificial person, having an independent legal entity with perpetual succession, a common seal, and carrying limited liability. These characteristics ensure that a company is distinct from its members owing to its securities. Prof. N.M. Butler said that “The limited liability corporation is the most significant single discovery of modern times. Even steam and electricity are less important than the limited liability company.Companies generate a substantial portion of the world’s wealth, people most often use companies as a tool for running a commercial enterprise. Most companies start of small with a few members. Once an enterprise flourishes, the management seeks to expand. For expansion, a company requires capital, this can be achieved by inviting more people from the public to subscribe to its securities, which can help fund its operations. Section 2(20) of the Companies Act, 2013 defines a company as incorporated under the Act or under any previous company law. Section 3(1)(a) states that a company may be formed for any lawful purpose by seven or more persons if it is a public company by subscribing their names to the memorandum of association and complying with the provisions of this Act in respect of registration.
A company can be categorised based on liability of its members:
- Company limited by shares: Section 2(22) states that liability of each of its members is limited to the amount unpaid on the shares held by each of them.
- Company limited by guarantee: Section 2(21) states that liability of each of its members is limited the amount members have undertaken to contribute to assets of the company in case it is being wound up.
- Unlimited companies: Section 2(92) describes that a company having no liability on its members is said to be an unlimited company, Creditors can file a claim against members for the company’s debts.
Public limited company
The two most common ways people have comprehended the term is that a public limited company can offer shares to the public. Its articles and financial statements are public documents accessible to the general public. It is a distinct legal entity with limited liability. Public companies customarily trade on the stock exchange, and accumulate capital from subscribing its securities to the public. India has a total of 23 stock exchanges with close to seven thousand public companies.
Section 2(71) of the Companies Act, 2013 describes a public company as a company which
- is not a private company;
- having a minimum paid up share capital as may be prescribed
The requirement attached to the provision conveys that if a private company is a subsidiary of a public company, then it shall be deemed to be a public company for the Act, even where such subsidiary company continues to be a private company in its articles. Post the Companies (Amendment) Act, 2015, the requirement of a public company having a minimum paid-up share capital of ₹5 lakh or more has been omitted.
A public company may be formed by persons among the public including Indian nationals or foreigners. It may be conceived in the government, cooperative, joint, as well as private sector of the economy.
Some examples of public companies are, Reliance Industries, Tata Motors, Bharti Airtel, Larsen & Tourbo, etc.
Section 4(2) of the English Companies Act, 2006 describes a public company as a company limited by shares or limited by guarantee and having a share capital.
- Its certificate of incorporation states that it is a public company, and
- it has complied with the requirements as to registration or re-registration in terms of the Act, or former Companies Acts.
Likewise, Part 18 of the Irish Companies Act, 2014 states that the liability of members is limited to the amount unpaid on shares held by them. Withal, it requires that the nominal value of the company’s allotted share capital must not be less than €25 thousand, out of which 25% must be fully paid before the company commences business or applies any borrowing powers,
The definition of commonwealth above jurisdictions is somewhat similar.
Procedure to open a public company in India:
Obtain Director Identification Number (DIN) for directors à Obtain their Digital Signatures à Get name of company approved upon submission of form INC 1 à Submit Articles of Association and Memorandum of Association along with form INC 7 à Certificate of incorporation
Salient features of a public limited company
- Minimum number of subscribers: At least 7 persons must subscribe to the memorandum to incorporate a public company.
- Limit on maximum number of members: There is no ceiling on the maximum number of members in a public company [Section 2(68)].
- Raising of capital: A public company can invite the public to subscribe for any securities of the company. It can issue raise capital by issuing a prospectus (Section 23).Communication relating to issue of the prospectus should be to the public and not private communication. It may also issue securities by way of rights or issue bonus, or through private placement. According to Section 62(2)(a)(i), offer of rights share must be made by a notice specifying the number of shares offered and giving at least 15 days, not exceeding 30 days from the date of the offer. If the offer is not accepted within the specified duration, it shall be deemed to be inclined. Likewise, a public company can make further issue of shares to its employees under a scheme of employee stock option by passing a special resolution [Section 62(1)(b)].Earlier, a public company was mandated to submit a return to the registrar regarding changes in shareholding by promoters and top ten shareholders within 15 days. However, this retirement has been done away with to simplify compliance.
- Minimum subscription: A public company cannot allot securities without receiving minimum subscription (Section 39).
- Transfer of shares: A public company has no restrictions on transfer of shares, hence they are freely transferable [Section 2(68)]. As per Section 44, both shares and debentures are movable property capable of being transferred in the manner provided in the articles.
