Public Company Concept, Definition, Features and Formation

Public Company is a vital part of a country’s economic framework, offering a broader platform for raising capital and facilitating large-scale businesses. In contrast to private companies, public companies can offer shares to the general public, making them an integral component of capital markets. The Companies Act, 2013, defines public companies and outlines the requirements for their formation, governance, and operation.

Definition of a Public Company:

According to Section 2(71) of the Companies Act, 2013, a Public Company is a company that is not a private company and:

1. Has a minimum paid-up share capital as prescribed under the law.
2. Offers its shares to the public through a stock exchange or other means.
3. Allows for free transferability of its shares.

Public company can invite the general public to subscribe to its shares or debentures, making it a key player in capital markets. It can have an unlimited number of shareholders and enjoys higher visibility and access to large-scale funding through initial public offerings (IPOs) and subsequent offers.

Concept of a Public Company

Public Company is typically formed to cater to large-scale business ventures that require substantial capital. By issuing shares to the public, the company can accumulate significant resources for growth, expansion, and diversification. Public companies are often subject to higher regulatory scrutiny and must adhere to strict compliance guidelines, ensuring transparency in operations and protecting the interests of investors.

In a public company, the ownership is shared among the shareholders, and the company’s activities are governed by a board of directors. The company’s shares are freely transferable, and shareholders can buy or sell their shares on the stock market, making it easier for investors to liquidate their investments.

Features of a Public Company:

1. Unlimited Number of Shareholders

A public company can have an unlimited number of shareholders, which is one of the key distinguishing factors from private companies, where the number of shareholders is capped at 200. This feature allows public companies to access a wide pool of capital by offering shares to the general public.

2. Free Transferability of Shares

In a public company, shares are freely transferable. Shareholders can buy or sell their shares on the stock exchange without any restrictions. This liquidity makes public companies attractive to investors who seek flexibility in their investments. It also facilitates the entry and exit of shareholders, contributing to a dynamic ownership structure.

3. Raising Capital from the Public

One of the primary features of a public company is its ability to raise capital by offering shares to the public. Through initial public offerings (IPOs) and follow-on public offerings (FPOs), a public company can accumulate large sums of money from individual and institutional investors. This capital is often used for business expansion, research and development, infrastructure, and other large-scale projects.

4. Strict Regulatory Oversight

Public companies are subject to stringent regulatory oversight by authorities such as the Securities and Exchange Board of India (SEBI). They must comply with various rules and regulations regarding disclosure, financial reporting, corporate governance, and investor protection. This regulatory framework ensures transparency and accountability, protecting the interests of the shareholders and the general public.

5. Mandatory Compliance with Listing Requirements

To list on a stock exchange, a public company must meet the listing requirements specified by the exchange and regulatory authorities. These requirements include minimum capital thresholds, disclosure of financial statements, corporate governance standards, and adherence to other operational rules. Once listed, the company must regularly update shareholders on its financial health, management decisions, and business strategy.

6. Separate Legal Entity

Like other types of companies, a public company is a separate legal entity. This means that the company exists independently of its shareholders and management. It can own assets, incur liabilities, sue, and be sued in its own name. This separate legal existence also ensures perpetual succession, meaning the company continues to exist even if shareholders or directors change.

7. Corporate Governance and Board of Directors

Public companies are required to have a board of directors responsible for making critical decisions related to the company’s management, strategy, and operations. Corporate governance practices are strictly regulated, with provisions for independent directors and committees such as the audit and remuneration committees. These measures are designed to ensure the company is managed in the best interests of the shareholders.

Formation of a Public Company:

The formation of a public company in India involves a structured process that must comply with the provisions of the Companies Act, 2013.

1. Minimum Requirements

Before forming a public company, certain minimum requirements must be fulfilled:

• A public company must have a minimum of 7 members (shareholders).
• It should have at least 3 directors.
• The company should have a minimum paid-up share capital, as prescribed under the Companies Act.

2. Name Approval

The first step in the formation of a public company is to apply for the name approval of the company with the Registrar of Companies (ROC). The name must be unique and not resemble the name of an existing company. It must also end with the words “Limited” to indicate that it is a public limited company.

3. Drafting Memorandum of Association (MOA) and Articles of Association (AOA)

Once the name is approved, the promoters must prepare the Memorandum of Association (MOA) and the Articles of Association (AOA). The MOA defines the company’s objectives, scope, and powers, while the AOA outlines the internal regulations governing the company’s management and operations.

4. Filing with Registrar of Companies

The next step is to file the incorporation documents with the ROC, including the MOA, AOA, and the details of the company’s directors, shareholders, and registered office. The prescribed forms, such as Form SPICe+, must be submitted along with the necessary fees.

5. Obtaining Certificate of Incorporation

Once the ROC verifies the documents, the company is issued a Certificate of Incorporation. This certificate serves as official proof of the company’s legal existence. The date mentioned in the certificate is considered the company’s incorporation date.

6. Commencement of Business

Before the company can begin operations, it must file a declaration with the ROC confirming that the paid-up share capital has been deposited. This is a crucial step, as no company can commence business activities without meeting this requirement.

7. Listing on a Stock Exchange

If the public company intends to list its shares on a stock exchange, it must comply with the listing requirements of the chosen exchange, such as the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). This process involves filing additional documents, such as the prospectus, which provides detailed information about the company’s business, financial health, and the terms of the share offer.

8. Appointment of Auditors and Corporate Governance

Once the company is incorporated, it must appoint auditors within 30 days of its registration. The auditors are responsible for reviewing the company’s financial statements and ensuring compliance with accounting standards. The company must also establish its corporate governance framework, including the appointment of independent directors, if required.