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Private and Public Companies in India: a Comparative Analysis

Types of Companies

1. Public Company means a company which is not a private company.

2. Private Company means a company which by its articles of association:-

a.  Restricts the right of members to transfer its shares

b.  Limits the number of its members to fifty. In determining this number of 50, employee-members and ex-employee members are not to be considered.

c.  Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company.

If a private company contravenes any of the aforesaid three provisions, it ceases to be private company and loses all the exemptions and privileges which a private company is entitled.

 

3. Companies deemed to be public limited company:
A private company will be treated as a deemed public limited company in any of the following circumstances :-

1.  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 the public company on and from the date on which the aforesaid percentage is so held.

 

2.  Where the annual average turnover of the private company during the period of three consecutive financial years is not less than Rs 25 crores, the private company shall be, irrespective of its paid up share capital, become a deemed public company.

 

 

3.  Where not less than 25% of the paid up capital of a public company limited 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.

 

4.  Where 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 companies shall become public company on and from date such acceptance or renewal is first made.

 

 

4.Limited and Unlimited companies:
Companies may be limited or unlimited companies. Company may be limited by shares or limited by guarantee.

a.  Company limited by shares In this case, the liability of members is limited to the amount of uncalled share capital. No member of company limited by the shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid. Members have no liability in case of fully paid up shares.

b.  Company limited by the guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. A guarantee company may be a company with share capital or without share capital.

 

Unlimited Company: The liability of members of an unlimited company is unlimited. Therefore their liability is similar to that of the liability of the partners of a partnership firm.

 

5.Section 25 Companies: Under the Companies Act, 1956, the name of a public limited company must end with the word 'Limited' and the name of a private limited company must end with the word 'Private Limited'. However, under Section 25, the Central Government may allow comapnies to remove the word "Limited / Private Limited" from the name if the following conditions are satisfied :-

1.  The company is formed for promoting commerce, science, art, religion, charity or other socially useful objects

2.  The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects.

 

6.Holding and Subsidiary companies
A company shall be deemed to be subsidiary of another company if :-

1.  That other company controls the composition of its board of directors ; or

2.  That other company holds more than half in face value of its equity share capital

3.  Where the first mentioned company is subsidiary company of any company which that other's subsidiary. eg Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A.

The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person.

 

7.Government Companies
Means any company in which not less than 51% of the paid up share capital is held by the Central Government or any State Government or partly by the Central Government and partly by the one or more State Governments and includes a company which is a subsidiary of a government company. Government Companies are also governed by the provisions of the Companies Act. However, the Central Government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions, modifications and adaptions as may be specified to such government companies.

 

 

8. Foreign Companies
Means a company incorporated in a country outside India under the law of that other country and has established the place of business in India.

 

 

Private company

 

 

Private Company means a company which by its articles of association :-

d.  Restricts the right of members to transfer its shares

e.  Limits the number of its members to fifty. In determining this number of 50, employee-members and ex-employee members are not to be considered.

f.    Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company.

 

If a private company contravenes any of the aforesaid three provisions, it ceases to be private company and loses all the exemptions and privileges which a private company is entitled.

 

If a private company contravenes any of the aforesaid three provisions, it ceases to be private company and loses all the exemptions and privileges which a private company is entitled.

 

 

 

Following are some of the privileges and exemptions of a private limited company:-

1.  Mimimum number is members is 2 (7 in case of public companies)

 

2.  Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply.

 

3.  Restriction contained in Section 81 related to the rights issues of share capital does not apply. A special resolution to issue shares to non-members is not required in case of a private company.

 

 

4.  Restriction contained in Section 149 on commencement of business by a company does not apply. A private company does not need a separate certificate of commencement of business.

 

5.  Provisions of Section 165 relating to statutory meeting and submission of statutory report does not apply.

 

 

6.  One (if 7 or less members are present) or two members  (if more than 7 members are present) present in person at a meeting of the company can demand a poll.

 

7.  In case of a private company which not a subsidiary of a public limited company or in the case of a private company of which the entire paid up share capital is held by the one or more body corporates incorporated outside India, no person other than the member of the company concerned shall be entiled to inspect or obtain the copies of profit and loss account of that company.

 

8.  Minimum number of directors is only two. (3 in case of a public company)

 

 

 

The Company Law Board on being satisfied that the infringement of the aforesaid 3 conditions was accidental or due to inadvertence or that on other grounds, it just an equitable to grant relief, may grant relief to the company from the consequences of such infringement. The infringement of the last 3 conditions does not automatically convert a private company into a public company. It continues to remain a private company; it merely ceases to be entitled to the privileges and exemptions available to a private company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public and Private Company: Differences

The main differences between Public or Private companies relate to the provisions of the Companies Act that are not applicable to private companies. These include:

• Provisions as to the type of share capital, further issue of share capital, voting rights, issue of shares with disproportionate rights, etc.
• Provisions restricting the company from giving financial assistance to subscribe to its own shares.
• Provisions restricting the amount of managerial remuneration paid and certain other provisions relating to managerial personnel.
• Provisions restricting the powers of the Board of Directors.
• Provisions restricting loans to directors.
• Private companies are deemed to be converted into public companies in the following circumstances:
  --- When not less than 25% of the paid up capital of the company is held by one or more corporate bodies.
  --- When the company holds 25% of the paid up share capital of a public company.
  --- When the average annual turnover of the company exceeds Rs.100 million. --- When the company accepts deposits from the public.
• On becoming a deemed public company, many provisions of the Companies Act, 1956 in respect of which the company had exemption as a private company would become applicable.

