DISTINGUISH BETWEEN PUBLIC COMPANY AND PRIVATE COMPANY

Introduction:

What is a Public Company?

A public company is one whose equity is organized into shares that can be freely exchanged on a stock exchange or in over-the-counter marketplaces. A public (publicly traded) firm can be listed on a stock exchange (listed company), which allows for share trading, or it can be unlisted. Indian government requires that public firms of only a certain size be listed on an exchange. In most situations, public firms are private enterprises in the private sector, and the term "public" refers to their reporting and trading on public markets.

What is a Private Company?

A private company is a form of commercial entity that is privately owned by a single person or a group. Unlike public companies, where shares are openly traded on stock exchanges, private companies retain the option to issue stocks and secure investments from outside shareholders. However, these shares do not trade on a publicly accessible stock exchange. Instead, transactions involving private company shares occur privately among pre-approved investors, often following strict internal procedures established by the company's articles of association.
Private corporations do not have to comply with the same financial disclosure and reporting criteria as public companies since their shares are not available for public sale.
A corporation may also choose to become a "public company" that conforms to public reporting standards but is not listed on a stock exchange.

What is the Difference Between Public and Private companies in India?

The quick answer is relatively little, yet there are important legal distinctions between them. Private Limited is a corporation that is registered and run by many or all of its members. In contrast, a Public Limited Company under the Company Act of 2013 is an organization that has little risk and provides services to the general public. Its stock can be purchased by anyone, either covertly through an initial public offering (IPO), or through financial exchange transactions.

Following are the major differences between Public and Private Companies:

1.      Relevant Sections: The Public Limited Company is defined under the Section 2(71) of Companies Act, 2013, and Private Limited Company is defined under the Section 2(68) of Companies Act, 2013.

2.      Meaning: A Public Company is a company that issues its registered shares for public to subscribe and it registered with the share market of their respective countries. A private Company is a company that that has minimum paid-up share capital mentioned in the Article of association, which aren’t available for general public to subscribe.

3.      Number of owners/members: A public company is required to have a minimum of 7 owners or members, with no set maximum limit, allowing for broad ownership and investment opportunities. In contrast, a private company must have a minimum of 2 owners or members but is restricted to a maximum of 200 individuals, fostering a more controlled and closely-held ownership structure. This distinction in ownership requirements between public and private companies reflects the differing levels of transparency, regulatory obligations, and access to capital markets that each type of company typically entails.

4.      Share Capital: When it comes to the distribution of share capital and profits, a public company operates differently from a private company. In a public company, the rights to share capital and profits are distributed among all owners or members according to the article of association and the number of shares owned by each individual. This means that the more shares a person owns, the greater their share of the profits and voting rights. In contrast, a private company distributes the rights to share capital and profits among all owners or members as per the article of association, without taking into account the number of shares owned by each individual. This means that each owner or member has an equal say in the company's decision-making process, regardless of their level of investment.

5.      Transfer of Shares: While owners/members of a public company have the freedom to transfer their shares to other individuals in the market, a private company's share transfer is subject to the terms and conditions outlined in the company's article of association (AOA). The AOA typically imposes various restrictions on share transfers within a private company, such as limitations on the sale of shares to external parties, requirements for approval from existing shareholders or the board of directors, or clauses that prioritize existing shareholders for purchase of shares being transferred. Therefore, owners/members of a private company must follow the specific guidelines outlined in the AOA to transfer shares, which may include obtaining approval from other shareholders or the board of directors.

6.      Shares Prospectus: In a public company, it is a requirement to issue a prospectus to invite the public to subscribe to shares of the company. This document serves as a formal invitation for individuals to invest in the company by purchasing its shares. On the other hand, in a private company, there is no obligation to issue a prospectus. Private companies have more flexibility in this regard and are not required to formally invite the public to subscribe to their shares through a prospectus. This distinction reflects the differing regulatory requirements and levels of transparency between public and private companies in terms of offering shares to potential investors.

7.      Number of Directors: In a public company, a minimum of 3 directors is required, with a maximum limit of 15 directors permissible. Conversely, in a private company, a minimum of 2 directors is mandatory, with the option to have up to a maximum of 15 directors. This distinction in directorial requirements between public and private companies reflects the varying governance structures and regulatory frameworks that govern these two types of entities.

8.      Name of Company: When referring to private companies in India, the term "Limited" is commonly found in their names. However, when specifically discussing private limited companies, the phrase "Private Limited" is added to differentiate them from regular private companies. This additional designation signifies that the company operates under stricter regulations and has fewer shareholders compared to public limited companies.

9.      Fund Raising: Fundraising is a crucial aspect of growing a business, and the methods employed vary depending on whether a company is public or private. Public companies benefit from ease of fundraising due to their ability to offer shares to the general public via the stock market. By doing so, they gain access to a vast pool of potential investors.

Contrastingly, private companies require the unanimous consent of all current members before issuing shares. Although this process might involve more effort than simply listing shares on the open market, it allows private companies greater control over their ownership structure and ensures that only approved investors acquire equity stakes.

10.  Subscription on Shares: The process of subscribing to shares in a company differs between public and private entities. In the case of public companies, the general public can easily subscribe to the company's shares through the stock market. This allows for a broad range of investors to participate in the company's growth and success.

However, in the case of private companies, the public does not have the option to subscribe to the company's shares. Instead, private companies can only issue shares to a select group of pre-approved investors, often with the unanimous consent of all current members. This approach allows private companies to maintain greater control over their ownership structure and ensures that only approved investors acquire equity stakes.

Conclusion:

To conclude, the distinctions between private and public companies encompass multiple aspects, including ownership structure, governance, share transferability, regulatory compliance, and managerial processes. Despite a prevalent belief that public companies are naturally larger and more valuable than private counterparts, several substantial businesses remain privately owned. The primary disparity arises from the availability of information for analysts to evaluate public companies relative to private ones. Public companies furnish extensive details regarding their financial performance, debts, and operations through earnings reports, making it simpler for analysts to ascertain the intrinsic worth of a firm and compare it to its present market price, referred to as the Price-to-Earnings ratio.