- Acceptance of public deposits: A public company can accept, as well as invite deposits from the public (Section 76).
- Issue of securities in dematerialised form: Only a public company can issue securities in the dematerialised form (Section 29).
- Articles: A public company may either formulate its own articles or endorse the model articles appended to the Act. For e.g. Table F provides for articles of association of a company limited by shares. Similarly, Table G provides for articles of association of a company limited by guarantee and having a share capital (Section 5).
- Provision for entrenchment of articles: A public company can amend the provisions for entrenchment as to alteration of articles in its article only by passing a special resolution.
- Minimum number of directors: A public company must have a at least 3 directors [Section 149(1)]. As per Section 162, appointment of each director should be made by a separate vote. The board of directors can fill a casual vacancy in the office of a director.
- Retirement of directors: At least two-thirds of the directors of a public company must be such whose office is liable to retire by rotation. Likewise, one-third of such directors must retire by rotation every annual general meeting.
- Independent directors: A public company has to appoint independent directors and must have at least one-third of the total number of directors on its board as independent directors [Section 149(4)].
- Small shareholders’ director: A listed public company shall have a director elected by small shareholders from amongst themselves, only if not less than 1000 small shareholders or one-tenth of a total number of such shareholders, whichever is lower, gives notice in this regard (Section 151).
- Quorum for general meeting: The quorum varies with the number of members of the company. The quorum may range from 5 to 30 depending on the number of members in the company. For e.g., quorum is 15 if members are more than 1000 (Section 103).
- Report on annual general meeting: A report has to be prepared and be filed with the registrar, consequent to every annual general meeting (Section 121).
- Managerial remuneration: The total remuneration should not exceed 11% of the net profits of the company unless a special resolution is passed (Section 197). As per Section 67(2), a public company is not permitted to give financial assistance, by way of loan, guarantee or otherwise for the purpose of purchase of any shares by any person in the company or any of its holding company.
- Constitution of audit committee and nomination and remuneration committee: Every listed public company, all public companies with a paid up share capital of ₹10 crores or more, and all public companies having incumulative, outstanding loans, or borrowings, or debentures, or deposits exceeding ₹50 crores or more, shall constitute an audit committee and nomination and remuneration committee (Section 177 & 178).
- Secretarial audit: As per Section 204(1), every company having paid up capital of ₹50 crores or more or having a turnover of ₹250 crores or more shall annex a secretarial audit report along with its director’s report.
- Rotation of auditors and audit firm: No listed company is allowed to appoint an individual for more than one term of more than five consecutive years or an audit firm for more than two terms of five consecutive years. This shall apply to only those unlisted public companies which have a paid up share capital of ₹10 crores or more, and other public companies having paid up share capital of less than ₹10 crores but having public borrowings from either financial institutions or banks, or public deposits of ₹50 crores or more.
- SEBI Regulations: Only regulations notified by SEBI are applicable in the case of public listed companies.
Types of public companies
- Listed companies: As per Section 2(52) of the Companies Act, 2013 a listed company is such which has any of its securities listed on any recognised stock exchange, for e.g. BSE, NSE, etc. It can issue a prospectus for inviting people to subscribe to its securities by way of an initial public offering or can make a further public offer. This ensures ownership in the hands of several shareholders, securing liquidity. The value of dividend to be paid to its shareholders can easily be derived since the market value can simply be calculated. For e.g. Wipro, Tata Consultancy Services, etc. The shares of a listed public company are traded using a Demat account.
- Unlisted Companies:Such companies are mostly owned by its founders or private investors. They are not empowered to issue a prospectus to the public, as their securities are not listed on any recognised stock exchange. Unlisted securities are often referred to as over-the-counter securities, as deals are made subject to preconditions of the parties. They usually procure their capital from their members, directors, their friends and relatives. An unlisted public company is different from that of a private company, as it does not have any limit on the number of shareholders to raise capital for commercial ventures. They have less stringent regulatory compliances as they are not liable to comply with any regulation notified by SEBI, withal, it has to comply with guidelines issued by the central government or ministry of corporate affairs. For e.g. Bennett Coleman, Parle, etc.
Procedure to convert from private company into a public company
- Conversion by default: A private company which fails to adhere to any of the requirements spelt out in Section 2(68) loses the privileges and exemptions granted to private companies under the Act. Consequently, it will be deprived of its status as a private company and be treated as a public company.