Private companies are formed between 2 to 50 members and it prohibits invitation to public for capital issues. Many provisions of the Companies Act are not applicable. Also, there is a restriction on transfer of shares and the taxation rates are higher. Shares of the Public Limited Companies on the other hand, are normally freely transferable. Minimum seven members are required to form the company. The taxation rates are normally lower and there is a wider coverage of Companies Act.

 

 

 

 

 

 

 

 

Establishing New Ventures - Company Formation - Public and Private Company

 

 

Incorporating a Company

Approval of Name:
The first step in the formation of a company is the approval of the name by the Registrar of Companies (ROC) in the State/Union Territory in which the company will maintain its Registered office. This approval is provided subject to certain conditions: for instance, there should not be an existing company by the same name. Further, the last words in the name are required to be "Private Ltd." in the case of a private company and "Limited" in the case of a Public Company.

Memorandum and Articles, etc.
The memorandum of Association and Articles of Association are the most important document to be submitted to the ROC for the purpose of incorporation of a company. The Memorandum of Association is a document that sets out the constitution of the company. It contains, amongst others, the objects and the scope of activity of the company and also defines the relationship of the company with the outside world.

The Articles of Association contain the rules and regulations of the company for the management of its internal affairs. While the Memorandum specifies the objects and purposes for which the Company has been formed, the Articles lay down the rules and regulations for achieving those objects and purposes.

The ROC will give the certificate of incorporation after the required documents are presented along with the requisite registration fee, which is scaled according to the share capital of the company, as stated in its Memorandum. A private company can commence business on receipt of its certificate of incorporation.

A public company has the option of inviting the public for subscription to its share capital. Accordingly, the company has to issue a prospectus, which provides information about the company to potential investors. The Companies Act specifies the information to be contained in the prospectus.

The prospectus has to be filed with the ROC before it can be issued to the public. In case the company decides not to approach the public for the necessary capital and obtains it privately, it can file a "Statement in Lieu of Prospectus" with the ROC.

On fulfilment of these requirements, the ROC issues a Certificate of Commencement of Business to the public company. The company can commence business immediately after it receives this certificate.

 

Winding Up

The Companies Act lays down the provisions and the procedures for winding up operations leading to the dissolution of the company. Winding up may be either through court or voluntarily by the members of the company.

Before a company can initiate such proceedings under the Companies Act, it must seek clearance from the government for closure of the unit and displacement of labour under the Industrial Disputes Act.

A sick or a potentially sick company that has been referred to the Board of Financial and Industrial Reconstruction may be wound up pursuant to an order passed by the Board. If a company wishes to close down a manufacturing unit without dissolving itself, it requires clearance from the government under the Industrial Disputes Act.

For final settlement to members of the Company Board, prior permission of RBI is required. This permission is to be taken once the final amount for payment has been ascertained.

 

 

 

 

 

Valuation of Private vs. Public Firms

 

There are a number of factors that are considered differently in the valuation of privately held vs. public companies-even those that are in the same industry-making a direct comparison for valuation purposes difficult. Following is a list of some of the issues that may result in differences between the valuations of public and private firms:

 

1. Market liquidity. A lack of market liquidity is usually the biggest factor contributing to a discount in the value of companies. With public companies, we can, if we choose, switch our investment to the stock of a different public company on a daily (if not more frequent) basis. The stock of privately held firms, however, is more difficult to sell quickly, making the value drop accordingly.

 

2. Profit measurement. While private companies seek mostly to minimize taxes, public companies seek to maximize earnings for shareholder reporting purposes. Therefore, the profitability of a private firm may require restatement in order for it to be directly comparable to that of a public firm. In addition, public-company multiples are generally calculated from net income (after taxes), while private-company multiples are often based on pre-tax (and many times, pre-debt) income. This discrepancy can result in an inaccurate formula for the valuation of a private company.

 

3. Capitalization/capital structure. Public companies within a specific industry generally maintain capital structures (debt/equity mixes) that are fairly similar. That means the relative price/earnings ratios (where earnings include the servicing of debt) are usually comparable. Private companies within the same industry, however, can vary widely in capital structure. The valuation of a privately held business is therefore frequently based on "enterprise value," or the pre-debt value of a business rather than the value of the stock of the business, like public companies. This is another reason why private-company multiples are generally based on pre-tax profits and may not be directly comparable to the price/earnings ratio of public firms.

 

4. Risk profile. Public companies usually provide an assurance of continuing operations above that of smaller, privately held firms. Downturns in the economy or a change in the environment (such as an increase in competition or regulatory changes) often have a greater impact on private firms than public firms in terms of performance and market positioning. That higher risk may result in a discount in value for private firms.

 

5. Differences in operations. It is often difficult to find a public company operating in the same niches as private firms. Public companies typically have operations spanning a broader range of products and services than do private companies. In addition, even if the products and services are the same, the revenue mix is often different.

 

6. Operational control. Although private companies are more likely to receive valuation discounts than public companies, there is at least one area where they may receive a value premium. While the sale of a private company usually results in the purchase of the controlling interest in the business, ownership of public-company stock generally consists of a minority-share ownership-which may be construed to be less valuable than a controlling-interest position.

 

About the Author

i am a student of fifth year pursuing my BBA LLB degree from Symbiosis Law School, Pune

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