Important Legal Disparities Between Private and Public Companies

Written by: Anahad Kaur, 3rd year B.A.LL.B Hons, School of Law, Lovely Professional University

Corporate law

In the field of corporate law, the contrast between private and public firms is almost crucial. These two types of businesses have different rules and regulations as applicable to them, and this matters a great deal in their formation and operation, undertaking information, and raising money. These distinctions have to be known by the entrepreneurs and the investors, solicitors and legislators.

1. Definition and Legal Status

Section 2(68) of the Company Act, 2013 (India) defines a private company to have minimum paid up share capital as may be specified with which there shall be compliance to its articles.

 • It restricts the right to transfer the shares.

• prohibits inviting members of the general public to subscribe for any of the company’s securities.

 • restricts its membership to 200.

However, the Companies Act, 2013 Section 2(71) defines a public company as a company which is:

• is not a private business;

 • it has a minimum paid-up share capital as may be required; and • it has the capacity to initiate the public into subscribing for its securities.

It is the main difference between public and private with private corporations working more private, and less shareholding, thus more privacy, and public companies access capital markets to raise money from the general public.

2. Formation and Registration

The Companies Act of 2013 stipulate that both kinds of incorporation require the company to register with the Registrar of Companies (RoC).  Nevertheless there are other procedures which public corporations should adhere to.  In this case, for example, if according to SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, a business has to take SEBI’s approval, then it could not release a prospectus or make an invitation to the public to subscribe without SEBI’s approval.

 Private enterprises have fewer bureaucratic obstacles and faster incorporation procedure.  Because of this, they are a going choice for businesses that are run by a family.

3. Capital and Fundraising

Public firms raise money from the general public by issuing shares and debentures through rights issues, initial public offerings (IPOs), etc.  While this means the business has access to more investors, it also creates more scrutiny for the business because it will be subject to more scrutiny and regulatory requirements.

On the contrary, private businesses cannot ask general public for money.  Mostly it depends on loans or venture funding or private placements.  The Section 42 of the Companies Act 2013 relates to the private placement of securities and restricts the number of people to which an offer be made.

4. Number of Directors and Members

As per Section 149 of the Companies Act, 2013 a private company has to maintain a minimum of 2 directors and 2 members, while a public company must have a least 3 directors and 7 members.  A public corporation can have whatever memberships it wants but a private firm can have as many as 200 members excluding existing and former employees.

 5. Share Transfer

 Shares of a private company cannot be freely transferred.  Usually, however, the articles of organisation contain limits in order to preserve control over ownership.  It ensures that current shareholders will be the first to choose rather than newcomers can come in without permission. On the other hand, freely transferable shares of publicly traded corporations are available.

6. Requirements for Disclosure and Compliance

 Especially listed public firms have to meet strict disclosure requirements.  All this has rules required by SEBI requesting regular release of financial statements, board decisions, related party transactions, corporate governance procedures and also listing rules asking to comply.Private companies enjoy greater confidentiality, as they are not required to disclose information to the public to the same extent. However, they are still bound by provisions of the Companies Act, 2013, and must file annual returns and financial statements with the RoC.

7. Corporate Governance

There are higher standards of corporate governance for public firms.  SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 mandates listed firm to formulate audit committee, appointing independent directors, and following the same.

 Being private enterprises there is more flexibility and governance is easier and often updated on demand of investors and founders.  They need to follow no complicated governance processes and have no responsibility to recruit independent directors.

8. Regulatory Oversight

Being public companies, the purview of SEBI and the Ministry of Corporate Affairs (MCA) also comes into the play.  SEBI assures that the businesses invested the fair way in the financial markets and also safeguard the interests of the investors.

 The Registrar of enterprises is the MCA’s main bureau regulating corporate behaviour in terms of private enterprises.  The compliance cost is lessened when SEBI is not in place, however, they are restricted from accessing public funds.

Conclusion

In short both firms and their legal systems serve different agendas and public ones are necessary whereas private ones are necessary for conducting any business.  Private corporations can help closely owned businesses accomplish control, privacy and flexiblity.  To the contrary, public firms are open and scalable, which are fitting the interests of a larger shareholder base.

 A decision to become public or private depends upon risk tolerance on the part of the promoters, capital needs, and long term objectives lean.  A thorough understanding of the legal differences makes efforts to make educated decisions and following the company regulatory framework a sure thing.

References:

1. The Companies Act, 2013 (India).

2. Securities and Exchange Board of India, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

3. Securities and Exchange Board of India, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

4. A. Ramaiya, Guide to the Companies Act (19th ed., LexisNexis, 2020).

5. SEBI Official Website: https://www.sebi.gov.in/

6. Ministry of Corporate Affairs, India: https://www.mca.gov.in/