- Voluntary conversion: According to Section 14 of the Act, a private company can be converted into a public company by passing a special resolution at a board meeting to alter its articles in such fashion, that it no longer includes the restrictions, limitations, and prohibitions imposed on a private company as per Section 2(68). Resultant of passing of resolution, the company has no restriction on transfer of shares, maximum number of members, and no prohibition on the invitation to the public to subscribe to its shares. The procedure to convert is as follows.
- Director or company secretary call for holding a board meeting at given date, time, and place.
- Within 15 days from passing of resolution, the altered articles must be filed with the registrar, who shall register the same. The word ‘Pvt.’ has to omitted wherever mentioned in the articles. Likewise, the company has to appoint an additional director, it the number is less than three, and increase the number of members to seven.
- As per Section 15, every alteration made in the memorandum or articles of association, shall be noted in every copy of the memorandum or articles. Default in complying, can draw a penalty on the company.
- No approval is required from the central government for conversion. The company ceases to be a private company from the date of passing of the special resolution.
- Once the altered articles have been registered, the company shall delete the word ‘Pvt.’ from its name.
- Within 30 days of the filing of the altered articles, the registrar shall cease the previous registration and issue a fresh certificate of incorporation.
Private companies like Uber, Pinterest, Zoom, etc. went public last year. Some notable Indian public limited companies are Reliance Industries, Bharti Airtel, Axis Bank, etc.
- Companies (Amendment) Act, 2015: The requirement of a public company of having a minimum paid up share capital of ₹5 lakhs has been dispensed with. Likewise, it made common seal optional.
- Companies (Amendment) Act, 2017: A company is now only required to provide such information in the prospectus as required by SEBI in consultation with the Central Government. The amendment also provides for defence against liability of a director for misleading statements made by an expert in the prospectus. The director has to prove that he had reasonable ground to believe such an expert. Furthermore, a company now can issue shares at a discount, if issued in compliance with RBI regulations. Moreover, the mandate that a company can’t issue sweat equity shares within one year of commencement of business has been dispensed. Now, a resident director has to stay in India for a total period of not less than 182 days during the current financial year.
- Companies (Amendment) Ordinance, 2018: Non-compliance with Section 121(2) shall make the company and every officer in default liable just for a penalty. Insertion of Section 10A provides for a company having a share capital to provide for a declaration to the registrar before it commences business within 180 days from the incorporation of the company.
- Companies (Amendment) Act, 2019: Applications required under Section 2 & 5 have to be filed with the central government instead of NCLT. Furthermore, amended Section 35(2)(c) removed the requirement of delivering a copy of prospectus along with the original to the registrar for registration. Likewise, amended Section 29(1A) now allows public offer of securities in the dematerialised form to not just public companies, but also a class of unlisted companies as may be prescribed.
- Companies (Amendment) Bill, 2020: The Company Law Committee constituted in September, 2019 sought to make amendments in the Act, with a twin-fold objective of decriminalising minor procedural lapses and easing restrictions to facilitate ease of doing business. Proposed Section 23(3), seeks to empower the central government to permit a class of public companies to issue specific securities for listing on stock exchanges in permissible foreign jurisdictions. Likewise, it seeks to legitimise the central government to exclude, in deliberation with SEBI to exclude certain class of companies from the definition of listed companies. Currently, a private company with debt securities listed on the stock exchange is considered as a listed company. The bill has been passed by the Lok Sabha and is yet to be notified.
Although public companies don’t enjoy the privilege of exemptions and relaxations under the Act, they have their amenities. Being listed on the stock market, grants it recognition, along with the capability to invite the public to subscribe to its shares. Acknowledgement helps attract new shareholders and investors to fund further commercial ventures.
Likewise, from the perspective of the shareholders, public companies grant them transparency, as their financial records are public documents accessible to all. Moreover, it’s answerable for its Actions in regular board meetings and accountable for the timely distribution of its dividends and equity. Regulatory compliances are pertinent as it is the dough of the public.
Recently, SEBI by notification dated 6th May, 2020, allowed listed companies to dispatch letter of offer pertaining of rights issue of share to shareholders through electronic mode. Furthermore, SEBI in its meeting held on 25th June, 2020 has approved significant changes to regulations governing listed companies. It has provided an alternate formula to determine the pricing of preferential shares. It has also cleared the air surrounding the acquisition of shares through the bulk deal, provided they are placed in an escrow account.
 Joint-stock Companies – Repeal of the Bubble Act, HC Deb Vol. 12 cc 1279-85 (Accessed on 14/08/2020)
 Available at http://22.214.171.124:8080/jspui/bitstream/123456789/960/4/Introductory%20%281-9%29.pdf (Accessed on 14/08/2020)
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 Janet Dine & Marios Koutsias, Company Law, Page 1, 7th Ed. 2009
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