With the growing globalization and the increasing nature of not only pan India businesses but businesses that flourish across the globe, India has seen a tremendous growth of many of its multinationals in recent years. However, India is driven not only by these multinationals but also by other types of companies and small businesses. The journey to grow into a multinational usually begins with smaller steps and before a company goes public it is most likely a closely held private company in many cases. We have all heard the terms public companies and private companies but what is the difference between public and private limited companies – let’s find out.
Given below is a brief discussion answering these questions and also providing related details of a public and private company.
What is a Company?
A company is a legal entity that is separate and distinct from its owners, with the ability to conduct business, own assets, and assume liabilities. It is created and regulated by the laws of the jurisdiction in which it is incorporated, and can be owned by individuals or other entities.
What is a private company?
A private company like a public limited company comes under the ambit of the Companies Act, 2013. Under this Act, a private company is defined as per provisions of section 2(68) as a joint stock company that is formed by 2 or more members. Such companies cannot list their shares on stock exchanges and their shares cannot be traded publicly as in the case of a public limited company. There are stringent provisions relating to the transfer of shares in a private company. As per the provisions of the Act, a private company can be defined as a voluntary association of 2 or more persons and the minimum paid-up capital needed for a private company is Rs. 1,00,000.
Also, unlike a public company, the maximum number of members in a private company is restricted to 200. This number does not include the current employees or the ex-employees who have been members of such a company and continue to be members even after their exit from the entity. Another important requirement is to attach the words ‘Private Limited’ to the name of the company so the stakeholders will be aware of the nature of the company.
Also Read: What is joint stock company?
What is a public company?
The definition of a public company under the Companies Act, 2013 is a negative definition which basically implies how not to identify a public company.
As per provisions of section 2(71) of the Companies Act, 2013, a public company is any joint stock company incorporated under the Companies Act 2013 and is not a private company. Such companies have a minimum paid-up capital of Rs. 5,00,000 and require a minimum of 7 members to form a private company.
Unlike private companies, there are no restrictions on the maximum number of members that can be allowed in a public company. The shares of such companies are listed on stock exchanges and can be easily traded as per the guidelines of SEBI. Such companies are required to attach the words ‘Public Limited’ to their name for all the stakeholders to be aware of the nature of this company.
What are the key differences between public and private companies?
After learning the basic definition of public limited and private limited companies, let us now understand the key differences between the two.
Public companies offer shares to the public through stock exchanges, allowing anyone to buy ownership. Private companies have limited shareholders and aren’t traded on exchanges. Public firms face stricter regulatory requirements, disclosure, and scrutiny, while private ones have more flexibility but less access to capital markets.
Let’s take a look at some of the other differences between these two business structures:
| Category | Public Limited Company | Private Limited Company |
| Meaning | A public limited company is a joint stock company, that is not a private company, and the shares of which are listed on a stock exchange. | A private company is a closely held company that does not have its shares listed on any stock exchange and cannot be openly traded. |
| Number of members | The minimum number of members to start a public limited company is 7 and there are no restrictions on the maximum number of members in a public limited company. | The minimum number of members needed to start a private limited company is 2 and the maximum number of members cannot exceed 200. |
| Paid-capital | The minimum paid-up capital needed for a public limited company is Rs. 5,00,000 | The minimum paid-up capital for a private company is Rs 1,00,000 |
| Transferability of shares | Shares of a public company are available in the open market and can be traded easily subject to the rules and regulations laid down by SEBI | Shares of a private limited company cannot be listed on any stock exchange and cannot be traded in the open market. |
| Issue of prospectus | A public limited company mandatorily needs to issue a prospectus and duly file it as per the guidelines of the Companies Act, 2013. | A private company cannot issue a prospectus and a statement in lieu of a prospectus is issued. |
| Subscription from the public | A public limited company is entitled to accept subscriptions from the general public and issue shares or debentures to raise capital. | A private limited company is not allowed to have a subscription of its shares by the general public. This implies that such a company cannot issue any shares or debentures to the general public for raising capital at any point |
| Allotment subject to minimum subscription | A public company is restricted to allot shares until the minimum subscription required as per its prospectus is achieved | A private company has no such restrictions and are free to allot their shares as per their articles of association. |
| Directors | The minimum number of Directors in a public limited company is 3 | The minimum number of Directors in a private limited company is 2 |
| Appointment of Directors | In a public limited company the appointment of only one Director can be done through a single resolution. | In a private limited company, two or more Directors can be appointed through a single resolution |
| Retirement of Directors | As per the provisions of the Companies Act, 2013, at least ⅔ Directors of the common have to retire by rotation. Out of these Directors, at least ⅓ Directors have to retire each year | A private limited company does not have such restrictions relating to the retirement of Directors by rotation. |
| Quorum | In the case of a public company the quorum required for a meeting is Number of members Quorum 1000 or less5 members. More than 1000 but less than 500015 members. More than 500030 members | A private company needs minimum 2 members present to meet the quorum of a meeting |
| AGM | The AGM of the company is to be held only at its registered office or any place in the city where the registered office is situated | The AGM of a private limited company can be held anywhere |
| Meeting | It is mandatory for the public company to hold statutory meetings as per the provisions of section 165 of the Companies Act, 2013 | There is no need for a private company to hold a statutory meeting as per the provisions of Companies Act, 2013 |
Examples of public and private companies
Here are examples of both public and private companies in India:
Public Companies:
- Reliance Industries Limited: A conglomerate with interests in petrochemicals, refining, telecommunications, and retail.
- Tata Consultancy Services (TCS): A multinational IT services company providing software solutions and consulting.
- State Bank of India (SBI): The country’s largest public sector bank, offering banking and financial services.
Private Companies:
- Ola Cabs: A ride-hailing platform providing transportation services via a mobile app.
- Swiggy: An online food delivery platform connecting customers with local restaurants.
- Reliance Jio Infocomm: A subsidiary of Reliance Industries, offering telecommunications services and digital products.
Conclusion
A private company and a public company and their scope are clearly defined under the Companies Act 2013. The Act also lays down provisions relating to the financial statements of these companies and other related details. The restrictions on public limited companies are higher as they are allowed to take public subscriptions to build their capital. This warrants more enhanced provisions to safeguard the interest of the shareholders and other stakeholders of the company.
FAQs
A private company will have the words ‘Private limited’ in its name while a public limited company will have the words ‘Public Limited in its name. This is the first point of identification of the nature of the company without referring to any more details.
Yes, a private company can appoint a Company Secretary but this provision is mandatory for such a company, unlike a public limited company.
No. it is not a mandatory requirement for the Directors to file their consent of appointment in a private limited company. However, a public limited company does require its Director to provide consent of appointment as per the provisions of section 152(5) in Form DIR-2.
The maximum number of members in a private limited company is 200.
In India, a company goes public by conducting an Initial Public Offering (IPO). The process involves registering with the Securities and Exchange Board of India (SEBI), issuing shares to the public through stock exchanges, and raising capital. This enables individuals to invest in the company and become shareholders.
